Bitcoin Investment: Worth The Risk?

Bitcoin is a cryptocurrency with a volatile history. Its value surged to over $60,000 in early 2022, an eightfold increase in 12 months, before halving a few weeks later. It has been used for illicit activities, including ransomware attacks, due to the anonymity it grants users. Bitcoin's value is derived from its scarcity—there is a fixed cap of 21 million digital coins, of which nearly 19 million have been created. However, critics argue that scarcity alone does not justify its value. Bitcoin is also criticised for its slow transaction times, irreversible transactions, and lack of consumer protection. Despite these concerns, Bitcoin's popularity is growing, and it has become an increasingly common investment option.

Bitcoin's value is based on its restricted supply and increasing demand

The limited supply of Bitcoin, combined with increasing demand, has led to a rise in its price. Demand for Bitcoin has been fuelled by media coverage, institutional and retail investors, and its popularity in countries with high inflation and devalued currencies. Additionally, Bitcoin's decentralised nature, borderless transferability, and security have contributed to its increasing demand.

The combination of restricted supply and increasing demand has resulted in Bitcoin's volatile price history, with sharp increases and downticks. While Bitcoin's value has fluctuated, its long-term trajectory has been upward, reaching an all-time high of nearly $73,700 in March 2024.

The future value of Bitcoin remains uncertain, with potential bullish and bearish catalysts influencing its price. However, its restricted supply and increasing demand have been key factors in driving its value thus far.

Bitcoin is a decentralised currency, controlled by no single government, central bank or company

Bitcoin is a decentralised currency, controlled by no single government, central bank, or company. Its decentralised nature means that it operates without a central authority or administrator, so anyone can create a new bitcoin address and transact without needing approval. This is achieved through a specialised distributed ledger called a blockchain, which records bitcoin transactions.

The blockchain is maintained by a peer-to-peer network, with nodes in the network verifying transactions through cryptography and recording them on the blockchain without central oversight. Transactions are validated and broadcast by nodes, each of which maintains a copy of the blockchain for ownership verification. A new block is created roughly every 10 minutes, updating the blockchain across all nodes without central oversight.

Bitcoin's decentralised nature has led to its popularity in countries where citizens are looking to circumvent capital controls. For example, in China, citizens have an annual limit of $50,000 to purchase foreign currency. In 2020, over $50 billion was moved from East Asia-based Bitcoin wallets to wallets in other countries, indicating that Chinese citizens may have converted local currency to Bitcoin to transfer their wealth across borders and avoid government regulation.

The lack of central control also means that no single entity can print more Bitcoin, ensuring that the currency cannot be devalued by increasing its supply. This is in contrast to fiat currencies, which are vulnerable to inflation as central banks can increase the money supply.

The decentralised nature of Bitcoin has led to its characterisation as a potential threat to the existing financial system and the role of governments within it. Bitcoin advocates argue that it has the potential to dismantle the current financial system, rendering central banks and intermediaries such as banks and financial institutions redundant.

However, Bitcoin's decentralisation also has its drawbacks. The lack of central control means that transactions are irreversible, and people have lost access to their Bitcoin due to lost or forgotten wallet credentials. The decentralised nature of Bitcoin also means that it is harder to regulate and has been associated with illicit activities, leading to its ban by several countries.

Bitcoin is highly volatile, with daily fluctuations of 5% being ordinary

However, Bitcoin has typically rallied after these drops, and its supporters argue that its volatility is understandable because it is still in the early stages of adoption. As of 2021, only 114 million of the world's nearly 8 billion people had invested in Bitcoin, according to data from crypto.com. Advocates expect volatility to decrease as the market grows and matures. They also believe that the introduction of securities like Bitcoin ETFs will help stabilise prices.

Critics, on the other hand, argue that the big fluctuations mean that Bitcoin doesn't work as a reliable currency. They also point to the irreversible nature of transactions, minimal consumer protections, and the lack of regulatory clarity as reasons for concern.

Despite its volatility, Bitcoin has maintained its popularity, and some investors believe that it is a good long-term investment. However, it is important to approach Bitcoin as a speculative investment and be aware of the high risks involved.

Bitcoin transactions are more efficient than credit cards

Bitcoin transactions are more efficient than credit card transactions in several ways. Firstly, Bitcoin transactions incur lower transaction fees, typically ranging from 1% to 5%, compared to credit card fees that can reach up to 3-4% or even 8% for international transactions. This makes Bitcoin a more cost-effective option, especially for small and medium-sized businesses.

Secondly, Bitcoin transactions are fully decentralized and do not rely on intermediaries like banks or financial institutions. This eliminates the need for merchants to pay additional fees to multiple parties and reduces the risk of technical failures due to a central entity's downtime. Bitcoin transactions are also irreversible and do not allow fraudulent chargebacks, protecting merchants from financial losses and reputational damage.

Thirdly, Bitcoin offers enhanced security compared to credit cards. The Bitcoin network is highly secure and virtually impossible to hack, as it would require control of more than 50% of the network nodes. Additionally, Bitcoin transactions do not reveal personal data, reducing the risk of identity theft and unauthorized purchases.

Another advantage of Bitcoin transactions is their accessibility. Over 1.4 billion people worldwide lack access to traditional banking services, but with Bitcoin, all that is needed is an internet connection and a Bitcoin wallet to send or receive payments. This opens up global trade opportunities and allows anyone to participate in the digital economy.

Lastly, Bitcoin transactions are easier to set up and do not require strenuous verification processes like credit card payments. Merchants can quickly start accepting Bitcoin payments without submitting identity proof or going through KYC procedures, making it a more convenient and privacy-preserving option.

Bitcoin is increasingly run on renewable energy sources

Bitcoin's energy consumption is a highly debated topic. The cryptocurrency has been criticised for its high energy consumption and presumed massive carbon footprint. However, according to a study by CoinShares, a cryptocurrency asset management and analysis firm, the majority of the electricity used by Bitcoin comes from clean sources, such as wind, solar, and hydropower. The study found that the Bitcoin network gets 74.1% of its electricity from renewables, a higher percentage than most other large-scale industries worldwide.

Other estimates place the share of renewable energy in Bitcoin mining lower, at around 39% on average, according to Cambridge University. The variability of renewables, such as hydroelectricity generation, can make it challenging for Bitcoin miners to consistently utilise cheap renewable energy sources. For example, in Sichuan Province, China, a significant Bitcoin mining hub, the average power generation capacity during the wet season is three times higher than in the dry season.

The high energy consumption of Bitcoin has led to scrutiny and concerns about its environmental impact. There have been calls for Bitcoin mining to shift to more sustainable energy sources, with some companies even suspending vehicle purchases using Bitcoin until more sustainable practices are adopted.

Despite the criticism, proponents of Bitcoin argue that mining makes use of excess renewable energy generation, reducing curtailment and supporting the development of renewable power. Additionally, the Crypto Climate Accord aims to ensure the cryptocurrency industry transitions to 100% renewables by 2030.

While the debate around Bitcoin's energy consumption and environmental impact continues, it is clear that the industry is increasingly turning to renewable energy sources to power its operations.

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