Bitcoin Investment: Is It Worth Betting Everything?

Bitcoin is a risky investment, so it's important to carefully consider your goals and strategy before you decide to invest. A common rule of thumb is to invest no more than 10% of your portfolio in individual stocks or risky assets like Bitcoin. It's also a good idea to make sure you understand what you're investing in.

Bitcoin is a decentralised virtual currency that is not issued, backed, or regulated by a central authority like the U.S. government. It is one of the most volatile assets, with large price swings. Its value comes from its finite supply, store of value, and payment system.

You can purchase Bitcoin from cryptocurrency exchanges, traditional stockbrokers, money transfer apps, Bitcoin ATMs, and Bitcoin ETFs. When buying Bitcoin, it's important to store it safely in a hot or cold wallet.

Before investing in Bitcoin, it's crucial to assess your risk tolerance, budget, and long-term financial goals. You should also only invest your discretionary income – the money left over after covering all essential expenses.

Bitcoin's volatility

Bitcoin is considered a volatile asset, with its value fluctuating relative to the average price over a given period. This volatility is driven by speculation, as investors bet on Bitcoin's price going up or down to make a profit. As a result, Bitcoin's price can experience sudden and significant increases or decreases, making it a risky investment.

Measuring Volatility

Volatility is measured by calculating the standard deviation of daily returns over a specific period, typically 30 or 60 days. This volatility index helps investors understand the risk associated with holding Bitcoin and can be compared to other assets, like gold and major currencies, which have significantly lower volatility than Bitcoin.

Historical Volatility

Impact of Volatility

The high volatility of Bitcoin means that it can offer the potential for high returns but also carries the risk of significant losses. For example, someone who invested in Bitcoin in 2013 would have seen their investment tumble by 80%, and it took three years for it to recover. More recently, in 2021, Bitcoin's price broke past $65,000, only to fall by more than 75% from its all-time high in 2022.

Factors Affecting Volatility

Several factors can influence Bitcoin's volatility:

• Market Maturity: As Bitcoin matures and its market cap expands, the impact of new capital inflows on price volatility is expected to diminish.
• Investor Sentiment: Low volatility often occurs after long bear markets when investor sentiment is apathetic or demoralised, and selling pressure is low.
• Regulatory Changes: The approval of Bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC) in January 2024 positively impacted Bitcoin's price and attracted institutional investment.
• Macroeconomic Factors: Broader economic trends, such as inflation and interest rates, can influence Bitcoin's price and volatility.

Bitcoin's use for payments

Bitcoin's value comes from its store of value and payment system, as well as its finite supply. It is important to note that Bitcoin is not widely accepted as a payment method, and there are risks involved with investing in it.

Bitcoin can be used to pay for goods and services, but it is not a widespread practice. There are a growing number of services and merchants accepting Bitcoin worldwide. To use Bitcoin for payments, you need to select the wallet and cryptocurrency you want to pay with, fill in the payment details in your wallet, and validate the transaction. This can be done through a cryptocurrency app on your mobile device or a wallet specifically for online payments on your computer.

Some platforms that allow you to pay with Bitcoin include BitPay and PayPal. BitPay allows you to pay bills, make online crypto payments, and buy gift cards straight from your wallet. PayPal allows you to purchase four cryptocurrencies, including Bitcoin, and use them to buy products and services through the "Checkout with Crypto" feature.

It is important to note that Bitcoin is a risky investment with high volatility. Before investing in Bitcoin, it is crucial to understand the risks involved and consult with a financial advisor to determine if it aligns with your financial goals and risk tolerance.

Bitcoin's environmental impact

Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy—more than is used by some small countries—to perform the work associated with crypto mining. In fact, Bitcoin mining uses an estimated 140 Terawatt-hours (TWh) of electricity annually, which is more than the total annual electricity usage of many individual countries, such as Argentina or Australia. This is equivalent to 0.4% to 0.9% of annual global electricity usage.

The energy intensity of crypto mining is a feature, not a bug. Bitcoin mining is the automated process of validating Bitcoin transactions without the intervention of trusted third parties like banks. The way the transaction validation process is designed uses large amounts of energy—the network depends on the computational power of thousands of computers.

The largest country for Bitcoin mining is the United States, which accounts for 37.84% of Bitcoin mining activities. Other countries with a high proportion of Bitcoin mining include China (21%) and Kazakhstan (12%). As a result, three countries heavily dependent on fossil fuels are responsible for around 72% of the world's Bitcoin mining.

Bitcoin mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. Over 77 kilotons of electronic waste are annually produced as a byproduct of Bitcoin mining.

Calculating the carbon footprint of cryptocurrency is more complicated. Although fossil fuels are the predominant energy source in most countries where cryptocurrency is mined, miners must seek out the most inexpensive energy sources to remain profitable. It is estimated that the Bitcoin network is responsible for about 73 million tons of carbon dioxide per year—equal to the amounts generated by Oman.

Due to the heat generated by mining machines, miners, manufacturers, and maintainers have turned to water cooling to reduce the costs of keeping equipment cool. In some cases, large mining farms have discharged hot or warm water into lakes or other water bodies, raising concerns about raising the average temperature of or contaminating these bodies.

In summary, Bitcoin mining has a significant environmental impact. It consumes large amounts of energy, much of which is generated by fossil fuels, and produces significant electronic waste. The process also has wider environmental impacts, such as water consumption and contamination, and contributes to global carbon emissions.

Bitcoin's association with criminal activity

Bitcoin is often associated with criminal activity, but this is largely a myth. In fact, crypto exchanges are increasingly becoming allies in the fight against criminal activity. However, there are still risks associated with investing in Bitcoin, and it is a very volatile asset.

Bitcoin and other cryptocurrencies are often linked to criminal activity, but this association is not as strong as many believe. In 2019, the United States Treasury Secretary, Steven Mnuchin, stated that Bitcoin was a national security issue due to its use in illicit activities. However, in 2022, the share of all crypto activity linked with illegal activity was only 0.24%, while traditional financial systems laundered $800 billion–$2 trillion, or about 2% to 5% of the global GDP.

The blockchain technology that Bitcoin is built on is transparent and immutable, meaning that all transactions are logged on a publicly accessible ledger, making it easy for law enforcement to track and identify criminal activity. Additionally, crypto exchanges like Binance actively collaborate with law enforcement agencies to combat criminal activity. For example, in 2022, the Binance Investigations team responded to over 47,000 law enforcement requests, playing a vital role in bringing down criminal groups operating with millions of dollars.

Despite these measures, criminals are still attracted to cryptocurrencies due to the promise of anonymity, ease of storage and transfer, and the lack of a central authority. This makes it easier for them to trade drugs, weapons, explosives, and other illegal goods and services, as well as launder money. Cryptocurrencies also allow terrorists to ask for funding and donations for extremist organizations without revealing their identities.

Risks of Investing in Bitcoin

Bitcoin is a risky and volatile investment. While it has offered the potential for high returns, there have also been significant downturns. For example, in 2013, Bitcoin's value tumbled 80%, and it took three years for the investment to recover. In 2018, there was a decline that lasted about a year, and there were drops of 50% or more in 2021 and 2022.

Transactions in Bitcoin are also irreversible, and people have lost millions of dollars due to lost or forgotten wallet credentials. Crypto exchanges also lack basic consumer protections, such as insurance protection from the Securities Investor Protection Corporation (SIPC) and the Federal Deposit Insurance Corporation (FDIC), which are found in traditional financial products.

Should You Invest All Your Money in Bitcoin?

Given the risks and volatility associated with Bitcoin, it is generally recommended that you should not invest all your money in Bitcoin. It is important to have a diversified portfolio and not invest more than 10% of your portfolio in risky assets like Bitcoin.

Additionally, Bitcoin is not a widely accepted medium of exchange, and there are only a handful of retailers and digital services that allow you to use crypto as payment. Therefore, investing all your money in Bitcoin could make it difficult to use your investments in everyday transactions.

In conclusion, while Bitcoin's association with criminal activity is mostly a myth, it is still a risky and volatile investment. If you choose to invest in Bitcoin, it is advisable to do so as part of a diversified portfolio and not as your sole investment.

Bitcoin's value

Bitcoin's price is renowned for being highly volatile. However, despite this volatility, it has become the top-performing asset of any class over the past decade, climbing a staggering 9,000,000% between 2010 and 2020. As of August 2024, Bitcoin's price stands at around $59,000, with a 24-hour trading volume of $28 billion and a market cap of $1.17 trillion.

Lastly, Bitcoin's value is influenced by its first-mover advantage. As the first cryptocurrency to come into actual use, it has created a global community and birthed an entirely new industry, with millions of enthusiasts creating, investing in, trading, and using Bitcoin and other cryptocurrencies in their daily lives.

Frequently asked questions