Bitcoin Investment: Is It Still Worth It?

Bitcoin is a cryptocurrency with a market capitalization of over $1 trillion. It was created in 2009 and is the original cryptocurrency. Its value has skyrocketed as it has become a household name. In May 2016, one bitcoin was worth about $500. As of August 2024, a single bitcoin's price was around $55,175. This represents a growth of 10,935%.

Bitcoin's price is extremely volatile. For example, between August 5 and August 14, 2024, its price fluctuated between $49,999 and $68,603.

Investing in Bitcoin is risky due to its extreme volatility. However, it has the potential for significant gains. It is also a long-term investment, and its value may increase over time.

Before investing in Bitcoin, it is important to do your research and understand the risks involved.

Bitcoin's value as a currency

Bitcoin is a decentralised peer-to-peer online currency, meaning that all transactions happen directly between equal, independent network participants, without the need for any intermediary to permit or facilitate them. Bitcoin was created to allow "online payments to be sent directly from one party to another without going through a financial institution".

Bitcoin demonstrates the attributes of a currency, but its primary source of value lies in its restricted supply and increasing demand. Bitcoin has value because it can function as a store of value and a unit of exchange. It also demonstrates six key attributes that enable its use in an economy:

• Scarcity: As the supply of unrewarded coins diminishes, demand increases. There will only ever be 21 million bitcoins in existence.
• Divisibility: Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with the smallest unit referred to as a satoshi.
• Acceptability: More and more people are becoming familiar with cryptocurrencies, and citizens of many countries are adopting them because their financial systems are failing them. Businesses are also accepting them in greater numbers, and more consumers are using them.
• Portability: Bitcoin can be used across borders, allowing any consumer with an internet connection to participate in the global economy and access financial services.
• Durability: As it occupies a digital space, a bitcoin can last as long as there is a digital area for it to be stored in.
• Uniformity: Bitcoins cannot be counterfeited and don't have a physical appearance, although there are renditions of coins that represent Bitcoin.

Bitcoin's value is primarily influenced by five factors:

• Supply and demand: No more than 21 million Bitcoins can be produced, and this is unlikely to happen before 2140. Only a certain number of Bitcoins are released each year, and this rate is reduced every four years by halving the reward for Bitcoin mining.
• Production cost: Solving even a single hash requires immense processing power, and it's believed that crypto mining collectively uses more electricity than some small countries.
• Competition: Bitcoin's cryptocurrency market share has sharply declined over the years. In 2017, it maintained a market share of over 80%, but its current market share is just over 52%.
• Public interest and media coverage: As with any speculative commodity, Bitcoin is greatly influenced by the court of public opinion. For example, in 2021, a tweet from Elon Musk caused Bitcoin's price to drop by 30% in a single day.
• Government regulation: Bitcoin may be unregulated, but it is not immune to the effects of government legislation. For instance, China's 2021 ban of the cryptocurrency caused a sharp price drop.

Bitcoin's efficiency for payments

Bitcoin's efficiency as a payment method has improved over the years, with the cryptocurrency's network activity increasing across several metrics since December 2020. According to blockchain.com, the Bitcoin network has become more efficient in processing payments, which better reflect its fundamental on-chain economic activity than transaction metrics.

The average daily number of transactions and payments on the Bitcoin network has increased by 3.5% and 8.7%, respectively. Additionally, the average daily active addresses have registered a 6.9% hike, and the estimated hashrate has also improved. As a result, network participants are now creating more efficient transactions, with an average of 2.2 payments per transaction compared to 1.6 in early 2020.

The improvement in payment efficiency can be attributed to several factors. Firstly, the amount of value transferred over the Bitcoin network has drastically improved, contributing to a more secure network. Secondly, the hashrate, which measures the processing power of the network, has significantly increased since the last bull run in 2017.

Bitcoin's payment efficiency is important as it was originally designed as a peer-to-peer version of electronic cash, allowing online payments to be sent directly from one party to another without going through financial institutions. However, some argue that Bitcoin's role as a payment method may have diminished in recent years, as its value appreciation and store-of-value proposition have taken centre stage. Nonetheless, improving payment efficiency is beneficial and can contribute to the network's overall robustness and security.

Bitcoin's environmental impact

Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy, which is often produced by burning fossil fuels. This energy consumption has a corresponding impact on the climate crisis.

Bitcoin mining is highly dependent on fossil fuels, with coal accounting for 45% of its energy supply mix, followed by natural gas (21%). The energy intensity of crypto mining is a feature, not a bug. The way the transaction validation process is designed uses large amounts of energy—the network depends on the computational power of thousands of computers. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.

Bitcoin's carbon footprint is substantial. In 2020, it used 75.4 TWh yr-1 of electricity, more energy than Austria or Portugal. A 2022 report estimates that Bitcoin mining may be responsible for 65.4 megatonnes of CO2 per year, comparable to country-level emissions in Greece. The amount of carbon dioxide produced by Bitcoin mining each year may be comparable to the amount emitted by Greece in 2019. Another estimate placed Bitcoin's energy consumption at 138 Terawatt-hours, which is more than Pakistan and Ukraine.

Bitcoin mining also has significant water and land footprints. During the 2020-2021 period, Bitcoin's water footprint was similar to the amount of water required to fill over 660,000 Olympic-sized swimming pools, enough to meet the current domestic water needs of more than 300 million people in rural sub-Saharan Africa. The land footprint of worldwide Bitcoin mining activities during this period was 1.4 times the area of Los Angeles.

The greenhouse gas emissions of Bitcoin mining alone could be sufficient to push global warming beyond the Paris Agreement's goal of holding anthropogenic climate warming below 2 degrees Celsius. To offset this footprint, 3.9 billion trees should be planted, covering an area almost equal to the area of the Netherlands, Switzerland, or Denmark, or 7% of the Amazon rainforest.

Bitcoin's association with criminal activity

Bitcoin has been associated with criminal activity, with some high-profile figures expressing concern about its use for illicit financing. For example, US Treasury Secretary Janet Yellen has stated that cryptocurrencies are "a particular concern" when it comes to criminal activity and terrorist financing. Berkshire Hathaway Vice President Charlie Munger has called Bitcoin a tool of "kidnappers and extortionists", and New York Times columnist Paul Krugman has claimed that some people use it to "buy drugs [or] subvert elections".

However, the data suggests that the association between Bitcoin and criminal activity may be overstated. Research shows that in 2020, illicit activity accounted for just 0.34% of all cryptocurrency transactions, or $10 billion in transaction volume. This is a significant decrease from 2019, when criminal activity represented 2.1% of all cryptocurrency transactions. By comparison, the UN estimates that between 2% and 5% of global GDP ($1.6 to $4 trillion) is laundered annually through traditional methods.

While it is true that Bitcoin has been used for money laundering, financing terrorism, and other criminal activities, the majority of transactions are legitimate. The idea that Bitcoin is mainly used for illicit purposes is a common misconception. In fact, a peer-reviewed paper cited above estimated that the actual amount of illegal activity was approximately four times what was officially observed, suggesting that crypto-crime may account for 1.4% to 2% of all activity, or $40 billion to $59 billion. This is still a relatively small proportion of the total value of cryptocurrency transactions.

It is also worth noting that blockchain forensics companies are actively working to identify and prevent criminal activity involving Bitcoin and other cryptocurrencies. These companies provide valuable insights and tools for law enforcement agencies to help them investigate and prevent crypto-crime. Additionally, most cryptocurrency transactions are performed through centralized exchanges that are subject to anti-money laundering (AML) and counter-terrorism financing (CFT) regulations similar to those for traditional banks.

Bitcoin's real value

Scarcity and Decentralization

Bitcoin supporters argue that its real value lies in its scarcity and decentralized nature. With a finite supply of 21 million bitcoins, it offers protection against inflation and dictators, making it revolutionary. Its decentralized structure means it can't be controlled by a single government, central bank, or company, ensuring its long-term value as a legitimate global currency.

Alternative to Fiat Currencies

Bitcoin's value also stems from its status as the first cryptocurrency and a viable alternative to fiat currencies. As an alternative to government-backed currencies, Bitcoin provides a peer-to-peer payment network that is secured by cryptography and verified by miners, offering a level of security and transparency.

Volatility and Efficiency

Critics argue that Bitcoin's volatility, with frequent price fluctuations, makes it unreliable as a currency. However, supporters counter that this volatility is understandable given Bitcoin's early adoption stage, and they expect it to decrease as the market matures and securities like Bitcoin ETFs become more common. Additionally, Bitcoin transactions are typically finalized in 10 minutes, making them more efficient than credit card transactions, which can take days to settle.

Environmental Impact

One of the most prominent criticisms of Bitcoin is its massive energy consumption, which some argue is not worth the emissions. Supporters, on the other hand, point to the increasing use of renewable energy sources for Bitcoin mining, with over 58% of mining utilizing sustainable electricity in early 2022, according to the Bitcoin Mining Council. They also believe that the benefits of Bitcoin justify the energy usage, especially when compared to more discretionary energy uses.

Criminal Activity

Critics worry that Bitcoin enables criminal activity and money laundering, with government officials expressing concern about its use on the dark web. However, supporters cite reports showing that criminal usage of Bitcoin is likely lower than that of traditional banking systems, and its public and transparent nature can make illegal activity easier to track.

Investment Potential

Bitcoin's investment potential is a significant aspect of its real value. Some prominent figures, like ARK Invest CEO Cathie Wood, predict a substantial increase in Bitcoin's value, with estimates ranging from $1 million to $75 trillion by 2030. Others, like veteran analyst Peter Brandt, forecast a more conservative high of $150,000 by the end of 2025. However, it's important to remember that these are predictions, and the future of Bitcoin is uncertain.

In conclusion, Bitcoin's real value is a complex and multifaceted topic, with valid points raised by both critics and supporters. Its scarcity, decentralized nature, and alternative currency status are key value drivers, but it also faces challenges related to volatility, environmental impact, and associations with criminal activity. Ultimately, the decision to invest in Bitcoin depends on an individual's risk tolerance and belief in its long-term potential.

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