Bitcoin Investment: Is It Too Late To Enter?

Bitcoin is a decentralised digital currency that has delivered unbelievable results so far, but it's still a risky investment. The cryptocurrency is based on blockchain technology and cryptography, and it offers new investment opportunities. Bitcoin's value has increased from $1 in 2011 to more than $60,000 at times in 2021. However, it is a volatile, high-risk investment. So, should you invest in it right now?

Well, it depends on your risk tolerance and investment goals. If you're thinking about adding crypto to your portfolio, ask yourself what role it can play in getting you to your personal financial goals. If you decide to invest, it's important to maintain a diversified portfolio that includes several different types of investments to reduce your overall risk exposure. As a rule of thumb, don't invest more than 10% of your portfolio in risky assets like Bitcoin.

Bitcoin had a great start to 2023, reversing the downward trend seen throughout the end of 2022. However, recent weeks have seen bitcoin retrace its steps due to a deteriorating macro backdrop. The labour market remains very tight, inflation remains way above target, and Fed Chair Jerome Powell has indicated that the process of getting inflation back down to 2% has a long way to go. Considering these factors, the markets are underpricing the likelihood of a 25-basis point increase in June, which would have a bearish effect on bitcoin.

So, should you buy BTC now? The quick answer is 'probably not'. The macro backdrop for bitcoin is bearish, and various on-chain/flow metrics for bitcoin are neutral. Therefore, if you have a two-to-four-week horizon, now may not be a good time to buy bitcoin. However, it's important to note that bitcoin is a good long-term investment for the next one to three years, and it is expected that the bitcoin price will rise in the long term.

Bitcoin's value as a currency vs. an asset

Bitcoin is a decentralised cryptocurrency, meaning it is not controlled by a central bank or other financial authority. It is a peer-to-peer system that allows users to make instant financial transactions without the need for intermediaries like banks.

Bitcoin has value because it can be exchanged for and used in place of fiat currency. 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, divisibility, acceptability, portability, durability, and uniformity.

However, there is an ongoing debate about whether Bitcoin is a currency or an asset. Some people argue that Bitcoin is not a currency because it does not have a stable value and its transaction processing is too slow. They consider it a speculative asset or a commodity. On the other hand, some people view Bitcoin as a currency because it can be used to pay for goods and services, even though it is not widely accepted yet.

As an asset, Bitcoin has offered the potential for high returns, but it is a risky investment due to its high volatility. It is subject to extreme price fluctuations and has had periods of significant downturns. For example, in 2022, Bitcoin prices fell by about 60%, and there was an 80% crash between 2017 and 2018.

As a currency, Bitcoin has the potential to become the world's universal digital currency, which would lead to exponential demand and price growth. Its decentralised nature makes it secure, resistant to manipulation, and accessible to people worldwide, even in underbanked regions or countries with unstable financial systems.

In conclusion, Bitcoin has characteristics of both a currency and an asset. Its value lies in its restricted supply and increasing demand. Whether to invest in Bitcoin depends on your risk tolerance, financial situation, and investment goals.

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. The largest country for Bitcoin mining is the United States, which accounts for 37.84% of Bitcoin mining activities.

Bitcoin mining produces about 40 billion tons of carbon dioxide annually, a huge red flag for any investors concerned about environmental, social and governance, or ESG, principles. It is also estimated that Bitcoin mining is responsible for 73 million tons of carbon dioxide per year—equal to the amounts generated by Oman.

Over 77 kilotons of electronic waste are annually produced as a byproduct of Bitcoin mining. 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 of water.

The traditional financial systems use about as much energy as a non-proof-of-work blockchain. However, it is important to remember that the environmental costs of making and maintaining fiat currency and our current banking system are also energy-intensive.

There is currently not enough official information available to determine how much of the energy consumed by cryptocurrencies is from renewable sources.

Bitcoin's volatility

Bitcoin is considered a volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The volatility of an asset is usually calculated by measuring its standard deviation from the average price over a given period.

Volatility is often associated with risk. A volatile asset is considered riskier because its value can substantially increase or decrease over a short period. Therefore, volatile assets tend to be less attractive to investors, as they prefer more predictable assets.

It is worth noting that while Bitcoin is a volatile asset, it has historically offered the potential for high returns.

Bitcoin's potential as a universal digital currency

Bitcoin has the potential to become the world's universal digital currency. It is the most popular and valuable cryptocurrency, with a market cap of over $360 billion. Its decentralised nature, resistance to manipulation, and accessibility make it an attractive option for people worldwide, especially those in underbanked regions or countries with unstable financial systems.

Bitcoin's appeal lies in its decentralisation, accessibility, innovative solutions, global reach, and open-source nature. Anyone with a mobile phone can access Bitcoin, and solutions like TxTenna allow transactions even without internet access. The Lightning Network, for example, enhances Bitcoin's usability by facilitating quick, low-cost transactions. Its global reach makes it ideal for cross-border transactions and remittances.

Additionally, Bitcoin's open-source nature means that a global community can verify, audit, trust, and improve its code. It also provides a pseudonymous transaction system, enhancing user privacy compared to traditional banking while maintaining transparency on its public ledger.

However, Bitcoin's pseudonymous transactions can be a double-edged sword. While they offer enhanced privacy, they can also be used for surveillance and pose privacy risks if not handled with adequate privacy-enhancing technologies.

As a universal digital currency, Bitcoin could reshape global finance and democratise financial access. However, it is important to note that it is just one of over 1,000 virtual currencies, and its future performance is uncertain.

Bitcoin's potential as an inflation hedge

Additionally, Bitcoin's decentralised nature means it is independent of any central bank or government control, adding a layer of security for investors concerned about potential government interventions.

However, Bitcoin's unique design does not guarantee its effectiveness as an inflation hedge in all circumstances. The value of Bitcoin is driven primarily by market demand and supply, with no tangible assets backing it up. As a result, Bitcoin's price can be extremely volatile, even more so than traditional investments. For example, between late 2017 and early 2018, Bitcoin's price dropped from nearly $20,000 to just above $3,000.

Another factor to consider is Bitcoin's relatively short history compared to traditional investments like gold. With just over a decade of existence, Bitcoin's performance in diverse economic scenarios, especially during inflationary periods, remains largely untested.

In conclusion, while Bitcoin has the potential to be an inflation hedge due to its fixed supply and decentralised nature, its inherent volatility, regulatory uncertainties, and short historical record compared to traditional hedges add a significant level of risk. Therefore, when considering Bitcoin as part of an inflation-hedging strategy, it is crucial to approach it with caution, conduct thorough research, and diversify your investments.

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