Bitcoin Investment: Is It Worth The Risk?

Bitcoin is a decentralised digital currency that is not issued or managed by any central authority, such as a government, company, or bank. This makes it attractive to those who are wary of traditional currencies and financial institutions. While investing in Bitcoin can be a risky move, some people believe that it is a good opportunity to make a substantial return on investment. However, it is important to carefully consider the risks and potential consequences before investing one's life savings in Bitcoin or any other cryptocurrency.

Bitcoin's resistance to inflation

Should You Invest Your Life Savings in Bitcoin?

Whether or not to invest your life savings in Bitcoin is a complex question and depends on your financial situation, risk appetite, and investment goals. While some people have made substantial gains by investing in Bitcoin, it is a highly volatile and risky asset.

It is generally not advisable to put all your eggs in one basket, as the saying goes. Diversification is a key principle of investing, and putting your entire life savings into a single asset, especially one as volatile as Bitcoin, is extremely risky.

If you are considering investing in Bitcoin, it is essential to do your research, understand the technology, and be aware of the potential risks and rewards.

Bitcoin has often been touted as a hedge against inflation. Here are some reasons why Bitcoin is seen as resistant to inflation:

Fixed Supply

Bitcoin has a maximum supply of 21 million coins. This restricted upper limit is a key factor in Bitcoin's resistance to inflation. Unlike fiat currencies, where central banks can print more money, Bitcoin's supply is fixed and cannot be inflated. This scarcity ensures that its value will remain steady or increase over time.

Not Tied to a Specific Economy or Currency

Bitcoin is not tied to any single entity, economy, or currency. It is a global asset class that reflects international demand. This means it is not subject to the economic and political risks associated with traditional fiat currencies and stock markets.

Algorithmic Monetary Policy

Bitcoin's monetary policy is predetermined by its underlying algorithm. The supply of Bitcoin is algorithmically controlled, with the rate of new Bitcoin being mined reduced by half approximately every four years. This algorithmic control ensures a predictable and gradually decreasing inflation rate.

Scarcity and Ease of Transfer

Bitcoin's scarcity, coupled with its ease of transfer, makes it attractive as a store of value. As a digital asset, it can be easily transferred globally, making it more portable and decentralized than traditional assets like gold.

Immunity from Direct Government Influence

Bitcoin is decentralized and operates without any central authority. There is no government, company, or bank in control of Bitcoin, which makes it more resistant to wild inflation and corruption.

While Bitcoin has attributes that make it resistant to inflation, it is important to note that it is not completely immune to inflationary pressures. The value of Bitcoin can still be influenced by market sentiment, economic conditions, and investor confidence. Additionally, Bitcoin's price can be impacted by external factors, such as regulatory changes and actions taken by central banks.

The risks of investing in Bitcoin

Bitcoin is a decentralised, digital currency with no physical presence or central authority. While this frees investors from being beholden to institutions, it also means that the value of Bitcoin is entirely dependent on the value ascribed to it by its owners and investors. This can be risky, as without a central authority to back its value, investors may be left in the lurch if complications with transactions or ownership arise.

Volatile Market

The price of Bitcoin is constantly changing, and with such an unpredictable market, there is no guarantee of a return on investment. For example, on November 6, 2018, one bitcoin was worth $6,461.01. 11 days later, on November 17, 2017, the price topped $20,000. A week later, buyers could not sell their investment for more than $14,626.

Cyber Threats

Bitcoin is technology-based, which means it is vulnerable to cyberattacks and hacking. There is also a fair amount of fraud in the bitcoin market, with fake exchanges duping investors out of their bitcoins. Additionally, if you forget or misplace your key, you may not be able to retrieve your coins.

Little or No Regulation

The bitcoin market is operating with little to no major regulations. The government doesn’t have a clear stance on cryptocurrency, and it is not taxed. This lack of taxation and regulation could lead to problems should bitcoin pose competition for government currency.

Technology Reliance

Bitcoin is an online exchange that is entirely reliant on technology. Without the technology, cryptocurrency is worthless. With Bitcoin, there is no physical collateral, so owners are more vulnerable to cyberthreats and online fraud.

Block Withholding

New bitcoins are created by solving mathematical equations called “blocks”. However, a mining pool can use computational power to mine a block and hide it from honest miners, essentially allowing a select few to reap the benefits while others are left with nothing.

Ponzi Scheme

Bitcoin has been referred to as a Ponzi scheme, with people at the top benefiting from the ignorance of others. As more people buy into bitcoin, it creates a bubble economy. When the bubble bursts, bitcoin will become useless, and many people will be left holding cryptocurrency that they are unable to sell, resulting in a painful financial loss.

The advantages of Bitcoin over traditional currencies

Bitcoin has several advantages over traditional currencies. Here are some of them:

Decentralization and Independence: Bitcoin is a decentralized digital currency, meaning no central authority, such as a government or central bank, controls it. This gives Bitcoin its unique resilience and enables it to operate independently of any specific country or regulatory body. It is a peer-to-peer money system that can function regardless of anyone's wishes.

Lower Transaction Fees and Faster Transactions: Bitcoin transactions tend to have lower fees compared to traditional payment methods involving intermediaries such as banks. Additionally, Bitcoin transactions are typically faster and can be completed within minutes, regardless of the distance between the sender and recipient.

International Accessibility: As an internet-based currency, Bitcoin can be sent and received by anyone with an internet connection, regardless of geographical location or financial infrastructure. This makes it especially useful for cross-border payments and international transfers.

Limited Supply and Potential for Increased Value: Bitcoin has a maximum limit of 21 million coins that can ever be produced, ensuring scarcity and potentially driving up its value over time.

Enhanced Security and Transparency: Bitcoin transactions are secured through cryptographic algorithms and recorded on a decentralized public ledger (blockchain), making them secure, transparent, and immutable.

Pseudonymity and Privacy: While Bitcoin transactions are public, the identities of the parties involved are not readily apparent, providing a level of privacy.

Programmability and Smart Contracts: Bitcoin introduces a new dimension of programmability. In the future, Bitcoin transactions can be attached to smart contracts or other programs that execute only when certain conditions are met, enabling the development of additional solutions on top of Bitcoin.

No Sovereign Backing: Unlike traditional fiat currencies, Bitcoin has no sovereign backing. Its value is independent of political or economic conditions, and it can exist freely outside the traditional financial system.

Frictionless and Direct Value Exchange: Bitcoin enables direct value exchange over the internet, providing users with access to their balance via a private key. It is both secure and open at the same time.

No Duplication: Unlike the traditional monetary system, it is impossible to duplicate a bitcoin, making it unique and preventing inflation.

Tax Advantages: When a bitcoin is transferred, its ownership is also transferred, helping to maintain accurate and straightforward records, especially for tax-related purposes.

How to store and secure your Bitcoin

Types of Wallets

There are several types of Bitcoin wallets, which can be divided into two main categories: hot wallets and cold wallets. Hot wallets are connected to the internet, while cold wallets are not. Here are some of the most common types of wallets:

• Mobile wallets: These are hot wallets that are hosted on a mobile device, such as a smartphone. They are usually self-custodial and are convenient for sending or paying with Bitcoin. However, they may be less secure than cold wallets and are not recommended for storing large amounts.
• Desktop wallets: These are software programs installed on a computer or laptop. They can be hot or cold wallets, depending on their connection to the internet. Desktop wallets are not considered the safest storage method as they are vulnerable to hacking.
• Hardware wallets: Hardware wallets are physical devices, similar to USB drives, that store your private keys offline. They are highly secure and are not susceptible to malware or online threats. However, they can be expensive and may be less user-friendly for those who are less technically inclined.
• Web-based wallets: These are wallets hosted by a web service, which stores your private keys for you. They are convenient but are not considered secure as they are vulnerable to hacking.
• Paper wallets: Paper wallets are created by printing out your private and public keys. They are a cheap and anonymous way to store Bitcoin but have a high risk of user error or damage. They are also less convenient as they require a new wallet for each transaction.

Security Measures

Regardless of the type of wallet you choose, there are several security measures you can take to protect your Bitcoin:

• Use a strong password: Use a password that is at least 16 characters long and contains a mix of letters, numbers, and punctuation marks.
• Backup your wallet: Regularly back up your entire wallet, including private keys, to multiple secure locations like USB drives, CDs, or hard drives.
• Encrypt online backups: Any backup stored online is vulnerable to theft, so it's important to encrypt these backups.
• Two-factor authentication (2FA): Enable 2FA, if available, to add an extra layer of security to your wallet.
• Multi-signature: Use a multi-signature feature, if available, which requires multiple independent approvals to spend your Bitcoin.
• Keep your software up to date: Update your wallet software and other applications regularly to patch security vulnerabilities.
• Be cautious: Avoid oversharing information about your Bitcoin holdings, and be cautious when using public Wi-Fi networks or unfamiliar websites.

Best Practices

• Don't store large amounts in hot wallets: Hot wallets are more susceptible to hacking, so it's recommended to only keep small amounts of Bitcoin in these wallets for everyday spending.
• Use multiple wallets: Consider using multiple wallets for different purposes, such as a hot wallet for everyday spending and a cold wallet for long-term storage.
• Don't keep all your Bitcoin in one place: Diversify your storage methods to reduce the risk of losing all your Bitcoin in a single incident.
• Regularly verify your backups: Ensure your backups are still accessible and in good condition by checking on them periodically.
• Use a recovery contact: Share the location of your wallets and passwords with a trusted individual, who can help recover your funds if something happens to you.

Diversifying your portfolio

Diversify by Coins and Tokens

You can diversify your crypto portfolio by direct ownership of different types of digital coins and tokens. This includes payment tokens like Bitcoin and Ethereum, security tokens backed by underlying securities such as real estate, utility tokens with specific use cases like Filecoin, governance tokens like Uniswap and Compound, basic attention tokens, gaming tokens, and non-fungible tokens (NFTs).

Diversify by Industry Focus

You can also diversify by investing in cryptocurrency projects focused on different industries. Blockchain technology is being applied to healthcare, supply chain management, transportation, entertainment, and climate change initiatives. For example, you could invest in healthcare-focused cryptocurrencies like MediBloc and Dentacoin, or a supply chain-focused cryptocurrency like VeChain.

Diversify by Asset Class

Crypto investors can diversify across various asset classes. This includes stocks of companies focused on the crypto sector or with large cryptocurrency holdings, blockchain-based or crypto bonds, and blockchain-based real estate tokens.

Diversify by Investment Vehicle

You can also diversify your crypto holdings across different investment vehicles and account types, such as digital wallets, taxable brokerage accounts that support cryptocurrencies, cryptocurrency IRAs, and decentralized financial products like decentralized savings accounts and staking platforms.

Diversify with Traditional and Alternative Assets

In addition to diversifying within the crypto space, you can also consider traditional and alternative assets to support your crypto portfolio diversification. This could include stocks, bonds, commodities, gold, oil, mutual funds, exchange-traded funds (ETFs), and more.

Remember, diversifying your portfolio is a way to manage risk and volatility. By spreading your investments across different assets, you reduce the likelihood of losing everything if one particular asset or sector crashes. However, diversification may also potentially lower absolute investment returns, as you are less likely to hit a home run with a single speculative investment. Therefore, it is essential to carefully consider your financial circumstances, objectives, and risk tolerance when deciding how to diversify your portfolio.

Frequently asked questions