Bitcoins: Investment Opportunities, Pros, And Cons

Bitcoin is a cryptocurrency, a virtual or digital currency, that has seen a surge in popularity in recent years. As a decentralised currency, it is not regulated by a central government or bank, meaning it is immune to government interference. This also means that transactions are irreversible and final. Bitcoin transactions are secured by blockchain technology, which acts as a public record of transactions.

Bitcoin has been hailed as the 'digital gold', with its value rising over the last decade. It is also easily accessible, tradeable 24/7, and can be used to purchase goods and services.

However, Bitcoin has also faced criticism for its volatility, high energy consumption, and use in criminal activities. Its decentralised nature also means that it is not widely accepted as a form of payment and is not regulated or protected by governments.

With these pros and cons in mind, is investing in Bitcoin a worthwhile opportunity?

Bitcoin's volatility

Bitcoin is susceptible to wild price swings over short periods of time. In the wake of the Mt. Gox collapse, Bitcoin's value fell by more than 50%. Following the FBI's announcement that it would treat Bitcoin as a legitimate financial service, its value spiked by a similar amount. In late 2017, Bitcoin's value doubled several times, only to halve in the first weeks of 2018, wiping out billions in market value almost overnight.

Daily fluctuations of 5% are ordinary, with occasional double-digit price moves. On 19 May 2021, its price plunged nearly 30%. It fell over 60% from November 2021 to May 2022.

Bitcoin's price depends heavily on supply and demand. As an asset quickly adopted by investors and traders, speculation about price movements plays a critical role in Bitcoin's value at any given moment. Media outlets, influencers, and industry moguls create investor concerns, leading to price fluctuations.

Supply and demand influence the prices of most commodities more than any other factor. Bitcoin's market value is affected by how many coins are in circulation and how much people are willing to pay. By design, there is a limited supply of 21 million coins. The closer the circulating supply gets to this limit, the higher the prices are likely to climb.

Bitcoin's limited supply also means that when demand exceeds the number of holders willing to sell, there could be a natural rise in BTC's price and value. This can be challenging for investors to predict.

Fear and greed are two primary drivers behind Bitcoin's volatility. Because of its well-known volatility, investors fear missing out on big upswings or falling victim to large downswings. This causes panic buying or selling, influencing demand and prices.

The future of payments?

Bitcoin and other cryptocurrencies are creating a buzz in the world of finance, but are they the future of payments?

One of the biggest advantages of Bitcoin is its accessibility and versatility. Anyone, anywhere can access the Bitcoin network and use it to send and receive money across borders. It is also an attractive option for those without access to traditional banking services. Bitcoin transactions are typically faster than bank transfers, taking around 10 minutes to an hour, and are much cheaper as they cut out the middleman of traditional financial institutions.

Bitcoin is also an attractive option for those seeking to protect their wealth from inflation. There is a finite amount of Bitcoin – 21 million – and its value is not determined by central banks or governments. This means that, unlike traditional currencies, the supply of Bitcoin will not increase in response to rising demand, and so its value should, in theory, remain stable or increase.

However, Bitcoin's value is notoriously volatile. Daily fluctuations of 5% are common, and double-digit price moves are not unusual. This makes it a risky prospect for those seeking to use it as a means of payment or as an investment.

Another concern is the energy-intensive process of mining Bitcoin. Bitcoin mining requires a lot of computational power, and thus a large amount of energy. As the Bitcoin network grows, so too will its energy consumption, leading to greater environmental concerns.

Despite these drawbacks, Bitcoin has its supporters, who argue that it is too early to write it off as an investment opportunity. They point to the fact that it is still in the early stages of adoption and that, as the market grows, it will become less volatile.

So, is Bitcoin the future of payments? It certainly has its advantages, but it also comes with a number of risks and drawbacks. For now, at least, it seems that Bitcoin is an intriguing prospect rather than a sure thing.

Environmental concerns

Bitcoin mining has been criticised for its environmental impact. Bitcoin mining uses large amounts of energy, with some estimates placing its energy consumption at 140 Terawatt-hours (TWh) of electricity annually (0.63% of global electricity use). This is more energy than is used by some small countries. For example, the Cambridge Bitcoin Electricity Consumption Index estimates that Bitcoin's energy consumption is more than that of Pakistan and Ukraine.

The energy used for Bitcoin mining is predominantly generated by fossil fuels. Researchers at the University of Cambridge report that the three countries with the largest share of Bitcoin mining (the US, China, and Kazakhstan) are heavily dependent on fossil fuels for their energy, with 76% of the energy consumed in China generated from coal and crude oil, and Kazakhstan mainly using fossil fuels.

The high energy consumption of Bitcoin mining leads to significant carbon emissions. A study published in Nature Climate Change warns that Bitcoin's emissions alone could push global warming above 2°C. According to the Web site Digiconomist, a single Bitcoin transaction has a carbon footprint of 549.74 kgCO2, which is the equivalent of 91,624 hours of watching YouTube. In comparison, 100,000 VISA transactions spend only 148.63 kWh of energy.

Bitcoin mining also generates electronic waste as the specialised hardware used for mining becomes obsolete roughly every 1.5 years. According to Digiconomist, the Bitcoin network generates approximately 72,500 tons of electronic waste annually.

However, there are indications that the environmental impact of Bitcoin mining may be improving. In 2021, China cracked down on cryptocurrency mining, causing more than 50% of the hashrate (the collective computing power of miners worldwide) to drop off the network. This led to a reduction in the number of machines running and the power being consumed, which reduced Bitcoin's environmental impact. The shutdown in China also took a lot of older and more inefficient mining rigs offline, which are unlikely to come back online. As a result, the overall Bitcoin network will now be mostly made up of more efficient rigs that get about double the hashpower for the same amount of electricity.

Additionally, the migration of Bitcoin mining to other parts of the world has led to a greater use of renewable energy sources. For example, relocations to the United States have resulted in a greater proportion of renewable energy source use, with regular access to high-efficiency equipment. This shift to more renewable energy has led to some critics of Bitcoin's energy use, such as Elon Musk and Tesla, to reconsider their concerns.

Criminal usage

Bitcoin and other cryptocurrencies have been criticised for their role in enabling criminal activity. In 2020, there was a global total of $10 billion in illicit activities using cryptocurrency. Cryptocurrencies are often used for dark marketplace trading, and government security organisations are directing their resources to crypto criminal investigations.

There are several reasons why criminals and terrorists opt to use cryptocurrencies:

Anonymity

While all transactions on the blockchain are kept on the public record, the identities of those making the transactions remain unknown. This means that criminals can trade drugs, weapons, explosives, and child pornography, seemingly without consequence.

No third-party involvement

Cryptocurrencies are transferred directly between peers, with no need for a third party to be involved or mediate. This is often exploited by criminals for one-off sales of drugs or digital data, as well as for terror funding across borders.

Accessibility and speed

Trading with crypto is easy and accessible. All one needs is an internet connection and a wallet application, which can be quickly and easily downloaded to a device. Cryptocurrencies are always available, and there is no need to validate transactions with a central body or third party. Transactions are usually delay-free and irreversible.

Easy storage and transfer

As digital assets, cryptocurrencies are easily stored and do not take up physical space. They can be transferred both locally and internationally, without the risk of being seized. This sets the stage for criminals to both steal and launder funds.

However, it is important to note that blockchain analysis solutions are being developed to de-anonymize and reveal illicit transactions made by criminals, helping security and law enforcement organisations overcome the challenge of cryptocurrency anonymity.

Real value?

One of the biggest criticisms of Bitcoin is that it's not backed by any meaningful value. Advocates argue that its value lies in the fact that there will only ever be 21 million bitcoins in existence. However, critics argue that scarcity alone is not enough to justify its value. Some detractors even go so far as to say that Bitcoin is essentially a Ponzi scheme, with its price inflated by hype.

The counterargument to this is that scarcity is only a small part of what makes Bitcoin valuable. Advocates believe that Bitcoin's value lies in its decentralisation, which means it can't be controlled by a single government, central bank, or company. They believe this feature will protect it from both inflation and dictators, making it revolutionary.

Bitcoin has also earned the title of 'digital gold', and is accepted as a store of value by many sophisticated investors. As a store of value, Bitcoin is a commodity, asset, or currency that retains its value over a long period of time—a particularly important feature during inflationary times.

Bitcoin has been the best-performing asset class of the last decade, even outperforming the NASDAQ 100, the second-best-performing asset class, by an order of magnitude. Even small investments have generated outstanding returns for long-term investors.

Many sophisticated investors see Bitcoin as an inflation hedge, including billionaire investor Paul Tudor Jones, who believes it is a better inflation hedge than gold. With ongoing money printing from central banks across the world, more and more investors are turning to Bitcoin as an inflation hedge.

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