Bitcoin: What Is It And Is It A Smart Investment?

Bitcoin is a form of digital currency that uses blockchain technology to support transactions between users on a decentralised network. It was launched in 2009 and was the first of its kind, and remains the most valuable cryptocurrency. Bitcoin can be used as a currency or an investment.

Bitcoin is a risky investment with high volatility. It is unregulated, irreversible, and lacks the consumer protections of traditional financial products. Its value is highly unpredictable and influenced by investor sentiment.

However, Bitcoin has the potential to be a non-correlated asset, similar to gold. It is decentralised, so it cannot be controlled by a single government, central bank, or company. It also has cost-efficient transactions, privacy, and growth potential.

Whether or not Bitcoin is a good investment depends on your individual circumstances.

Bitcoin's volatility

However, advocates of Bitcoin argue that the volatility is understandable because it is still in the early stages of adoption. As of 2021, only 114 million of the world's nearly 8 billion people invested in Bitcoin, according to data from crypto.com. Advocates expect volatility to decrease as the market grows and matures.

The volatility of Bitcoin also stems from the combination of its massive potential and its entirely uncertain outlook. Its price is tied exclusively to investor sentiment, which can be unpredictable and inconsistent.

The extreme volatility of Bitcoin has limited its appeal as a hedge against inflation and a store of value. Throughout 2021 and 2022, Bitcoin experienced both sharp rallies and price declines even though inflation data consistently ticked higher.

Despite the risks, some individuals believe in the potential of Bitcoin as a decentralized currency and store of value, leading them to consider it a good long-term investment.

Bitcoin's use for payments

Bitcoin can be used as a currency, although critics argue that it is too inefficient for this purpose. It takes 10 minutes on average to process a single bitcoin transaction, compared to the seconds it takes to process a credit card transaction. However, advocates argue that third-party solutions are solving this problem, with bitcoin payments being processed in as little as milliseconds through a third-party protocol called the Lightning Network.

Bitcoin transactions are also irreversible, which can be a risk for users. For example, people have lost millions of dollars of Bitcoin because they lost or forgot their wallet credentials.

Another issue with using Bitcoin for payments is that it is not widely accepted. While it is gaining traction, with El Salvador becoming the first country in the world to make Bitcoin a legal tender in 2021, it is still not a common practice for businesses to accept Bitcoin.

However, some argue that Bitcoin has the potential to become the world's universal digital currency. If this were to happen, its demand and price would grow exponentially.

Bitcoin's environmental impact

The energy used to mine Bitcoin often comes from fossil fuels, contributing to global carbon emissions. It is estimated that the Bitcoin network is responsible for about 55 million tons of carbon dioxide per year, similar to the amount generated by Singapore. In addition to carbon emissions, Bitcoin mining also produces thousands of tons of e-waste per year.

The impact of Bitcoin mining on local communities cannot be overlooked. Crypto-asset mining operations can cause local noise and water impacts, air and other pollution, and electronic waste. These impacts can exacerbate environmental justice issues for neighboring communities, which are often already burdened with other pollutants, heat, traffic, or noise.

To reduce the environmental impact of Bitcoin, some have suggested switching to alternative crypto-asset technologies such as Proof of Stake, which could dramatically reduce overall power usage. Additionally, encouraging the use of renewable energy sources for Bitcoin mining could also help to mitigate its environmental impact.

Overall, while Bitcoin has provided some benefits and value, its environmental impact is a significant concern, particularly as the world seeks to reduce its carbon footprint.

Bitcoin's association with criminal activity

Bitcoin has been criticised for its association with criminal activity. Government officials worry that the cryptocurrency enables dark web purchases, money laundering, and other illegal activity. In 2021, US Secretary of the Treasury Janet Yellen stated that cryptocurrencies are used "mainly for illicit financing".

However, advocates of Bitcoin argue that it is mostly used for legal transactions. A report by former CIA Acting Director Michael Morell concludes that criminal Bitcoin usage "is certainly not higher than it is in the traditional banking system and is most likely less". They also argue that the public nature of the blockchain ledger makes illegal activity easier to spot. As digital forensics departments improve their methods for tracking blockchain transactions, criminals may find it increasingly difficult to use cryptocurrencies.

Bitcoin's value and scarcity

Value

Bitcoin's value is derived from its limited supply, decentralised nature, and increasing adoption. There will only ever be 21 million bitcoins, making it a scarce resource. Its decentralised nature means it can't be controlled by a single government, central bank, or company, protecting it from inflation and dictators. Bitcoin's value is also influenced by its growing adoption. El Salvador became the first country to make Bitcoin legal tender in 2021, and other countries are considering following suit.

Scarcity

The scarcity of Bitcoin is one of its key features. There will only ever be 21 million bitcoins in existence, and this limited supply means that investors will not be negatively impacted by dilution. This fixed supply also makes Bitcoin an attractive hedge against inflation and a store of value, although its extreme volatility has limited its appeal in these areas.

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