Bitcoin: Should You Invest In The Crypto Craze?

Bitcoin is a decentralised digital currency that is not regulated by a central authority. Instead, it gives full control to users instead of financial institutions. It was launched in 2009 and has since then inspired thousands of new types of cryptocurrency and become popular as an asset class due to gains in its value.

Bitcoin has delivered unbelievable results so far, but it's still a risky investment. Its value has been extremely volatile, and it has a negative environmental impact.

Bitcoin can be used as a currency or an investment. If you decide to buy Bitcoin, you'll need a place to store it — like a hot or cold wallet.

Bitcoin's volatility

Bitcoin is a volatile asset, and its price can fluctuate significantly. Volatility is a measure of how much the price of an asset varies over time, and it is often associated with risk. Bitcoin's volatility is driven by speculation, with investors betting on its price going up or down, which can lead to sudden increases or decreases in its value.

The high volatility of Bitcoin can be both an opportunity and a risk for investors. On the one hand, it can provide the potential for high returns, as Bitcoin has delivered unbelievable results in the past. On the other hand, it also comes with the risk of significant losses, as its price can tumble due to various factors such as regulatory changes, economic conditions, and market sentiment.

Overall, Bitcoin's volatility is an important factor for investors to consider when deciding whether to invest in this asset class. While it can provide opportunities for high returns, it also carries significant risks, and investors should carefully evaluate their risk tolerance and diversification strategies before investing in Bitcoin.

The practicality of Bitcoin as a means of payment

Bitcoin was created as an alternative to real money, with an emphasis on decentralisation and maximum protection against theft. It is a decentralised digital currency that is not regulated by a central authority, instead giving full control to users. This means that Bitcoin is anonymous and allows users to conduct their financial matters without scrutiny by authorities. However, some argue that Bitcoin is pseudonymous, as a user's wallet address can be used to identify them.

Benefits

• Anonymity/Pseudonymity: Bitcoin is decentralised and does not require user information, allowing for anonymous transactions. However, some argue that it is pseudonymous as wallet addresses can be used to identify users.
• Peer-to-peer: The peer-to-peer nature of Bitcoin reduces the need for third-party involvement, allowing users to send and receive money without other services.
• Fewer fees: Bitcoin transactions have lower fees compared to traditional financial services.
• Pay from anywhere: Bitcoin allows users to make or receive payments anywhere with an internet connection.
• Available to everyone: Bitcoin provides access to financial services for people who may not have quick access to banks and loans but have internet connections through mobile devices.
• Transaction security: Blockchain technology verifies that funds are available before a transaction is completed, making it nearly impossible for users to complete a purchase without sufficient funds. Additionally, Bitcoin transactions cannot be disputed, cancelled, or reversed.
• Fast access to the international market: The decentralisation of Bitcoin allows businesses to avoid the hassle and expense of international transaction fees and exchange rates, providing a single form of currency that is uniformly applicable worldwide.

Drawbacks

• Transaction fees: While there are generally fewer fees involved in Bitcoin transactions, the transaction fees for the Bitcoin network have been rising.
• Price volatility: The volatile nature of Bitcoin means that the value of a user's cryptocurrency can change quickly, potentially resulting in insufficient funds to complete a purchase or overpayment.
• Lack of regulation: Bitcoin is not regulated, backed, or guaranteed, leaving users without recourse if they are scammed or if the exchange storing their keys goes out of business.
• Risk of loss: As with other forms of currency, Bitcoin can be lost or stolen. Users are responsible for their private keys, and if they are lost, there is no way to recover them.
• Environmental impact: Bitcoin mining is energy-intensive and has a negative environmental impact, with miners collectively using a significant amount of energy.

Overall, while Bitcoin offers some advantages as a means of payment, such as increased anonymity, lower fees, and fast international transactions, it also presents challenges due to its volatility, lack of regulation, and environmental impact.

Bitcoin's environmental impact

Carbon Footprint

Bitcoin mining's energy consumption is vast, with a global network consuming 173.42 Terawatt-hours of electricity during 2020-2021. This would rank 27th in the world if Bitcoin were a country, ahead of Pakistan, with a population of over 230 million. The carbon footprint of this energy consumption is equivalent to burning 84 billion pounds of coal or operating 190 natural gas-fired power plants. To offset this, 3.9 billion trees would need to be planted, covering an area almost equal to the Netherlands, Switzerland, or Denmark, or 7% of the Amazon rainforest.

Water Footprint

The water footprint of Bitcoin mining is also substantial. During 2020-2021, it was estimated to be 1.65 km3, exceeding the domestic water use of over 300 million people in rural sub-Saharan Africa. This is enough water to fill over 660,000 Olympic-sized swimming pools.

Land Footprint

The land footprint of Bitcoin mining is equally concerning. During 2020-2021, the global Bitcoin mining network's land footprint was more than 1,870 square kilometers, 1.4 times the area of Los Angeles.

Energy Sources

The energy sources used for Bitcoin mining also contribute to its environmental impact. While some sources claim that Bitcoin mining uses a significant amount of renewable energy, others state that it relies heavily on fossil fuels. According to the United Nations University, coal accounts for 45% of Bitcoin's energy supply, followed by natural gas (21%). Hydropower, a renewable source with significant environmental impacts, satisfies 16% of its electricity demand, while nuclear energy provides 9%. Solar and wind energy provide only 2% and 5%, respectively.

E-Waste

In addition to its direct environmental impacts, Bitcoin mining also generates significant electronic waste (e-waste). The production and disposal of hardware specifically for Bitcoin mining contribute to this issue, with short-lived hardware being cycled through at a rapid pace. It is estimated that Bitcoin's annual e-waste amounts to 30.7 metric kilotons, comparable to the amount of IT and telecommunication equipment waste produced by the Netherlands.

Bitcoin's association with criminal activity

Bitcoin is a decentralised digital currency that is not regulated by a central authority, instead giving full control to users rather than financial institutions. Its decentralised nature helps secure the Bitcoin network and makes it resistant to manipulation, tampering and fraud. However, Bitcoin has been associated with criminal activity, and this association is one of the reasons why it is considered a risky investment.

Bitcoin and other cryptocurrencies have been linked to criminal activity due to their decentralised nature and the perception that they offer anonymity to users. Criminals can use cryptocurrencies instead of the formal banking system to move large sums of money, potentially reducing the risk of detection by law enforcement or financial institutions, which are required to submit suspicious transaction reports. This makes cryptocurrency an attractive tool for organised crime groups to conduct money laundering and other crimes related to corruption, such as bribery and embezzlement.

In 2019, United States Treasury Secretary Steven Mnuchin stated that Bitcoin was a national security issue as it had been used for illicit activities, and that cryptocurrencies were dominated by illegal activities and speculation. However, data suggests that the majority of cryptocurrency is not used for criminal activity. According to Chainalysis' 2021 report, in 2019, criminal activity represented 2.1% of all cryptocurrency transaction volume (roughly $21.4 billion worth of transfers). In 2020, the criminal share of all cryptocurrency activity fell to just 0.34% ($10.0 billion in transaction volume).

Blockchain technology, which is the basis of Bitcoin and other cryptocurrencies, also has inherent transparency that can help law enforcement combat criminal activity. All transactions are logged on a publicly accessible ledger, allowing anyone to view the entire codebase at any time. This transparency leaves a clear trail of evidence that prosecutors can use to secure convictions. Crypto exchanges also actively collaborate with law enforcement agencies to help detect and prevent financial and cybercrimes, and they assist in the prosecution of bad actors. For example, in 2022, Binance, the world's largest exchange by trading volume, responded to over 47,000 law enforcement requests, with an average response time of three days, which is faster than any traditional financial institution.

While Bitcoin has been associated with criminal activity, the data suggests that this association is not as strong as some may believe, and the transparency of blockchain technology and the active involvement of crypto exchanges can help law enforcement combat illicit activities.

The value of Bitcoin

Bitcoin is a decentralised digital currency that is not regulated by a central authority, such as a bank or government. Instead, Bitcoin gives full control to users. Bitcoin uses blockchain technology to support transactions between users on a decentralised network.

Bitcoin has had a positive correlation to stock prices in 2022, which is concerning for investors when inflation is on the rise. However, Bitcoin has been one of the best investments in the world since it was created in 2009. In a little over a decade, the price of Bitcoin skyrocketed from $1 in April 2011 to as high as $68,789 in November 2021.

Bitcoin's value is largely dependent on investor sentiment, which can be unpredictable and inconsistent. This has resulted in extreme volatility, with Bitcoin's price tumbling about 60% year-to-date as of September 2022. Despite this, Bitcoin has a relatively loose correlation with other asset classes, making it a potentially attractive tool for portfolio diversification.

Bitcoin's value is also influenced by its fixed supply, which means that investors will not be negatively impacted by dilution. This fixed supply may also make Bitcoin an attractive hedge against inflation and a store of value in the long term, although its extreme volatility has limited its appeal in this regard so far.

Should You Invest in Bitcoin?

Bitcoin is a risky and volatile investment, and it is generally recommended only for those with a high-risk tolerance and a strong financial position. If you choose to invest, it is important to maintain a diversified portfolio that includes several different types of investments to reduce your overall risk exposure.

While Bitcoin has the potential to be a valuable investment, there are also several criticisms and concerns surrounding it. Critics argue that Bitcoin is too volatile and inefficient to be a reliable currency, and that it relies on massive computing power, resulting in high energy consumption. There are also concerns about its use in illegal activity and the lack of regulatory protections for crypto investors.

However, supporters of Bitcoin argue that it is still in the early stages of adoption, and as the market grows, volatility is expected to decrease. They also believe that third-party solutions are solving the inefficiency problem and that future innovations will make paying with Bitcoin more efficient. Additionally, advocates argue that Bitcoin is increasingly being run on renewable energy sources, and its benefits justify its energy usage.

Key Considerations

When considering investing in Bitcoin, it is important to keep in mind that it is a highly volatile and risky asset class. Crypto investors do not benefit from the same regulatory protections as registered securities, and the regulatory environment for crypto is currently uncertain. Additionally, crypto is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, so it is important to only invest an amount you are willing to lose.

Frequently asked questions