Bitcoin: What It Is And Why You Should Invest

Bitcoin is a decentralised digital currency that uses blockchain technology to support peer-to-peer transactions between users. It was launched in 2009 and has since inspired thousands of new types of cryptocurrency. Bitcoin is a volatile asset class, and there are several pros and cons to investing in it.

On the one hand, Bitcoin offers cost-efficient transactions, privacy, and decentralisation. It also has growth potential, as some investors believe that once Bitcoin matures, its value will increase. On the other hand, Bitcoin is subject to price volatility, hacking concerns, and a lack of protection from the Securities Investor Protection Corporation.

Before investing in Bitcoin, it is important to understand the risks involved and ensure that you have a place to store it, such as a hot or cold wallet.

Bitcoin's value and volatility

Bitcoins Value and Volatility

Bitcoin's value comes from its store of value and payment system, as well as its finite supply. Bitcoin is decentralised and operates on a peer-to-peer basis, removing the need for third-party involvement such as banks. It is a risky investment with high volatility and should only be considered if you have a high-risk tolerance and can afford to lose some or all of your investment.

Volatility

Volatility is a measure of how much the price of a financial asset varies over time. Bitcoin is considered volatile, and its price can fluctuate significantly from day to day. The more volatile an asset, the more people will want to limit their exposure to it. Volatility also increases the cost of hedging, which is a major contributor to the price of merchant services.

Supply and Demand

Like most commodities, Bitcoin's price depends heavily on supply and demand. As an asset, it has been adopted quickly by investors and traders, and speculation about price movements plays a critical part in Bitcoin's value at any given moment.

Investor Actions

As Bitcoin is the most popular cryptocurrency, its demand increases as supply becomes more limited. Wealthier investors tend to hold their Bitcoins, preventing those with fewer assets from gaining exposure. This can also drive volatility, as investors with large holdings can influence the market price.

Media Influence

Media outlets, influencers, industry moguls, and cryptocurrency fans create investor concerns, leading to price fluctuations. When media outlets announced Proshare's introduction of its Bitcoin Strategy ETF in October 2021, Bitcoin's price skyrocketed.

Limited Supply

Bitcoin's value is also influenced by its limited supply. There are currently 18.7 million bitcoins in circulation, which is nearing its maximum threshold of 21 million. New bitcoins are created as a reward for miners, but over time, the size of these rewards decreases.

Investor Sentiment

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

Regulatory Changes

Government agency views of cryptocurrency can also affect Bitcoin's price. For example, the Chinese government and central bank announced in 2021 that all cryptocurrency transactions were illegal, causing Bitcoin's price to drop.

Lack of Central Bank

Bitcoin's volatility is also driven by its lack of a central bank to control its supply. This means that no central authority can intervene in the Bitcoin market to support or prop up markets and artificially subdue volatility.

How to buy Bitcoin

There are several ways to buy Bitcoin, each with its own advantages and disadvantages. Here is a step-by-step guide on how to purchase your first Bitcoin:

Step 1: Choose a Crypto-Trading Service or Venue

You can purchase Bitcoin through a crypto exchange, brokerage firm, or payment service. Crypto exchanges such as Binance, Coinbase, Kraken, Gemini, and Crypto.com offer a wide range of cryptocurrencies and features. Brokerage firms like Robinhood and traditional brokers like Fidelity also offer crypto trading. Payment services such as PayPal allow you to buy, sell, and hold Bitcoin.

Step 2: Set up an Account and Verify Your Identification

Before buying Bitcoin, you will need to create an account on your chosen platform and verify your identity. This usually involves providing personal information and, in some cases, submitting identification documents.

Step 3: Connect Your Exchange to a Payment Option

You can connect your bank account directly to the exchange or link a debit or credit card. Some exchanges may charge higher fees for certain funding options, and using a credit card may result in higher interest rates.

Step 4: Place Your Order

Once your account is funded, you can place your first order to buy Bitcoin. Depending on the platform, you may be able to purchase Bitcoin by tapping a button or entering Bitcoin's ticker symbol: BTC. Remember that you don't have to buy a whole Bitcoin; you can invest as little as $25 or $30.

Step 5: Safe Storage

After purchasing Bitcoin, you'll need to store it securely. You can use a hot wallet, which is an online wallet provided by the exchange or a third-party provider. Alternatively, you can use a cold wallet, which is an offline wallet that isn't connected to the internet, such as a hardware wallet or paper wallet. Cold wallets are considered more secure but may require technical knowledge to set up.

Bitcoin's environmental impact

Bitcoins Environmental Impact

Bitcoin mining also has a significant water footprint, estimated to be similar to the amount of water required to fill over 660,000 Olympic-sized swimming pools. This water consumption is enough to meet the current domestic water needs of more than 300 million people in rural sub-Saharan Africa. The land footprint of Bitcoin mining activities during the same period was 1.4 times the area of Los Angeles.

The high energy demands of Bitcoin mining are primarily met by fossil fuels, with coal accounting for 45% of its energy supply mix, followed by natural gas at 21%. Hydropower, a renewable energy source, satisfies 16% of Bitcoin's electricity demand, while nuclear energy contributes 9%. However, renewable sources like solar and wind power only provide 2% and 5% of Bitcoin's total electricity needs, respectively.

The intense energy requirements of Bitcoin mining lead to massive levels of greenhouse gas emissions. From 2020 to 2021, Bitcoin mining processes produced 85.89 million metric tons of carbon dioxide equivalent (MTCO2E). This amount of emissions is comparable to the annual emissions from 9,665 gallons of gasoline consumed by passenger vehicles or 96,210 pounds of coal burned. The greenhouse gas emissions from Bitcoin mining alone could potentially push global warming beyond the goals set by the Paris Agreement to hold anthropogenic climate warming below 2 degrees Celsius.

The environmental impact of Bitcoin mining has raised concerns among environmental activists, governments, and business leaders. The White House, in its September 2022 report, noted that Bitcoin requires more energy than all other cryptocurrencies combined. Bitcoin accounted for 60-77% of the total global crypto-asset electricity use in 2022. The high energy consumption and resulting emissions of Bitcoin mining have led to calls for regulatory interventions and technological advancements to improve the efficiency and sustainability of the global financial system.

While Bitcoin's energy usage and carbon footprint are significant, some argue that the industry uses a substantial amount of renewable energy, and its journey towards sustainability is fueled by relentless innovation and efficiency enhancements. Bitcoin miners are exploring novel solutions, such as utilizing stranded energy sources like natural gas from remote mining operations or harnessing wind and solar power. These efforts can potentially reduce global warming and mitigate potent greenhouse gas emissions, positioning Bitcoin miners as unexpected allies in the fight against climate change.

Bitcoin's legality

The legality of Bitcoin varies from country to country. Here is a breakdown of its legality in different parts of the world:

North America

Bitcoin is legal in the United States, Canada, and Mexico. In the U.S., the Internal Revenue Service (IRS) considers Bitcoin property for taxation purposes. The Treasury has defined it as a convertible currency with an equivalent value in real currency. Any entity that administers or exchanges Bitcoin falls under the definition of a money services business and is subject to the Bank Secrecy Act.

Europe

Bitcoin is legal in the United Kingdom, Germany, Switzerland, France, Italy, and many other European countries. The European Union does not consider Bitcoin a currency but has stated that VAT/GST is not applicable to the conversion between traditional (fiat) currency and Bitcoin. The UK has allowed cryptocurrency use since its inception and has developed a framework for cryptoasset regulation.

Asia

Bitcoin is legal in Japan, Singapore, Hong Kong, and several other Asian countries. In China, however, it is illegal to use Bitcoin, and the government has heavily restricted its use. India has also banned banks from dealing in Bitcoin, leaving the overall legal status of cryptocurrencies unclear.

Oceania

Bitcoin is legal in Australia and New Zealand. In Australia, the Australian Taxation Office considers Bitcoin a financial asset with value that can be taxed when specific events occur, such as trading, exchanging, selling, or using it for purchases.

Africa

Bitcoin is legal in South Africa and Mauritius. The South African Revenue Service classifies Bitcoin as an intangible asset. In contrast, the Central African Republic had made Bitcoin legal tender in 2022 but repealed this decision in 2023.

South America

Bitcoin is legal in Brazil, Argentina, and El Salvador, the first country to recognize Bitcoin as legal tender in 2021.

It is important to note that the regulatory landscape for Bitcoin and other cryptocurrencies is constantly evolving, and the information provided here may not be exhaustive. The legality of Bitcoin in any given country can change over time, so it is essential to stay informed about the latest developments.

Bitcoin's future

Bitcoin is a decentralised form of digital cash that eliminates the need for traditional intermediaries like banks and governments. It is the first and most valuable cryptocurrency, with a market cap of more than $360 billion.

There are several arguments for and against investing in Bitcoin.

Arguments for investing in Bitcoin:

• Bitcoin has the potential to be a non-correlated asset, similar to gold, meaning it may not follow the trends of other assets like stocks.
• Bitcoin is decentralised and cannot be controlled by a single government, central bank, or company, which protects it from both inflation and dictators.
• Bitcoin can be a way for people living in underbanked regions or countries with unstable financial systems to protect their wealth and access financial services.
• Bitcoin has a relatively loose correlation with other asset classes, making it a potentially attractive tool for portfolio diversification.
• Bitcoin has a fixed supply, meaning investors will not be negatively impacted by dilution.
• If Bitcoin ultimately becomes the world's universal digital currency, its demand and price will grow exponentially.
• Bitcoin's long-term track record speaks for itself. In a little over a decade, its price skyrocketed from $1 to nearly $70,000.

Arguments against investing in Bitcoin:

• Bitcoin is too volatile to be a reliable currency, with daily fluctuations of 5% and occasional double-digit price moves.
• Bitcoin is too inefficient to work as a means of payment. It takes about 10 minutes to process a single transaction, compared to seconds for credit cards and cash.
• Bitcoin relies on massive computing power and has a negative environmental impact. According to the University of Cambridge, it takes more energy to run Bitcoin than it does to power the entire country of Poland.
• Bitcoin is not backed by any meaningful value. Its value is based on the fact that there will only ever be 21 million bitcoins, but critics argue that scarcity alone is not enough to justify its price.
• Bitcoin does not have a central development team, so it may be harder for Bitcoin to add new functions and innovate when necessary compared to other cryptocurrencies.
• Bitcoin does not have a long-term track record, and it is difficult to determine its true value because its price is tied exclusively to investor sentiment.
• The cryptocurrency market is very loosely regulated, and more regulation could make Bitcoin less appealing to some investors.

In conclusion, Bitcoin's future is highly uncertain, and there are strong arguments both for and against investing in it. It is a risky and volatile asset, and investors should proceed with caution.

Frequently asked questions