Bitcoin's Investment Potential: Why It's Worth Your Money

Bitcoin is a cryptocurrency that has been on a wild ride since its creation in 2009. Its price has seen exponential growth, with an eightfold increase in 12 months in 2024, but it has also experienced sharp declines. Bitcoin's value is influenced by supply and demand, media coverage, and public interest, among other factors. It is prone to price volatility, and its value can fluctuate drastically in a short period.

Bitcoin is a decentralised currency that is not issued or controlled by any central authority, and transactions are secured by cryptography. It has grown in popularity over the years, and its exchange-traded funds (ETFs) were introduced in early 2024.

Despite its volatile nature, Bitcoin has attracted investors due to its potential for high returns. However, it is a risky and speculative investment, and its value is uncertain. Some experts believe that Bitcoin is a good investment, while others argue that it is not a productive asset and does not have any intrinsic value.

Before investing in Bitcoin, it is essential to understand the risks involved, including financial loss, future regulation, fraud, and cybercrime.

Bitcoin's volatility

Bitcoin is prone to price volatility, with wide swings to the upside and downside. In May 2021, its price plunged nearly 30%. It fell over 60% from November 2021 to May 2022. In 2022, it fell more than 75% from its all-time high. In 2013, it saw an 80% tumble in value. There were also drops of 50% or more in 2021 and 2022.

The cryptocurrency's value is influenced by five factors: supply and demand, media coverage and public interest, the cost of production, government legislation, and the success of alternative cryptocurrencies.

Supply and Demand

It is widely known that no more than 21 million Bitcoins can be produced, and that's unlikely to happen before 2140. Only a certain number of Bitcoins are released each year, and this rate is reduced every four years by halving the reward for Bitcoin mining. The last of these "halvings" occurred in May 2020, and the next one is due in April 2024. When it happens, there may be a significant increase in Bitcoin demand, largely driven by media coverage and investor interest.

Media Coverage and Public Interest

As with any speculative commodity, Bitcoin is greatly influenced by the court of public opinion. For example, in 2021, a tweet from Tesla's Elon Musk caused Bitcoin's price to drop by 30% in a single day, wiping about US$365 billion off the cryptocurrency market.

Cost of Production

It is said that Bitcoin benefits from minimal production costs. However, solving even a single hash requires immense processing power, and it's believed that crypto mining collectively uses more electricity than some small countries. It's also believed that miners were largely responsible for the chip shortage experienced throughout the pandemic due to buying and burning out vast quantities of graphics cards.

Government Legislation

Bitcoin may be unregulated, but it is not immune to the effects of government legislation. For instance, China's 2021 ban of the cryptocurrency caused a sharp price drop. The European Union has also attempted to ban Bitcoin in the past, and the US was recently accused of trying to do the same. A ban in either region could be devastating for Bitcoin's overall value.

Success of Alternative Cryptocurrencies

Bitcoin's cryptocurrency market share has sharply declined over the years. In 2017, it maintained a market share of over 80%. Bitcoin's current market share is just over 52%. The most significant alternative is Ethereum, which currently accounts for roughly 16% of the crypto market. Some experts suggest that Ethereum may even overtake Bitcoin, but others disagree.

The future of money

Bitcoin, the original cryptocurrency, has been on a wild ride since its creation in 2009. In the years since, its price has surged and plummeted, and the total market value of all cryptocurrencies now exceeds $1.5 trillion. Bitcoin's emergence amid the global financial crisis, which shook trust in banks and governments, was perfectly timed. It enabled transactions using only digital identities, granting users some degree of anonymity. However, it has become clear that Bitcoin does not offer true anonymity, and government agencies have successfully tracked and retrieved ransoms paid in Bitcoin.

Bitcoin was created as a way to conduct transactions without the intervention of a trusted third party, such as a central bank or financial institution. Its blockchain technology is truly ingenious and groundbreaking, harnessing the power of programs running on networks of computers to securely conduct payments within and between countries without relying on financial institutions that charge high fees. This has the potential to benefit consumers and businesses, facilitating both domestic and international commerce.

Bitcoin has failed in its stated objectives, yet it has become a speculative investment. This is puzzling, as it has no intrinsic value and is not backed by anything. Bitcoin investors seem to be relying on the greater fool theory—to profit from an investment, you need only to find someone willing to buy the asset at an even higher price.

Bitcoin is prone to price volatility, with wide swings to the upside and downside. Its value is primarily influenced by supply and demand, public interest and media coverage, and the actions of prominent individuals and companies. For example, in 2021, a tweet from Elon Musk caused Bitcoin's price to drop by 30% in a single day, wiping about $365 billion off the cryptocurrency market.

Bitcoin's cryptocurrency market share has sharply declined over the years, falling from over 80% in 2017 to just over 52% currently. There are now scores of Bitcoin alternatives, known as altcoins, the most significant of which is Ethereum, which currently accounts for roughly 16% of the crypto market.

Despite its volatility and regulatory challenges, Bitcoin has some incredibly prominent backers in both the investment world and the wider business landscape. It is also not going away anytime soon. Variants of Bitcoin's technology are making many financial products and services available to the masses at low cost, and these developments have spurred central banks to consider issuing digital versions of their currencies. China, Japan, and Sweden are already conducting trials of their digital currencies.

While Bitcoin may not become a global currency, it has set off a revolution in money and finance that will ultimately affect everyone. It remains to be seen whether this will be for better or worse.

Regulatory risks

The regulatory treatment of Bitcoin also varies within countries, depending on the agency or level of government. For example, in the US, the Internal Revenue Service (IRS) treats Bitcoin as property for tax purposes, while the Commodity Futures Trading Commission (CFTC) considers it a commodity.

The lack of consistent regulation creates uncertainty for investors. For instance, in 2021, China effectively made it illegal for citizens to mine or hold any cryptocurrency, causing the price of Bitcoin to fall. If other countries follow suit, Bitcoin investors could face significant losses.

The unique characteristics of cryptocurrencies, such as their global portability and the variety of tokens available, present a challenge for regulators. Some tokens have circumvented regulations by declaring themselves "utility tokens", and have been listed on exchanges outside their native countries.

International bodies, such as the International Monetary Fund (IMF), have called for global cooperation among regulators. The IMF has made several recommendations, including licensing and authorising crypto-asset service providers, and imposing strict prudential requirements on stablecoin issuers.

While Bitcoin has survived many regulatory changes, partly due to pressure from the cryptocurrency community, the lack of consistent and comprehensive regulation remains a significant risk for investors.

Bitcoin's energy consumption

The high energy consumption of Bitcoin is due to its proof-of-work algorithm, which requires miners to perform computationally intensive tasks to validate transactions on the blockchain. As a result, the machines performing these tasks consume large amounts of energy, primarily sourced from fossil fuels. This has led to concerns about the environmental impact of Bitcoin and the sustainability of the proof-of-work algorithm.

The energy consumption of Bitcoin has also drawn the attention of policymakers and grid planners, particularly in the United States, where cryptocurrency mining operations have grown rapidly in recent years. The increased demand for energy from cryptocurrency mining can strain electricity grids and lead to higher electricity prices and increased carbon dioxide emissions.

Some estimates place Bitcoin's energy consumption at around 127 terawatt-hours (TWh) annually, which is more than the energy consumption of many countries, including Norway. The large energy usage associated with Bitcoin mining is an inevitable consequence of the fundamental nature of its algorithms.

However, Bitcoin advocates argue that the energy consumption of Bitcoin is increasingly being met by renewable sources. For example, according to the Bitcoin Mining Council, over 58% of Bitcoin mining used sustainable electricity in early 2022. As renewable energy becomes more affordable, it could help miners maximize profits while reducing their environmental impact.

Overall, while Bitcoin's energy consumption is a valid concern, there are ongoing efforts to improve the sustainability of the cryptocurrency industry, including the development of less energy-intensive consensus mechanisms.

Criminal activity

Bitcoin and other cryptocurrencies have been associated with criminal activity, but this is largely a myth. While it is true that cryptocurrencies are used to facilitate criminal activities, any form of value will be used for illegal purposes, whether through crypto or fiat. In fact, cash is an undeniably more popular means of exchange for criminal activities.

The misconception that cryptocurrencies are mainly used for illicit financing is partly due to their relative anonymity and lack of regulation. However, Bitcoin and other cryptocurrencies don't provide complete anonymity due to the Know-Your-Customer (KYC) policies implemented by most crypto exchanges. Even without KYC scanning, law enforcement agencies can easily track crypto transactions to identify criminal activity, as the blockchain is transparent and immutable.

The inherent transparency of blockchain technology and the active involvement of crypto exchanges help law enforcement agencies combat criminal activity. All transactions are logged on a publicly accessible ledger, allowing anyone to view the entire codebase at any time. This leaves a clear trail of evidence that prosecutors can use to secure convictions. Additionally, crypto exchanges share expertise and resources with law enforcement agencies to help detect and prevent financial and cybercrimes.

While the use of cryptocurrencies for illicit activities is a concern, it is important to note that the majority of cryptocurrency is not used for criminal activity. According to various reports, the share of all cryptocurrency activity linked with illegal activity ranged from 0.24% to 2.1% in recent years, with an overall downward trend. In comparison, it is estimated that between 2% and 5% of global GDP ($1.6 to $4 trillion annually) is connected with money laundering and illicit activity through traditional financial systems.

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