Inaya Mclaughlin
Bitcoin is a cryptocurrency with a market capitalization of over $1 trillion. It was created in 2008/2009 as a way to conduct transactions without the intervention of a trusted third party, such as a central bank or financial institution. Bitcoin has grown in popularity since its creation, with its price surging to over $60,000 in 2021, an eightfold increase in 12 months. However, it has also experienced sharp declines, falling to half its value in just a few weeks.
Bitcoin is a risky and volatile investment. Its value is unpredictable and can fluctuate dramatically. It is also not backed by any meaningful value and is not a widely accepted medium of exchange. On the other hand, Bitcoin is decentralized, and its supply is limited to 21 million units, making it scarce.
Before investing in Bitcoin, it is important to understand the risks and consider your financial situation and risk tolerance.
What You'll Learn
Bitcoin's volatility
Bitcoin is considered a volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The more volatile an asset, the riskier it is to hold. Volatility also increases the cost of hedging, which is a major contributor to the price of merchant services.
Bitcoin's high volatility means that its value may go up or down substantially. For example, in 2022, it fell more than 75% from its all-time high. However, investors have been well compensated for Bitcoin's volatility, and it has historically exhibited high volatility with returns disproportionately skewed to the positive side.
Bitcoin's low volatility has historically been a precursor to a price increase. For instance, in early 2024, Bitcoin's one-year realized volatility reached a new all-time low, and this was followed by a steep rise in price.
Teen's Guide to Bitcoin: Getting Started with Crypto
You may want to see also
Its use for payments
Bitcoin's use for payments is a topic of debate. Critics say that it is too inefficient to be a practical means of payment, highlighting the average 10-minute transaction time. In contrast, credit card transactions are almost instantaneous. Critics also point out that you may have to pay capital gains tax on Bitcoin transactions, making it impractical for everyday purchases.
However, Bitcoin advocates argue that it is more efficient than credit cards, as credit card transactions can take days to settle, whereas Bitcoin transactions are finalised in 10 minutes. They also argue that third-party solutions are solving the inefficiency problem. For example, the Lightning Network, a third-party protocol, can process Bitcoin payments in milliseconds.
Bitcoin's use for payments is also limited by the number of merchants that accept it. However, there is a growing number of services and merchants accepting Bitcoin worldwide. Additionally, most point-of-sale businesses use a tablet or mobile phone to allow customers to pay with their mobile phones.
To pay with Bitcoin, you need a Bitcoin wallet, which is available for all major operating systems and devices. You can install an app on your mobile device or use a wallet specifically for online payments on your computer.
Gold Coins: Long-Term Investment Strategy?
You may want to see also
Environmental concerns
Bitcoin's environmental impact is a significant concern for investors. The cryptocurrency's energy consumption is immense, with some estimates placing it at 151 terawatt-hours (TWh) of electricity annually, more than the energy used by entire countries. This energy consumption has severe consequences for the environment, contributing to climate change and wasting valuable resources.
Bitcoin's energy consumption is due to its decentralised nature and the mining process. Miners use purpose-built computers to solve complex mathematical equations, and in return, they are rewarded with a fraction of a Bitcoin. The more people that mine Bitcoin, the more energy is consumed. As the price of Bitcoin has increased, so too has the number of miners, leading to a sharp rise in energy consumption.
The type of energy used to mine Bitcoin is also a concern. Most mining facilities are located in regions that rely on cheap, highly polluting coal-based power plants or hydroelectricity. According to the Cambridge Centre for Alternative Finance, coal accounts for 38% of Bitcoin's energy use. This heavy reliance on fossil fuels means that Bitcoin mining contributes millions of tons of carbon dioxide to the atmosphere each year.
Bitcoin mining also generates significant electronic waste. The specialised hardware used for mining becomes obsolete roughly every 1.5 years, leading to a growing e-waste problem.
The environmental impact of Bitcoin has led to criticism from some notable figures, including Elon Musk, who highlighted the issue in a 2021 tweet.
While some argue that renewable energy could be used to power Bitcoin mining, this is not a simple solution. As long as renewable energy sources are limited, using them for Bitcoin mining could lead to shortages in other areas.
The environmental impact of Bitcoin is a significant concern for investors, and it is essential to consider the potential risks and downsides of this cryptocurrency before investing.
Ankr Coin: A Smart Investment Decision?
You may want to see also
Its association with criminal activity
Bitcoin's association with criminal activity is one of the most significant concerns for critics of the cryptocurrency. Criminals can exploit the inherent pseudonymity and decentralised nature of Bitcoin to conduct money laundering and other crimes related to corruption. The lack of regulatory oversight and the anonymous nature of transactions make it challenging to identify and take legal action against perpetrators.
Bitcoin and other cryptocurrencies have been linked to various illicit activities, including cybercrime, theft, fraud, money laundering, terrorism financing, and drug trafficking. The irreversible nature of transactions and the lack of consumer protections make it difficult for victims to recover their losses.
According to blockchain analysis company Chainalysis, around $2.5 billion was laundered through Bitcoin between 2009 and 2018, with the fraction of cryptocurrency transactions linked to illicit activities on the rise since early 2019. In 2021, 0.15% of known cryptocurrency transactions were involved in illicit activities, representing a total of $14 billion.
While it is difficult to determine the exact extent of criminal activity involving Bitcoin, it is clear that it has been a significant issue. In 2023, illicit cryptocurrency addresses received a total of $24.2 billion, with stablecoins now being the cryptocurrency of choice for cybercriminals due to their stability.
However, it is important to note that the use of Bitcoin in criminal activities represents only a limited share of the criminal economy compared to cash. Additionally, as digital forensics departments improve their ability to track blockchain transactions, criminals may find it increasingly difficult to use Bitcoin for illicit purposes.
Doge Coin: Worth the Investment Risk?
You may want to see also
Its real value
Bitcoin's real-world value is a hotly debated topic. One of the only things more popular than bitcoin is arguing about bitcoin. Bitcoin's price fluctuations are well-documented, but what does that say about the digital asset's intrinsic value?
Bitcoin's value today is based on how the market currently prices it. Yes, bitcoin is a volatile asset, and its price changes daily. Still, to a large degree, market participants have spoken in determining that the digital currency is a solid store-of-value asset and medium of exchange.
Bitcoin is a cryptocurrency, and there are three main types of money: commodity money, representative money, and fiat money. Bitcoin is a form of fiat money, where the only thing backing the currency is faith in the stability and prosperity of the issuing entity. In this case, the issuing entity is a decentralised network of computers.
Bitcoin's value comes from its divisibility and scarcity. Bitcoin is more divisible than any other currency on the planet. A single bitcoin can be divided into one hundred million pieces. The smallest unit of measure in the Bitcoin economic system is a satoshi or "sat" worth 0.00000001 BTC.
Bitcoin also has a fixed supply cap of 21 million, which is the basis of its scarcity and what makes it an attractive store-of-value asset.
Bitcoin faces several scalability issues, but projects like the Lightning Network aim to address these issues and give bitcoin even more real-world utility, adding value in the future as part of the growing world of cryptocurrency and blockchain.
Bitcoin: Buy, Invest, or Both?
You may want to see also
Frequently asked questions
Bitcoin is the largest cryptocurrency by market cap and has offered the potential for high returns. It is decentralised, meaning it doesn't require a third party like a bank to verify transactions. It also 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 highly volatile and susceptible to market manipulation. It is irreversible, meaning that if you lose your wallet credentials, your Bitcoin is gone. It is also not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.
Opinion is divided. Some experts, like Warren Buffett, are against it because they don't believe it has any utility. Others, like Michael Novogratz, are supporters and believe that it could hit new highs.
This is debated. Owning Bitcoin is not like owning stock in a company because it doesn't generate revenue or issue dividends. Some say it's a currency, but it's not widely used for payments. Others argue it's a commodity, while some believe it's a new asset class altogether.
Bitcoin is highly volatile and its ascent has not been linear. For example, someone who bought Bitcoin in 2013 would have seen their investment tumble 80% and it wouldn't have recovered for another three years.
