Unless you’ve had your head in the sand over the past year, you will be aware that Bitcoin and other ‘crypto currencies’ have been making people wealthy. In some cases, tremendously wealthy. You might be wondering if it’s too late to invest in Bitcoin? If you’ve missed the boat, so to speak.
Bitcoin has been on the rise and rise. This time last year, a whole Bitcoin (you don’t have to buy a whole Bitcoin, you can buy portions of Bitcoin), would have set you back £5,844. Today it’s worth approx £41,945. This represents more than a sevenfold increase in value.
Imagine you invested £10,000 this time last year. Today it would be worth around £71,800. Not a bad rate of interest.
Whilst even the most bullish of investors might have expected the bubble to burst at some point, Bitcoin has continued to increase in value. It has exposed the ney-seyers as woefully under informed.
Even following steep rises in 2020, 2021 witnessed a further rally on Bitcoin, helped by large Wall Street investors and billionaires piling into the currency. Tesla boss Elon Musk tweeting about the crypto currency last month caused yet another price spike.
Recently analysts have pointed to signs that Bitcoin could smash through the $70,000 (over £50,000) mark. This just weeks after the cryptocurrency recorded its $61,800 (£44,820) all-time high.
Perhaps, like many people, you’re wondering if it’s too late to invest in crypto currency. More specifically Bitcoin.
Here we provide you the essential information you need to know about Bitcoin. Our analysis will also tell you whether it’s too late to invest in Bitcoin. Or if Bitcoin is still a worthwhile investment.
Bitcoin is a type of digital currency, otherwise known as a crypto currency. On the face of it, it’s no different to any other currency. A system of money that individuals use it to trade goods and services. Except, the currency only exists digitally.
Each Bitcoin is basically a secure computer file which is stored in a ‘digital wallet’ on a smartphone or computer. Like any currency, people can put Bitcoins (or part of one) into their (digital) wallet to spend. You can send Bitcoins to other people when buying goods or services, or even as gifts. However, every single transaction is recorded in a public list called the ‘blockchain’.
Blockchain is the critical aspect of crypto currency that ultimately separates it from traditional ‘paper’ currencies.
Blockchain is an electronic ledger that creates an unchangeable record of transactions. So each transaction is time-stamped and linked to the previous one. Each transaction recorded in the electronic ledger is called a block. When you bundle the history or ‘chain’ of transactions together, you end up with the ‘block chain’, which gives us the term blockchain.
The reason blockchain is an important concept is that it could improve security, transparency, and traceability. It speeds up transactions, lowers costs, and reduces the need for intermediaries.
For example, imagine a world where fraud and corruption is wiped out. Blockchain would make transactions transparent. Money movement would be easily traceable. People wouldn’t lose significant amounts of their money to middle-men whenever they move it around because security and transparency is no longer an issue.
Be under no illusion, blockchain based currencies are the future. It’s a question of ‘when’ not ‘if’, they become mainstream. The imperative question is, which one or which ones will be widely used.
There are many crypto currencies fighting for space in a growing market. Over 4,000 different crypto currencies were registered in 2021. However, Bitcoin is the one that has risen above all others in terms of price and exposure.
With over 4,000 crypto currencies listed, you could be forgiven for wondering where to even start. Just nine years ago, there was only Bitcoin. Now we have the equivalent of 20 cryptocurrencies for every country in the world.
To unpick all of this, it’s first important to note that the market is poorly named and a great many of these are not strictly ‘currencies’. Large proportions of these cryptocurrencies are simply innovative systems that utilise blockchain technology to revolutionise all sorts of different processes and industries. The fact that blockchain promises such transparency and traceability means that there are applications for all sorts of data transfer, ownership, and logistical uses.
Secondly, there are many spin-off currencies (we’ll touch on this later). Additionally, there are crypto currencies designed to merge together these different spin-offs.
Of course hundreds are also launched with the aim of competing with Bitcoin to become a mainstream digital currency. This has resulted in the creation of markets, volatility, bubbles, huge gains, eye watering losses, and swathes of speculation.
Having several thousand cryptocurrencies isn’t necessarily a bad thing. But some have the main objective of being used as a tool for speculation. Inevitably many will fade away. In the end, we may have one or just a handful of crypto currencies that will become adopted by the mainstream.
The important thing to remember is that much of the information distributed and absorbed on the web, is made with the intention to gain interest and push up demand and prices for certain crypto currencies. There are thousands of people happy to tell you it’s not too late to invest in Bitcoin, or any other crypto-currency. It’s easy to get caught in the hype.
It’s important to understand a little about Bitcoin mining if you are considering investing in the currency.
Bitcoin mining is the process that creates the cryptocurrency. To ‘mine’ a Bitcoin (i.e. create a new Bitcoin), you must solve a complex computational puzzle. People that solve these puzzles are rewarded with new Bitcoins.
What is clever about this system is that the puzzle also involves validating and bundling together information relating to thousands of Bitcoin transactions (into a ‘block chain’). This validation process when mining ensures that the payment network is trustworthy and secure.
Think of it as rewarding auditors when they’ve done a good job. Thus, the crypto currency Bitcoin is validated by the miners, who are rewarded with receiving new coins. So, in short – the Bitcoin network is policed and validated by users who are incentivised to do so.
There are of course a number of challenges facing Bitcoin. But there is one overriding, major issue. Mining is extremely resource-intensive. The complex puzzles use up vast amounts of computing power. It doesn’t sound that bad, but put it into context. Imagine you attempted to use your home computer to solve the Bitcoin puzzles, chances are, your energy usage would far exceed the earnings you make from Bitcoin mining. Now scale that up.
Mining has become very sophisticated over the last few years. Pools of miners using complex machinery to speed up mining operations. Crucial to their profitability is locating these pools in locations where energy is cheapest. But, the scale is huge, and so is the energy use.
Bitcoin mining is so carbon intensive that it threatens emission reduction targets in countries all over the world. For example, 75 percent of Bitcoin Mining takes place in China, and its current carbon footprint is as big as one of the country’s largest 10 cities. The situation is likely to get worse before it gets better.
As long as there is demand, there is a structure built into Bitcoin that almost guarantees that its value will increase. Or at least, it will not be devalued by inflation.
The value of Bitcoin is designed to be inelastic. This is because the amount of new bitcoin released with each mined block (called the ‘block reward’), is halved every 210,000 blocks (or roughly every 4 years).
Thus, there is an absolute limit on the amount of Bitcoin that can ever be mined. We’ve already mined well over 80 percent of it.
In other words, the supply of new Bitcoin is constrained. When Bitcoin first started, 50 Bitcoins per block were given as a reward to miners. As of now, the block reward is 6.25 coins per block. This will decrease to 3.125 coins per block in the next post halving. It will keep on halving until the block reward per block becomes 0 (estimated by the year 2140).
Theoretically, if demand remains constant, but supply is constrained, the value of the coin will continue to rise because they become more scarce.
However, there are a number of other factors that could continue to raise the price of Bitcoin. Now we’ve established how Bitcoin works, here are the reasons Bitcoin could continue to see rises for the foreseeable future.
In 2020 we certainly saw the institutional accumulation of Bitcoin by mainstream investors. Why did this happen? Well in part due to the fact that Bitcoin was finally supported and understood by Wall Street.
It moved from a fringe speculation bubble, to a commodity you might even find in your pension fund. With major investment funds and billionaires sitting up, taking notice, and piling into Bitcoin, it’s clear that the narrative has changed around Bitcoin. Basic understanding of how the crypto currency worked has helped this step-change in mentality.
A large part of the reason Bitcoin has witnessed exponential growth over 2020-2021 is thanks to macroeconomic conditions brought upon us by the Covid pandemic.
Global government borrowing to deal with the Covid pandemic has reached eye-watering levels. It’s unlikely that increases in taxes could ever pay back the current level of borrowing. As a result, the world is seeing unprecedented levels of quantitative easing. This means paper currencies are being devalued simply by governments printing vast amounts of new money each day.
Due to the structural setup of Bitcoin halving, making the supply of it inelastic, it’s easy to see why Bitcoin is seen as ‘digital gold’ by investors.
Given the long term impacts of record government borrowing, paper currencies are forecast to continue being devalued through quantitative easing in order to reduce the debt burden for at least the next two decades. As investors seek to protect themselves from devaluation, some analysts believe this could push Bitcoin beyond $1 million within the next 20 years.
Crypto currencies are complex and relatively new, so it’s possible risks exist which we don’t fully understand yet. The market could look entirely different in five years time. From reading the points above you might already be convinced that it’s not too late to invest in Bitcoin. However, here are some current and identifiable risks to be aware of:
Although Bitcoin has seen Bullish price growth since 2009, Bear markets happen. If the market overshoots, it will inevitably fall back. At least in the short term.
In principle, Bitcoin halvings should matter less and less as the amount of new coins continues to reduce over time. But the halving process has already created a buying and selling cycle, which could continue to occur through habit and speculation alone. This will lead to short-term price fluctuations.
If you buy at the top of the cycle, and can’t afford to hold onto your Bitcoin when the price drops, the potential losses are huge. If too many investors are exposed to falls, this simply exacerbates the fall.
Market fluctuations aside, there are more significant structural issues with how Bitcoin works.
If you consider that hundreds of thousands of purchases and sales using Bitcoin occur in a single day. Then consider that verifying each of those transactions is a lot of work for miners. Using up significant resources and energy.
So, what happens if Bitcoin became a mainstream currency and there were millions of transactions every second? There would be various repercussions around speed, validation and computing power to handle and put these transactions into ‘blocks’.
Forward thinking miners are already heading off some of these risks. But these risks are also the reason for hard forks in the currency (i.e. numerous currency offshoots). These structural issues could cause more uncertainty. Rather than seeing the crypto market consolidate over time, it could continue to disperse or break up.
Given that human driven climate change, habitat loss and pollution are the biggest threats facing every living organism on the planet, investors are becoming increasingly driven by ethics.
Mining Bitcoin is currently an environmental disaster. As a result, pressure could mount on investment companies to ditch support for the currency.
Energy or computing systems will need to develop fast to head off a green revolt against Bitcoin.
As we have seen in the past, individuals still generally put their own personal wealth above wider ethical concerns. However, this could change given the far-reaching consequences of climate change.
Considering the information set out above, blockchain-based crypto currencies are undoubtedly the future. Whilst we’ve seen huge gains being made in recent months, the truth of the matter is that we are in the infancy of cryptocurrencies.
Those still thinking Bitcoin is a fad have frankly exposed themselves as woefully under-informed.
There are many analysts making the argument that Bitcoin will hit $1 million within the next 20 years. Others even predict that Bitcoin will anchor the financial system in the future.
Nobody can be certain what shape this industry will be in five years from now. However, it’s certainly not too late to start investing in Bitcoin. Particularly given the long term prospect of currency devaluation owing to huge Government borrowing and stimulus packages. The inelasticity of Bitcoin makes it a promising bet for investors.
Whilst there are many investors talking up Bitcoin, who, unsurprisingly have a stake in the currency. I personally think there is a very strong chance we could see Bitcoin continue to rise significantly over the long term, given the devaluation of paper currencies.
Bitcoin will need to address the issue of the sheer volume of computing power required to mine the coins, both for structural and environmental reasons. Between now and the point at which the whole world adopts crypto currency, you can expect many ups and downs, twists and turns.
It’s not too late to invest in Bitcoin. But, as always, the important thing is to do your own research before investing in anything.
Featured image and content image from Pixabay.
