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Investing in bitcoin: What to consider

Key takeaways

  • Critics say bitcoin doesn't work as a currency, citing concerns like volatility, energy usage, and use in illegal activity.
  • Supporters argue that it's too early to make some of these claims, and that innovation is already fixing many of those concerns.
  • Investors should review the arguments from both sides and understand the risks specific to cryptocurrencies before considering bitcoin as an investment.

Bitcoin's popularity is growing, but not everyone is convinced it's a good investment. Tesla held nearly $2 billion in bitcoin in 2021, while Warren Buffett has repeatedly questioned its value. So should you consider investing in bitcoin? Let’s look at six of its most popular criticisms (which we'll characterize as “bear” arguments) and their counterarguments (appearing below as the “bull” arguments).

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Can someone explain the volatility?

Bears say bitcoin's wild price fluctuations means it's too volatile to work as a currency. Bulls say it's too early to draw conclusions. Volatility should decrease as the market matures.

The bear argument Critics argue bitcoin is too volatile to be a reliable currency. Daily fluctuations of 5% are ordinary, not to mention occasional double-digit price moves. On May 19, 2021, its price plunged nearly 30%. It fell over 60% from November 2021 to May 2022. While it has typically rallied after these drops, bears argue the big fluctuations mean it doesn't work.

The bull argument Bitcoin advocates say the volatility is understandable because bitcoin is still in the early stages of adoption.

As of 2021, only 114 million of the world's nearly 8 billion people invested in bitcoin, according to data from crypto.com. Advocates expect volatility to decrease as the market grows and mature securities like bitcoin ETFs are likely to become available. Their reasoning: More people holding bitcoin means less power for big single holders (aka whales) to cause price fluctuations.

But does it work for payments?

The bear argument Critics say bitcoin is too inefficient to work as a means of payment. Case in point: It currently takes 10 minutes on average to process a single bitcoin transaction. In contrast, credit cards (and cash) take seconds. You may also incur capital gains tax on the transaction. Bears say it's impractical for daily uses like buying groceries and paying for movie tickets.

The bull argument Advocates argue bitcoin is already more efficient than credit cards. While credit card transactions are processed in seconds, they take days to officially settle, while bitcoin transactions are finalized in an average of 10 minutes.

Bitcoin bulls also argue third-party solutions are solving the inefficiency problem. For example, bitcoin payments process in as little as milliseconds through a third-party protocol called Lightning Network. Advocates expect future innovations will only make paying with bitcoin more efficient.

What about the environmental concerns?

Bears say bitcoin uses too much power. It runs on more energy than the entire country of Poland. Bulls say bitcoin is increasingly run on renewable energy, and its benefits justify the usage.

The bear argument One of the loudest arguments against bitcoin is that it relies on massive computing power. According to the University of Cambridge's Bitcoin Electricity Consumption Index,1 it takes more energy to run bitcoin than it does to power the entire country of Poland. Critics argue bitcoin isn't worth these emissions.

The bull argument Despite the energy requirements, advocates argue bitcoin is increasingly run on renewable sources. For example, according to the Bitcoin Mining Council,2 a vocal advocate for bitcoin, over 58% of bitcoin mining used sustainable electricity in early 2022. As renewable energy gets cheaper, going eco-friendly could help miners maximize profits.

Advocates also argue bitcoin's benefits justify the energy usage, especially when compared to more discretionary uses of energy. For example, the Center for Global Development holds that Christmas lights likely consume more energy than the Bitcoin network.

Don't criminals use it?

Bears say bitcoin makes it easier for criminals to make illegal transactions, which is an ethical issue. Bulls say bitcoin's public record actually makes illegal activity easier to spot for digital forensics teams.

The bear argument While criminal transactions are made with all kinds of currencies, critics argue that bitcoin and cryptocurrencies make them even easier. Government officials worry that cryptocurrencies are enabling dark web purchases, money laundering, and other illegal activity. In 2021, Secretary of the Treasury Janet Yellen said cryptocurrencies are used "mainly for illicit financing."

The bull argument Advocates cite statistics that show cryptocurrency is mostly used for legal transactions. For example, a report3 by former CIA Acting Director Michael Morell, which concludes that criminal bitcoin usage "is certainly not higher than it is in the traditional banking system and is most likely less."

Another argument in bitcoin's favor is that its public record can make illegal activity easier to spot. As digital forensics departments get better at tracking blockchain transactions, criminals may find it increasingly difficult to use cryptocurrencies.

But does it have real value?

The bear argument One of the biggest criticisms of bitcoin is that it's not backed by any meaningful value. Advocates may say its value lies in the fact that there will only ever be 21 million bitcoins, but skeptics argue scarcity alone is not enough to justify its value. Some say it's essentially a Ponzi scheme, and that its price is inflated by hype.

The bull argument The counterargument is that scarcity is only a small part of what makes bitcoin valuable. Advocates believe bitcoin transforms how money works because it's decentralized, and therefore can't be controlled by a single government, central bank, or company. They believe this feature will protect it from both inflation and dictators, making it revolutionary.

What about competitors?

The bear argument Even some of the industry's biggest supporters think alternative cryptocurrencies could eventually overthrow bitcoin as the largest crypto currency by market cap. One reason: Bitcoin doesn't have a central development team that can improve it, while many others do. That could make it easier for other cryptocurrencies to add new functions and innovate when necessary.

The bull argument Bitcoin die-hards see its lack of a central development team as one of its most important features. They believe this makes it the purest, most decentralized cryptocurrency. Most cryptocurrencies are exploring other blockchain applications, but bitcoin is only concerned with functioning as a peer-to-peer payment network. Advocates see this a competitive advantage, especially when combined with its first mover advantage.

What to consider before buying bitcoin

Whether you align with the bull or bear case, there are a few things to keep in mind before adding bitcoin to your portfolio.

Remember that bitcoin and crypto are highly volatile, and may be more susceptible to market manipulation than securities. Crypto holders do not benefit from the same regulatory protections applicable to registered securities, and the future regulatory environment for crypto is currently uncertain.

Crypto is also not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, meaning you should only buy crypto with an amount you're willing to lose. This may help reduce portfolio impact in case prices drop significantly.

Next steps to consider

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More to explore

1. Cambridge Centre for Alternative Finance, "Cambridge Bitcoin Electricity Consumption Index," University of Cambridge, September 2023, https://ccaf.io/cbnsi/cbeci

2. Bitcoin Mining Council, "Bitcoin Mining Council Survey Confirms Year on Year Improvements in Sustainable Power and Technological Efficiency," August 2023, https://bitcoinminingcouncil.com/bitcoin-mining-council-survey-confirms-year-on-year-improvements-in-sustainable-power-and-technological-efficiency-in-h1-2023/

3. The Cipher Brief, " Report: An Analysis of Bitcoin’s Use in Illicit Finance," April 2021, https://www.thecipherbrief.com/report-an-analysis-of-bitcoins-use-in-illicit-finance

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