In life, many of us notice the flaws and risks in something, but we go ahead and do it anyways. For example, a tree branch might be very loose, but you go ahead and sit on it. The likeliest possibility? You fall on the ground, getting injured in some sort of way. In the world of finance, we might see some flaws in an asset, but we decide to buy it anyway. An example that fits this perfectly is Bitcoin. No, I am not saying I hate Bitcoin. It’s highly innovative and interesting, but oftentimes that means there are flaws that we can’t ignore.
The first one is a simple fact that has been recognized by everyone, including Elon Musk. Bitcoin’s environmental impact is bad, to be nice. With mining being highly complex, fossil fuels such as coal are used to power these super-computers, which already sounds bad. The electricity used to mine Bitcoin powers multiple countries throughout the world, which is crazy as it’s on a trajectory to continue rising. However, this flaw has solutions, such as innovating the technology to consume less energy or using clean energy to power the mining process.
The second one just relies on the idea. Simply put, many don’t consider Bitcoin as a currency, but rather a speculative financial device. This was further exemplified on Tuesday, when China, the world’s largest country by population and one of the biggest economies, announced that they will ban financial institutions and payment companies from providing cryptocurrency transactions, which was a major blow. China was once home to 90 percent of cryptocurrency trades, but their crackdown has decreased that number significantly. Other countries are considering this too, which poses a major risk.
Lastly, the amount of criminal activity in Bitcoin is concerning, a worry that Charlie Munger has said many times. Because Bitcoin is a decentralized asset, it allows for people to be anonymous, which is why many criminals turn to it for ransomware or laundering. If criminals are using Bitcoin, it decreases the chance that people will adopt it as an everyday currency, which hurts its prospects. We saw this occur on Tuesday with the Colonial Pipeline cyberattack. The group behind the hack was DarkSide, and it was reported that they received 90 million dollars’ worth of Bitcoin ransom payments.
These 3 reasons have fueled the decrease in Bitcoin’s value, with the price hovering around 40,000 dollars now. Bitcoin bulls will see this as a good time to get in, but many are now questioning the sustainability of Bitcoin as an everyday item. Do you believe in Bitcoin’s ability to be an everyday currency in the future?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.