Is bitcoin deserving of a spot in your investment portfolio?

The incredible financial upheavals that have occurred around the world in the last 12 months have resulted in a resurgence of crypto-currencies, particularly bitcoin, as more mainstream investments.

Bitcoin's price has risen by over 400%, and there is widespread speculation that institutional investors will soon add significant amounts of cryptocurrency to their investment portfolios.

Cryptocurrency supporters believe that these assets have the same utility as more traditional wealth stores like art, gold, or even negative yielding inflation-linked bonds.

It is thought that bitcoin's scarcity – there can only ever be 21 million – will allow it to maintain its value against traditional currencies that are under threat from fiscal and monetary policies.

Greater institutional and corporate support has provided some legitimacy, which in turn has increased confidence in the crypto ecosystem's stability.

Visa and Mastercard have crypto products and projects in the works, while Tesla, PayPal, Square, and a slew of other large companies accept bitcoin as payment for their services.

However, how can serious investors value an asset that has no cashflow, exists because a sufficient number of people believe it has value, and has become a popular speculative target? Given the risk, the price of crypto-currencies may experience significant volatility for some time.

Despite the fact that the crypto space is better served by more reputable exchanges and service providers, there is still a wild west element to the industry players, and careful due diligence is required.

While institutional support has grown, Glassnode, a blockchain analytics firm, estimates that about 2% of holders still control more than 70% of all bitcoin. Price manipulation is a risk in such a tightly held market, and investors must be wary of liquidity, especially in a highly speculative environment.

If you want to invest in Bitcoin in small amounts to diversify your portfolio, there are some advantages. Cryptocurrencies are ancillary alternative assets or potential currency derivatives.

Nonetheless, with investors becoming more concerned about environmental issues, the resources required to grow the bitcoin blockchain through mining are significant.

Bitcoin miners operate massively powerful computer farms tasked with solving increasingly complex mathematical equations. If a miner solves the equation first, they are awarded 6.25 Bitcoin ($270,000).

The mining process consumes more energy per year than many countries; if Bitcoin were a sovereign state, it would be among the top 30 energy consumers in the world.

The carbon footprint associated with bitcoin's environmental impacts varies depending on the source of energy used, but with approximately 60% of the world's electricity still generated by fossil fuels, its carbon footprint is substantial.

In the grand scheme of things, there is a lot of hype, polarisation, and misinformation surrounding bitcoin. There are numerous vested interests. This is the type of environment that has historically produced the worst risks for investors.