By Kevin Wood, May 2025
Bitcoin has emerged as one of the most controversial investment assets of the past decade. As cryptocurrency continues to capture headlines with dramatic price swings and evolving regulations, investment advisers must understand its complete landscape when determining suitability for client portfolios. This piece examines Bitcoin's advantages, disadvantages, and significant risks, providing a comprehensive foundation for explaining why many financial planning firms have excluded it from client investment strategies.
The Potential Benefits of Bitcoin
Technological Innovation and Decentralisation
Bitcoin operates on blockchain technology, creating a decentralised financial system outside traditional banking structures. This decentralisation means the network is distributed across millions of users and thousands of nodes worldwide, making it resilient and difficult to shut down. Unlike conventional currencies controlled by central banks, Bitcoin functions without a central authority, potentially offering protection against certain systemic risks in the traditional financial system.
The technology utilises cryptographic techniques to secure transactions, making them resistant to counterfeiting and double-spending. These security features represent genuine technological innovation in the financial sector, regardless of Bitcoin's ultimate success as an investment asset.
Limited Supply and Inflation Protection
Perhaps one of Bitcoin's most compelling characteristics from an investment perspective is its fixed maximum supply of 21 million coins. This built-in scarcity contrasts sharply with fiat currencies, which central banks can print in unlimited quantities. Some proponents argue this makes Bitcoin a potential hedge against inflation and currency debasement, though this theory remains unproven across various economic conditions.
The limited supply model creates a fundamentally different asset class compared to traditional currencies, where supply can be expanded through monetary policy decisions. This scarcity principle has been a key driver behind Bitcoin's historical price appreciation during certain periods.
Transactional Benefits and Financial Inclusion
For merchants and payment processors, Bitcoin offers several potential advantages, including lower transaction fees compared to traditional credit card networks. Transaction fees typically range from 2-4% for credit cards, while Bitcoin transactions historically have been processed with fees of 1% or less. The cryptocurrency also eliminates the risk of chargebacks, as transactions cannot be reversed once confirmed.
Bitcoin also presents opportunities for financial inclusion, potentially providing banking-like services to billions of unbanked individuals worldwide. In regions with unstable currencies or limited banking infrastructure, cryptocurrencies can offer alternative methods for storing value and facilitating transactions, though practical implementation challenges remain significant.
The Significant Drawbacks
Extreme Price Volatility
Bitcoin's price volatility represents one of its most problematic characteristics as an investment. The cryptocurrency has experienced dramatic price swings, climbing to nearly $65,000 in November 2021 before dropping to just over $20,000 a year and a half later. Such extreme volatility makes Bitcoin unsuitable for investors seeking stable, predictable returns or wealth preservation.
This volatility stems partly from Bitcoin's lack of intrinsic value. Unlike shares that represent ownership in companies generating profits, or bonds backed by government taxation power, Bitcoin's value is determined entirely by market sentiment and trading dynamics. Without fundamental economic anchors, price movements can be dramatic and unpredictable.
Limited Practical Utility
Despite over a decade of development, Bitcoin still faces significant obstacles to mainstream adoption. Bitcoin transactions can be cumbersome, slow, and expensive, taking approximately 10 minutes to validate and sometimes incurring substantial fees during periods of network congestion. These limitations severely restrict Bitcoin's practical utility as an everyday currency.
Furthermore, Bitcoin remains accepted by only a limited number of merchants worldwide, making it impractical to rely on as a primary medium of exchange. This creates a paradoxical situation where Bitcoin is too volatile to serve as an effective currency yet lacks the fundamental economic drivers that typically support investment assets.
Environmental Concerns
Bitcoin mining-the process of validating transactions and securing the network-consumes enormous amounts of energy. According to comparisons by the University of Cambridge, worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting. This substantial environmental footprint raises ethical concerns for environmentally conscious investors.
While some mining operations are transitioning to renewable energy sources, Bitcoin's underlying proof-of-work mechanism remains inherently energy-intensive by design. These environmental considerations have prompted increased scrutiny from regulators and institutional investors alike.
The Serious Risks
Cybersecurity Vulnerabilities and Exchange Failures
The cryptocurrency ecosystem has been plagued by security breaches and exchange failures, resulting in billions of pounds in losses. While the Bitcoin blockchain itself is secure, the exchanges and wallets where Bitcoin is stored have proven vulnerable to hacking. Major incidents include:
Mt. Gox (2011) - Once handling 70% of all Bitcoin transactions, the exchange reported 25,000 BTC (worth $400,000 at the time) stolen from 478 accounts before eventually collapsing.
Bitfinex Hack (2016) - Ilya Lichtenstein exploited a vulnerability in Bitfinex's security protocols, executing one of the largest cryptocurrency thefts in history by transferring 119,754 BTC (valued at around $71 million at the time).
FTX Collapse (2022) - One of the largest cryptocurrency exchanges declared bankruptcy after a liquidity crisis revealed an $8 billion hole in its accounts, with its founder later convicted of fraud.
These high-profile failures demonstrate the substantial custodial risks associated with Bitcoin investments, even when using seemingly reputable platforms.
Criminal Activity and Fraud
Bitcoin's pseudonymous nature has made it attractive for illicit activities. According to Chainalysis, 2024 may break records for illicit cryptocurrency activity, with potential volumes exceeding $51 billion (£39 billion). While the percentage of cryptocurrency transactions associated with crime decreased to 0.14% in 2024 (down from 0.61% in 2023), the absolute volume continues to grow.
The cryptocurrency space has witnessed increasingly sophisticated scams, including AI-generated sextortion schemes using deepfakes and advanced identity fraud methods to evade Know Your Customer (KYC) checks. These evolving criminal techniques pose substantial risks to investors unfamiliar with the cryptocurrency ecosystem.
Regulatory Uncertainty
The regulatory landscape for Bitcoin remains uncertain and evolving. Governments worldwide have not yet fully determined how to handle cryptocurrencies, creating the potential for unpredictable regulatory changes that could significantly impact Bitcoin's value and utility. This regulatory ambiguity introduces an additional layer of risk beyond market volatility.
Recent warnings from central banks highlight growing concerns about cryptocurrency's impact on financial stability. The Bank of Italy's April 2025 Financial Stability Report specifically flagged Bitcoin and other digital assets as emerging risk factors, citing concerns for both investors and the broader financial system. The report notes that "the strong growth of Bitcoin and of other crypto-assets with high price volatility means risks not only for investors but also potentially for financial stability".
Fiduciary Considerations for Investment Advisers
Unsuitability for Most Client Portfolios
As an investment adviser operating under fiduciary duty, recommending Bitcoin to clients presents significant challenges. The combination of extreme volatility, lack of intrinsic value, cybersecurity risks, and regulatory uncertainty makes Bitcoin unsuitable for most client portfolios, particularly those focused on wealth preservation or generating stable, reliable income for retirement.
While Bitcoin might appeal to clients seeking speculative opportunities, its risk profile typically exceeds appropriate levels for core portfolio allocations. Without fundamentals like earnings, dividends, or interest payments, Bitcoin lacks the traditional metrics that advisers use to evaluate investment suitability and fair valuation.
Lack of Investor Protections
Bitcoin investments generally lack the regulatory protections associated with traditional financial instruments. When Bitcoin is stolen through hacking or fraud, investors have little recourse. This absence of safeguards contrasts sharply with regulated investments, where various schemes exist to protect investor assets.
For financial advisers with a professional obligation to prioritise client interests, these missing protections represent a significant concern. The potential for complete capital loss through exchange failures, wallet compromise, or outright scams creates liability issues that make Bitcoin difficult to justify in client portfolios.
Conclusion
While Bitcoin represents a fascinating technological innovation with potential long-term implications for the financial system, its current characteristics make it unsuitable for most client investment portfolios. The extraordinary volatility, significant cybersecurity risks, regulatory uncertainty, and lack of fundamental valuation metrics all contribute to a risk profile that exceeds appropriate levels for fiduciary investment recommendations.
As financial advisers, our primary obligation is to recommend investments that align with clients' best interests, risk tolerance, and financial goals. Given Bitcoin's extreme risk profile and the availability of more established, regulated investment options, excluding Bitcoin from client portfolios represents a prudent, risk-aware approach to financial planning.
The cryptocurrency ecosystem continues to evolve, and future technological developments may address some of these concerns. However, until Bitcoin demonstrates more stability, security, and integration with regulatory frameworks, its exclusion from mainstream investment portfolios remains justified from a fiduciary perspective.