Bitcoin is the largest cryptocurrency, and its market capitalization exceeds $1 trillion. As more people buy Bitcoin, its market cap transcends that of leading billion-dollar companies in the US, such as Tesla and Walmart.
The sheer size of Bitcoin is from the participation of very few people. The crypto community on X (Twitter) recently revealed that only 5% of the global population is invested in crypto.
Several factors are impeding Bitcoin’s adoption. The greatest obstruction is the misconceptions that people have about Bitcoin. Many fear investing in this asset because of myths that it is a pyramid scheme. There is also a stigma around BTC’s association with criminal activities.
Nevertheless, these myths are being unraveled by the day. Wall Street is leading the way by endorsing multiple spot Bitcoin exchange-traded funds.
BlackRock, the largest asset manager with a staggering $9 trillion in assets under management (AUM), recently ran a Bitcoin promotion to boost awareness around the king of cryptocurrencies.
Such growth calls for more people to become knowledgeable about how they can buy Bitcoin and why they should invest in it.
This article takes a deep dive into Bitcoin. It carefully dissects the unique features of the most prominent digital currency. With this guide, you can buy Bitcoin as an informed investor.
Understanding Bitcoin
Before you buy Bitcoin, you should go through the Bitcoin whitepaper. The Bitcoin whitepaper plays a vital role in understanding Bitcoin’s history.
The Bitcoin whitepaper was written by the pseudonymous creator of Bitcoin, Satoshi Nakamoto, over a decade ago. This document outlines how Bitcoin works, the reason behind its creation, and how it can transform the financial landscape.
Below is an excerpt from the first paper introducing Bitcoin, explaining how this digital asset works and the inspiration behind its creation.
(Source: Bitcoin whitepaper)
This excerpt shows that understanding Bitcoin by reading its whitepaper is challenging for many, especially those with limited technical knowledge. That is why we have shared some interesting facts about this asset in an easy-to-understand way to address one of the most significant barriers to Bitcoin adoption: complexity.
Things to Know About Bitcoin
Below are some things that you should know before you buy Bitcoin:
Bitcoin Is Volatile And Highly Risk
Before you buy Bitcoin, it’s crucial to understand that Bitcoin investment carries significant risks. The price of Bitcoin is known to fluctuate dramatically, often by large margins. This is in stark contrast to the stock market, where price shifts are typically minor. It’s important to approach Bitcoin investment with caution and a clear understanding of the potential risks involved.
In the stock market, prices shift by minor percentage points daily. The only time that a stock can record massive downward movements is when the respective company is involved in a scandal or on the brink of collapse.
This same cannot be said for Bitcoin. Bitcoin tends to record double-digit dips and gains within a short period. Below is a chart showing Bitcoin’s ups and downs over the past five years.
As you can see from this chart, Bitcoin gained from below $20,000 in 2020 to highs above $60,000 in 2021. It dropped to below $20,000 again towards the end of 2022. By early 2024, Bitcoin had jumped to an all-time high above $70,000.
These price movements make it easy to see why some people claim to have made massive profits from investing in Bitcoin. However, at the same time, some have made colossal losses.
Therefore, you should only invest in Bitcoin, knowing that it has made both “kings” and “paupers.”
But why is Bitcoin so volatile?
Bitcoin can see increased demand in case of economic uncertainty. Such events cause unparalleled price increases. Conversely, Bitcoin’s price tends to decline when the demand is low.
Bitcoin’s price is also sensitive to market sentiment. Positive news can spawn aggressive buying behavior, leading to price appreciation. Bitcoin will also drop due to panic selling in case of negative news.
Security Is Vital To Bitcoin
The other thing you need to know before you buy Bitcoin is that security is vital. The creator of Bitcoin paid much attention to security, given that blockchain technology powers this digital asset.
The Bitcoin network is fortified with a multi-layered security system. Processes like transaction hashing, mining, and block confirmations work in tandem to ensure the Bitcoin blockchain remains impervious. This robust security system has been in place since 2009, and to date, no Bitcoin has ever been stolen from the Bitcoin network. Understanding these security measures can instill confidence in potential investors.
The creators of Bitcoin get a commendation for Bitcoin’s track record of security. However, the same cannot be said about its users.
James Howells, one of the early investors in Bitcoin, lost 7,500 BTC, worth over $400 million at the current prices, after losing his hard drive containing the coins. Howells recently sued for permission to dig up the landfill where he lost his hard drive and retrieve the coins.
Howells lost his hard drive after throwing it in a garbage bin mistakenly. He can only access Bitcoin with this hard drive.
This is just one example of many people who have lost Bitcoin due to a lack of secure safekeeping practices. Just like you would safeguard your real-life wallet, you should also secure your Bitcoin wallet.
Bitcoin can provide very high levels of security if you use it correctly. If you get a hardware wallet (mostly comes with a USB drive) to store your crypto, ensure that you keep it safely. If you lose the wallet, like Howells did, you may never retrieve your Bitcoin.
You should also practice safe internet usage practices. Your wallet keys are like a password. You should never share them with anyone. Install an antivirus program on your computer to guarantee privacy when accessing a cryptocurrency exchange or wallet.
Some might argue that the complexities of securing a crypto wallet are avoidable by storing Bitcoin on cryptocurrency exchanges. However, cryptocurrency exchanges are not always safe.
Big Fail
Let us look at two examples of cryptocurrency exchanges once classified as too big to fail: Mt.Gox and FTX.
In the case of Mt.Gox, a hacker gained unauthorized access to the exchange to the exchange and stole more than 850,000 Bitcoins. At the time of the theft, Mt.Gox was the largest cryptocurrency exchange. This jaw-dropping hack saw users unable to access their Bitcoin on the exchange.
Let us now look at FTX. FTX did not collapse because of a hack. Instead, the exchange’s founder used customer funds to buy property, make campaign donations, and make poor crypto bets. FTX customers lost their Bitcoin and other cryptocurrencies.
These two instances show why you should always self-custody crypto. After you buy Bitcoin, choose a wallet that you can use to store your assets safely.
A Single Entity Does Not Control Bitcoin
One of the main selling points of Bitcoin is that a single entity does not control it. It runs on open-source software, which makes it superior to fiat currency.
Central banks control fiat currency. This control has often been labeled bad because of poor policies and printing money. Bitcoin has a capped supply of 21 million coins. However, fiat currency lacks a capped supply because of the ability of central banks to print more money.
As there will always be 21 million Bitcoins, growing demand will see the coin overcome a significant challenge in traditional finance: inflation. Satoshi Nakamoto rolled out Bitcoin after the 2008 financial crisis, which could mean that he/she/they intended it to be an alternative to fiat.
Bitcoin’s decentralized and independent nature has also increased adoption in countries looking to reduce dependence on the US dollar. Case in point is El Salvador.
In September 2021, Bitcoin officially became a legal tender in El Salvador. The country’s pro-Bitcoin president, Nayib Bukele, is very vocal on X (Twitter) and has always shared his thoughts on the potential of Bitcoin.
Bukele has often been at loggerheads with institutions such as the International Monetary Fund (IMF) and the World Bank, cautioning him against Bitcoin. According to the crypto community on X, the IMF and the World Bank are worried about Bitcoin’s uncontrollable nature.
The IMF has acknowledged that the decentralized nature of Bitcoin makes it available for use in cross-border payments.
The decentralized nature of Bitcoin is a crucial feature that you need to know because it forms the basis of decentralized finance (DeFi).
Regulatory Framework Remains Uncertain
Before you buy Bitcoin, you should understand that the regulatory framework for this digital asset worldwide remains uncertain.
In the US, the US Securities and Exchange Commission (SEC) has been the subject of criticism for failing to regulate the cryptocurrency industry. However, when it comes to Bitcoin, the SEC Chair, Gary Gensler, appears to classify Bitcoin as a commodity, which is a win, given that the SEC has classified several other major cryptocurrencies as securities.
However, the US government remains unconvinced about Bitcoin. The US President, Joe Biden, recently threatened to veto a resolution to introduce more friendly accounting principles for crypto assets.
The SEC’s hesitance to regulate the crypto industry has landed it in court. Grayscale, the largest crypto asset manager, sued the regulator for failing to approve its spot Bitcoin ETF. After Grayscale had made a landmark victory against the SEC, the commission later approved several Bitcoin ETFs, including those of Wall Street giants.
Besides the US, other jurisdictions are working hard to regulate Bitcoin and cryptocurrencies. In Europe, the Markets in Crypto Assets (MiCA) framework seeks to regulate cryptocurrencies while protecting investors.
Some countries have also been more open to cryptocurrency as they seek to attract millions of dollars worth of investments. Dubai, Switzerland, and Singapore are taking the lead as they try to emerge as crypto hubs.
Bitcoin Is Powered By Blockchain Technology
Another feature you should know as you buy Bitcoin is that it is powered by blockchain technology. Blockchain is a shared public ledger on which the Bitcoin network runs. Transactions confirmed on Bitcoin are included on the blockchain.
The blockchain’s security, integrity, and operation are enforced by a technology known as cryptography. Blockchain is decentralized, as a single organization does not control it. In simple terms, blockchain is like Google Docs, which anyone can access and edit.
However, despite being open-source, the network has no risk as this nature makes it secure and transparent. A transaction block t added to the Bitcoin network needs verification by a majority of BTC holders.
The mining process is crucial to the running of Bitcoin. Mining includes a process where new Bitcoins are added to the circulating supply. The Bitcoin mining process has often faced criticism for being energy-intensive.
The Biden administration has received much criticism for proposing a 30% tax on Bitcoin mining activities, with the opposers saying it was punitive.
Mining is like a competition across the Bitcoin network to come at a cryptographic solution meeting specific criteria. When the miners arrive at a correct solution, they receive a reward in the form of Bitcoin.
The Bitcoin mining process will continue until all 21 million coins are mined. After miners mine all the coins, Bitcoin rewards through mining will cease.
In Summary – Things To Know Before You Buy Bitcoin
Bitcoin is emerging as a leading financial asset. Wall Street has been deeply involved with Bitcoin since BlackRock released spot Bitcoin ETFs. People are venturing into this industry because of the potential to gain and achieve higher global value.
If you are just getting started on Bitcoin, some complexities come with understanding the nature of this asset. Understanding the nature of blockchain technology and how Bitcoin works can be challenging for a beginner.
However, if you are unwilling to go into the complexities, the main thing you need to understand about Bitcoin is that it is volatile, risky, and decentralized. This coin has the potential to transform the financial industry.
FAQs
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What should I know about Bitcoin?
Bitcoin is a volatile digital asset whose price tends to fluctuate regularly. Before you buy Bitcoin, understand all the risks involved. You should also pay much attention to keeping your Bitcoin safe from potential loss and hacking attacks.
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How does Bitcoin make you money?
Bitcoin will make you money based on the forces of demand and supply. When the demand for Bitcoin is high, the price will appreciate. Consequently, a slow demand affects price performance. You can also choose to become a Bitcoin miner and reap miner rewards.
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Is Bitcoin safe?
In terms of security, Bitcoin is safe. Unlike the myths that often categorize Bitcoin as a scam or fraud, this digital asset is secure from hackers and fraudsters. However, you need to take the security of your wallet into your own hands to store Bitcoin securely.
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What happens if I lose my Bitcoin?
If you lose your Bitcoin wallet, you will have no way of accessing your Bitcoin. Therefore, you should go the extra mile to safeguard your wallet. You should also avoid phishing campaigns and other events that might lead to losing your Bitcoin.
