Should you invest in bitcoin? A beginner’s guide
Should I Invest in Bitcoin? Let’s Find Out…
Investment products come in various forms, each with their own levels of risk and potential reward. Bitcoin, the digital currency, is a highly speculative asset class with significant risks and rewards.
To illustrate the rapid growth of Bitcoin, in 2009, it was worth just a fraction of $0.01. However, eight years later, it reached all-time highs of nearly $20,000 in late 2017, resulting in substantial growth for early investors.
On the other hand, Bitcoin has since lost value, currently hovering just under $4,000. This means that if you had invested during the price surge in 2017, you would likely be in a negative position.
In our guide on whether you should invest in Bitcoin, we will first provide a brief explanation of what Bitcoin is. Then, we will examine the risks and potential long-term rewards associated with investing in this digital currency.
Let’s start by exploring what Bitcoin is.
What is Bitcoin?
In simple terms, Bitcoin is a digital currency that was introduced in 2009 by an anonymous developer known as “Satoshi Nakamoto.” It is often referred to as a “cryptocurrency” because it is based on a mathematical concept called cryptography.
There are notable differences between Bitcoin, a cryptocurrency, and traditional fiat currencies like the Pound, Dollar, or Yen.
Firstly, Bitcoin exists solely in a digital form and does not have a physical presence. It operates virtually on a technology called the “Blockchain.”
Additionally, Bitcoin is not controlled or owned by any central authority or backed by any central bank or nation. Instead, it is maintained and controlled by the online community, and decisions are made through consensus.
If you decide to invest in Bitcoin, you will likely need to acquire a digital wallet to store your cryptocurrency. A Bitcoin wallet functions similarly to a traditional bank account, as it is used to safeguard your funds.
However, unlike a traditional bank, if you forget your wallet password or if it is hacked, there is no central authority to contact for recovery. This is why Bitcoin and its underlying blockchain are referred to as “decentralized,” as the project operates without a central point of control.
While there is much more to learn about Bitcoin and its technology, you should now have a basic understanding of this digital phenomenon.
Let’s now delve into how investing in Bitcoin works.
How Does a Bitcoin Investment Work?
Investing in Bitcoin operates in a similar manner to investing in any other financial asset. Essentially, it involves speculating on the potential increase in the value of Bitcoin with the intention of selling it at a higher price in the future.
Similar to traditional financial markets, the value of Bitcoin is influenced by market forces. If there is a positive sentiment among the public, with more buyers than sellers, the price of Bitcoin is likely to rise. Conversely, if sentiment is negative, with more sellers dominating the market, the value of Bitcoin may decrease.
Just like in the stock market, real-world events can impact sentiment and, in turn, the price of Bitcoin. For example, if a third-party Bitcoin platform is hacked, it can have a negative impact on the price. On the other hand, if a mainstream organization expresses interest in Bitcoin, it may drive the price up.
Determining the value of a Bitcoin investment can be challenging. Many people compare the value of Bitcoin to major fiat currencies like the U.S. Dollar to gauge its worth in the real world, which helps them decide on buying or selling Bitcoin.
How do you Actually Invest in Bitcoin?
When it comes to making your first investment in Bitcoin, there are several options available. In most cases, you would need to use a third-party exchange, especially if you intend to use real-world currency to buy Bitcoin.
Some websites, like Coinbase, which is based in the U.S., are specifically designed for first-time buyers as they allow you to use your debit or credit card online in exchange for Bitcoin. However, it’s worth noting that this convenience comes with a fee, with card payments typically costing around 4%.
There are also alternative avenues for buying Bitcoin. For instance, there are thousands of Bitcoin ATMs scattered around, which enable you to insert local currency in exchange for Bitcoin.
When it comes to storing your Bitcoin investment, it’s important to note that you will be responsible for safeguarding your funds. The recommended approach is to use a third-party wallet application that can be downloaded onto your phone or laptop.
It’s worth mentioning that you can also invest in Bitcoin through a Contract for Difference (CFD) platform. A CFD is a financial product that allows you to speculate on the future value of an asset without actually owning or holding the asset itself.
There are now several fully regulated CFD platforms that make it easy to invest in Bitcoin. However, it’s important to keep in mind that when investing in Bitcoin through a CFD, you do not actually own the Bitcoin. Instead, you are purchasing a contract based on its future price.
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Where to Buy Bitcoin
Our top recommendations for purchasing Bitcoin are Coinbase and Binance, as these are currently the largest and well-managed cryptocurrency exchanges. We have conducted detailed reviews of both platforms, so we recommend reading them first to determine which one best suits your needs.
What are the risks of investing in Bitcoin?
This section of our “Should I Invest in Bitcoin” guide is arguably the most crucial, as it’s essential to have a comprehensive understanding of the inherent risks involved.
To better comprehend the level of risk associated with Bitcoin, let’s take a look at the past couple of years. At the beginning of 2017, the real-world price of Bitcoin was around $1,000. By the end of the same year, Bitcoin’s value had skyrocketed by nearly 2,000%, reaching an all-time high of $20,000.
However, since December 2017, the value of Bitcoin has significantly declined. In fact, at the time of writing, the value of Bitcoin is less than $4,000, which means that if you had invested during the cryptocurrency frenzy of late 2017, you would have experienced a significant loss in your portfolio’s value.
Bitcoin Price Chart, from CoinMarketCap
The primary reason for the significant fluctuations in Bitcoin’s value is its liquidity. In well-established markets like the Dow Jones or FTSE, where trading activity is high, blue chip stocks typically experience minimal price movements, resulting in small gains or losses. This makes blue chip stocks a relatively low-risk asset class.
However, in contrast, Bitcoin is known for its high volatility, with gains or losses of over 10% in a single day being common. While volatility has decreased compared to the past, the Bitcoin market remains highly speculative.
In addition to volatility, there are other risks associated with Bitcoin. As a decentralized project, Bitcoin lacks a central authority. While this is appealing to anti-establishment proponents, it also means that if your Bitcoin funds get hacked, there is no recourse or entity to turn to for assistance.
Furthermore, the risks of losing your private keys should also be considered. Private keys are similar to passwords and grant exclusive access to your Bitcoin funds. If you were to lose or misplace your private keys, your funds would essentially become inaccessible indefinitely.
Binance is a prominent cryptocurrency exchange that offers a wide range of cryptocurrencies, including Bitcoin, for buying and trading. For detailed information, you can refer to our review.
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Should I Invest in Bitcoin?
In conclusion, it is crucial to understand that investing in Bitcoin is highly speculative. There is a possibility of significant losses or even losing your entire investment. While there is also potential for substantial gains, past performance does not guarantee future results, and there is no assurance that Bitcoin will reach its previous all-time highs.
It is important to assess if you can afford to lose the funds you plan to invest before proceeding with a Bitcoin investment. If you can afford the potential loss, then Bitcoin investment may be suitable for you.
Alternatively, some investors opt for a strategy of investing small, regular amounts to gain exposure to the world of Bitcoin. This approach allows for investing in Bitcoin without risking substantial savings and helps to mitigate the impact of volatile price movements.