Bitcoin is the most popular cryptocurrency at the moment. Here you can understand how it works and the benefits of trading Bitcoin.
The popularity of Bitcoin has been floating high in recent years. The cryptocurrency stole everyone's attention particularly during late 2020 to early 2021, when the price reached an all-time high and kept growing since. Bitcoin surpassed $50,000 in February 2021 for the first time ever and at the time of writing, Bitcoin can be traded as high as $58,900 per unit.
See Bitcoin price update to keep up with the latest BTC value
But even with the high value it currently has, there are still many doubts and skepticism revolves around it. It's not easy to predict whether this digital currency will continue to go up or just a passing storm. Others believe that this is just the beginning of a bigger journey of Bitcoin. So, is Bitcoin worth investing your money in? This guide will provide all the important information about Bitcoin.
- What to Know Before Investing in Bitcoin
- How to Get Bitcoin
- The Future of Bitcoin
What to Know Before Investing in Bitcoin
Bitcoin is a digital currency first introduced in 2009, created by someone who called himself Satoshi Nakamoto. Categorized as a type of cryptocurrency, Bitcoin is not regulated by a particular central bank, not backed by gold, nor is it protected by certain countries.
In the following years, other cryptocurrencies besides Bitcoin began to emerge, such as Litecoin, Peercoin, and etc. But even so, Bitcoin is the most widely recognized cryptocurrency and has been discussed everywhere, including in a documentary film called "the Bitcoin Gospel". Ethereum is often said to be the second most popular cryptocurrency after Bitcoin at the moment.
What makes Bitcoin unique is that this digital currency runs across a decentralized network of linked yet independent computers. Every single Bitcoin transaction is processed via the internet and recorded with a sophisticated technology known as "the blockchain". This technology is considered safe due to its ability to prevent hacking and foul activities. In fact, the cryptocurrency's entire database has not been hacked once since it went live in January 2009.
Transparency is another unique aspect that Bitcoin has. Any transactions can be seen by anyone and are carried out anonymously; the only visible thing is the users' account numbers. Such technology also means no other party can intervene or control the network for their personal gains. Its creation is also democratic and requires the majority of users' approvals before a number of new Bitcoins are about to be created.
Other than that, no central bank or government can dictate the currency's value. Typically, the price of fiat currencies is managed by a monetary authority that issues the currency and generally a result of an open market. In contrast, the value of Bitcoin is purely determined by the people and how much they are willing to pay for it. So it is a sentiment-driven market that has no limit to how high or low it can go.
See Also: Forex Brokers Allowing Bitcoin Deposit
The Advantages of Bitcoin
The overwhelming performance of Bitcoin has attracted many investors in the market. What are the advantages of using the most popular cryptocurrency?
Anonymity and Privacy Matters
As explained above, Bitcoin offers a way of making transactions completely anonymous and safely protected. Blockchain technology eliminates the need for any intermediary so your personal data and information will not be compromised by any other party.
This is important because while online bank accounts are allegedly protected from all types of crime and hacking, it is still connected to you. That means the private merchants and public authorities are able to track your transaction history, including how you spend and receive your digital funds.
In comparison, by using Bitcoin, you can separate your accounts from your public persona by trading anonymously. It's possible to track the flow of transactions from one account to another, but there is no way of telling for sure who those users really are.
Greater Liquidity Compared to Fiat Currencies
Because the market cap of cryptocurrency is still relatively new and small compared to other assets on the market, it is more sensitive to market changes. Bitcoin itself is arguably the most popular cryptocurrency with the highest liquidity on the market. As a result, users can trade Bitcoin for cash or assets instantly with relatively low fees. The high-liquidity can also mean that Bitcoin is a great investment tool if you're aiming for short-term profits. If the demand is constantly high, it can also benefit you in the long-term.
See also: Currency Pair, Liquidity, and Volatility
Bitcoin is now a global phenomenon. People from across the globe started to invest in Bitcoin. With such high enthusiasm, the world began to pay more attention to Bitcoin, expanding the market and creating new opportunities for traders. Currently, the popularity finally reached the institutional level where the government, the IMF, the G-20, and large corporations are all starting to talk about Bitcoin and its impact. So as a young addition to the market, Bitcoin may change the mainstreams and set a new trend.
The Downsides of Bitcoin
While Bitcoin may offer many benefits, it is equally important to identify the risks that come with it. Here are some disadvantages of using Bitcoin:
While volatility can be advantageous to get high returns when the market is favorable, keep in mind that it can also be harmful when the price is moving against you. If we take a look at Bitcoin's price history, the price fluctuations were pretty extreme. Even in a matter of weeks, the price can move up or down quite dramatically.
Imagine what would have happened if you had bought Bitcoin in March 2020. The price was traded around $9000 but on the 12th it suddenly plunged below $5000. With such an unpredictable market, it's quite risky to invest a lot of your money in it. Therefore, remember not to invest more than you could afford.
Little to No Regulation
The digital currency currently operates without any regulation. In most parts of the world, it isn't taxed and monitored by the regulatory bodies that could protect you from fraudulent acts and crimes. As a result, you are more exposed to scam practices, ranging from small-time Ponzi schemes to massive hack attacks.
Other than that, probably the most disturbing flaw that Bitcoin has is the absence of refund policies. Users affected by fraud can't request a refund to Bitcoin because there is no standardized policy that specifically talks about that, unlike what credit card companies and traditional online payment methods have.
Replaceable by Other Cryptocurrencies
Bitcoin is recognized as the pioneer of cryptocurrency with the biggest community in the world. But in recent years, many other cryptocurrencies began to emerge and kept making improvements to their services. As competitors, they are trying to fill the gaps and flaws that Bitcoin has. For example, a newer cryptocurrency called Ripple now has rudimentary refund functions that are not available in Bitcoin.
Over time, it is possible that these alternative coins (Altcoins) eventually stand out and take Bitcoin's current place. Although that does not necessarily mean a complete downturn for Bitcoin, it can definitely affect the value and the dynamics of the digital currency.
How to Get Bitcoin
If you are interested in investing in Bitcoin, there are two ways to do it:
- First, you can buy Bitcoin by exchanging the fiat currency that you have with Bitcoin. There are currently many exchanges where you can easily buy and sell this cryptocurrency. So basically, investing in Bitcoin is very similar to investing in traditional currency, but it is way more volatile. You just have to pick an online exchange, deposit some funds, choose and buy BTC (symbol for Bitcoin). Later, you can sell the cryptocurrency again to gain profit.
- Second, you can also "produce" your own Bitcoin by mining it. The most vital tool you need is a sophisticated infrastructure and technology, which includes ASIC (Application-Specific Integrated Circuit) computer and other devices. In the process, you will have to validate the transactions using complex mathematical formulas. In return for your auditing activities, you will be rewarded a certain amount of Bitcoin from the system. By spreading the responsibility among many users from all around the world, Bitcoin is called a "decentralized" cryptocurrency that does not rely on any central authorities.
The Future of Bitcoin
In late 2017, Bitcoin experienced a massive bubble burst that resulted in an extreme price downfall. The digital currency started the year 2018 by losing more than 50% of its original value. There have been many speculations about the cause of this phenomenon; some suggest massive sell-offs, while others point out the fear of huge capital gain taxes.
With the more recent skyrocketed price that managed to touch $50,000, many began to question whether this is just a bigger bubble that could burst anytime. While it is hard to make predictions about the market, we can observe that the current situation is different from 2017. Back then, the boom was quite impossible to miss because everyone was so hyped about it. However, that doesn't seem to happen right now.
The possible reason is that in 2017, the market was dominated by individual investors, many of whom were interested in the scarcity of Bitcoin and joined in fear of missing out (FOMO). But now, the trend has gone up to institutional or big corporation level. Big investors such as MicroStrategy and insurance giant MassMutual have entered and heavily invested in the Bitcoin market. Corporate investments mean that the volumes are usually higher than average retail traders and those volumes are more likely to stay put, making the supply of Bitcoin scarcer and therefore increasing the price.
See also: Top 7 Forex Brokers to Buy Bitcoin
Another positive opportunity comes from the maturing of the technology that supports cryptocurrency. One of the biggest problems for cryptocurrencies used to lie in the high need for energy-intensive computing processes required to make transactions safer; the carbon emission produced by cryptocurrency miners was estimated to be more than that of a country like Sri Lanka. But several changes and technology advancements have been made to overcome the issue, such as Ethereum's new system that switches from blockchain to a "proof-to-stake" mechanism that eliminates the need for energy-intensive computing processes.
The next trend that's currently happening is the coronavirus pandemic as a major event that causes changes in the market. With the macroeconomic situation slumping, many businesses are infected and become more unstable, so investors are looking for alternative ways to diversify their portfolios. Bitcoin is seen as a great opportunity in the midst of such crisis as it is not affected by government regulations. At some point, Bitcoin is regarded as a strong competitor of gold safe haven and even has the potential to win over it should JPMorgan's prediction of Bitcoin rise to $146,000 in the upcoming months comes true.
However, such forecast won't guarantee anything because the market is unpredictable. The price still might go down due to the highly volatile market and other conditions. Some people said that the ongoing rally is just a result of a trend-following strategy, so it could go downhill as soon as the trend fades. Also, if the big companies that currently invest a lot in Bitcoin decided to draw back and take their money, then it will definitely affect the price too.
Bitcoin is the most popular cryptocurrency with the biggest user community in the world at the moment. The trend also shows that the price is most likely to go up in the next months consistently, so this might be a great time to invest or trade with Bitcoin, though it would've been better if you started early this year when the price was still low. Lastly, if you decide to trade with Bitcoin, regard it as a risky investment that could lead you to high return or high loss in a very short time. You must be realistic in setting up the profit/loss target and don't invest more than you could afford. Also, always make sure to try the demo account first before trading Bitcoin, whether it is in a broker or a cryptocurrency exchange.