6 Things to Know About Bitcoin Before You Buy It
As a general rule, it is usually not wise to invest in something that you don’t understand. If you are wondering what all the Bitcoin fuss is about and if it’s something you should invest in, you should first do your research to understand it.
1. What is Bitcoin?
Created in 2009, Bitcoin is the world’s first widely-adopted cryptocurrency. It continues to gain traction and is the most popular cryptocurrency. A cryptocurrency, or ‘crypto’ for short, is a digital currency that uses cryptography. Cryptography is a method of securing information through the use of codes.
Bitcoin is decentralized, meaning that any two people in the world can send Bitcoin to each other without involving a bank or other institution. It was meant to be a universally accepted form of payment, without the added complications of exchange rates and transaction costs.
2. How Bitcoin Works
Bitcoin is not owned by an individual or company. It is a completely open payment network and anyone with an internet connection can participate.
Blockchain, which tracks who owns what like a master ledger would, is one of the most important elements of Bitcoin. The Bitcoin blockchain is decentralized, meaning no single entity controls it and anyone can view it.
All Bitcoin currently in circulation has been mined by a computer. Bitcoin mining is the process in which new Bitcoins are added into circulation. It is also the way that the network confirms new transactions. It acts like a transaction processer that confirms a transaction by coding it into blocks and adding it to the blockchain. Bitcoin miners make sure your digital wallet has Bitcoin to spend.
In the early days of Bitcoin, a typical desktop computer was powerful enough to participate in mining. Mining today takes significantly more resources to process, often by powerful, specialized computers owned by businesses or pooled individuals. The mining process uses sophisticated hardware to solve an extremely complex math problem. The first computer to solve the problem is rewarded with the next block of Bitcoins.
3. Bitcoin is Limited
When it began, the number of Bitcoin that would become available was capped at 21 million, meaning that there will never be more than 21 million Bitcoins in existence. As of mid-October 2021, there is just over 2 million Bitcoin left to be mined. The number of Bitcoin in circulation will approach 21 million, but it will never fully reach it because of the use of rounding operators in the codebase.
As Bitcoin approaches the 21 million ceiling, the economics surrounding it will change. With a dwindling supply of Bitcoin to mine, miners may rely more on transaction fees to earn revenue for their operations.
4. Bitcoin is Volatile
Volatility refers to the level of uncertainty or risk surrounding the rate of price fluctuations for a security over time. Bitcoin wasn’t worth anything when it first became available in 2009. It has seen dramatic price swings since then and as of mid-October 2021, a Bitcoin was worth just over $65,000 USD. It is not uncommon for Bitcoin to see daily double-digit price increases and decreases.
An absence of regulation also helps to fuel the volatility of Bitcoin.
5. How to Get Bitcoin
The easiest way to buy Bitcoin is by obtaining an account on a cryptocurrency exchange, like Coinbase. You will also need a secure personal digital ‘wallet’ to hold your Bitcoin. Money from your bank account would be needed to fund your cryptocurrency exchange account. Bitcoin is purchased from a seller, similar to buying stocks in a brokerage account. Once the Bitcoin is in your exchange account, you would send it to your secure digital wallet.
Bitcoin can also be bought and stored outside of an online exchange with a process that uses public and private digital encryption keys to unlock a virtual vault.
6. Should I Invest in Bitcoin?
Bitcoin can seem appealing. Since it has a known limited quantity, it is more likely to hold value over time and to not be eroded by the issuance of new Bitcoin.
Bitcoin is also extremely volatile and not the easiest investment to grasp.
Ultimately, only you can decide in investing in Bitcoin is right for you. Based on your understanding of cryptocurrency, your financial situation, and your risk appetite, it may or may not be a wise investment for you at this time.
Disclaimer: This information is intended for educational purposes and is not tailored for the needs of any specific investor. It is important to conduct your own analysis and research before making any investment. It is recommended to independently research and verify or seek financial advice from a professional in connection with any information on this website before using it to make an investment decision or otherwise.