Following Bitcoin’s slow decline to under $30,000 after its dramatic bull run earlier this year — when the original cryptocurrency reached an all-time high of $65,000 in April 2021 — many novice and experienced investors are wondering whether they should invest in Bitcoin before the market picks up speed again, or if they should wait for further corrections.
As this week’s dramatic BTC price increase showed, it is nearly impossible to time the market perfectly and predict the absolute bottoms and tops. For example, just this week alone, the value of a Bitcoin jumped from just over $30,000 to over $40,000 on the back of an Amazon rumor and The B Word webinar with Elon Musk and Jack Dorsey.
If you’re a new investor finally ready to dip your toes into the crypto pool, here are some essentials to know so you can stay afloat.
What Is Bitcoin?
Bitcoin is a digital currency created in 2009 by the pseudonymous programmer, or group of programmers, known as Satoshi Nakamoto. The idea behind Bitcoin was to create a decentralized distributed ledger called a blockchain where all transactions would be recorded in an immutable fashion — completely separate from traditional finance. All transactions would be performed in the blockchain’s native token, called Bitcoin, with the idea that transaction fees would be lower than that of traditional online payment systems.
Since its inception, Bitcoin has grown in popularity and adoption and is now viewed as a viable legal tender in some countries, such as El Salvador. The adoption of cryptocurrency by more institutional investors has also fueled more public interest in digital assets.
Bitcoin still has a long way to go before it’s accepted globally, but it has made a lot of headway since the genesis block was mined more than 10 years ago. Read on to find out whether or not you should buy Bitcoin.
Bitcoin Pros and Cons
Like any financial investment, investing in Bitcoin comes with risks and rewards. Before choosing to invest, it’s important to weigh up the pros and cons to check if this is the right financial venture for you to buy into.
Pros of Bitcoin
- Bitcoin has scarcity and a deflationary supply mechanism. Only 21 million Bitcoin will ever be mined, from now until approximately the year 2142. It is estimated that 20% of existing BTC have already been lost as well (due to loss of private keys and various other reasons). Tie that in with a halving event every four years that cuts new Bitcoin mining rewards by 50% every time, and you have an asset that will likely go up in value due to supply pressure.
- It’s pseudonymous. Bitcoin transactions are only recorded on a public blockchain listing your alphanumeric public address, which makes it perfect for those who value their online privacy. Do note that authorities may require you to declare your Bitcoin holdings for tax or other purposes, depending on your place of residence.
- Faster transaction speed and cheaper transaction fees than traditional fiat currencies. Bitcoin can be sent anywhere in the world to a counterparty within minutes and at a nominal fee (as long as there is no blockchain congestion, of course).
- Protection from payment fraud. Due to the transparency of all transactions on the blockchain, it is virtually impossible to commit payment fraud. Only a 51% attack would make this possible.
Potential for high returns. The increasing adoption and growing market cap of Bitcoin makes it a great potential investment (while we are not giving investment advice here, just stating facts!). Since March 2020, Bitcoin increased by over 1,500% in value at one stage, thanks to a new influx of institutional investors.
Cons of Bitcoin
- It’s still largely unregulated. A disadvantage may be the fact that Bitcoin is still largely unregulated, which means a lot of black market activity is still able to happen due to the nature of the digital currency. However, in most countries, Bitcoin is treated as either property or a commodity for tax purposes (including the U.S.) and legislation is improving to make it more attractive to institutional investors.
- The irreversible nature of all transactions on the blockchain. Because cryptocurrency is not backed by any central authority or government, this means that if you were to send Bitcoin to the wrong person by mistake, or lose access to your Bitcoin, the coins would be lost forever.
- High volatility and potential for large losses — if Bitcoin gained 1,500% in value at one stage, it has also suffered extreme losses at others.
Unlike traditional stocks and shares whose price is determined by how well a company is doing, the value of Bitcoin and other cryptocurrencies is purely speculative. Bitcoin’s acceptance as a means of payment or an investment depends on people’s confidence in it. This makes cryptocurrency a slightly more risky investment than traditional financial instruments. Of course, Bitcoin has one of the strongest communities in the crypto space, with Bitcoin maximalists hellbent on HODLing their BTC forever.
Is Bitcoin Safe?
Bitcoin has the most crime reports of any other cryptocurrency, which makes sense because it’s the oldest cryptocurrency. However, to answer the question of whether Bitcoin is safe or not, it’s important to consider a few factors:
Bitcoin is based on a decentralized distributed ledger that is not controlled by any authoritative body. This makes it safe in the sense that no government or authority controls your money, but, its decentralized nature also means that if anything were to happen to your Bitcoin, e.g. you lost access to your private key, or you sent Bitcoin to the wrong person by mistake, your Bitcoin would be irretrievable.
However, the blockchain technology on which Bitcoin was built offers unprecedented cybersecurity. A lot of hacks have happened because investors have chosen to keep their Bitcoin on a centralized exchange, as opposed to a decentralized exchange, which means they don’t have access to their own private keys. Hence the slogan: “Not your keys, not your Bitcoin.”
The possibility for weakness in a centralized exchange is why it is important to always keep your private key or seed phrase in a safe place and never reveal them to anyone. It’s also wise to consider keeping your cryptocurrency on a cold storage hardware wallet for extra protection from hacks.
If you don’t want to manage private keys, use a reputable centralized exchange like Binance or Coinbase.
There is also the threat of quantum computing, which could potentially make all Bitcoin wallets vulnerable; however, it is likely that the Bitcoin protocol will be upgraded to make it more secure if and when this ever comes to pass.
Conclusion: Is Bitcoin Worth Investing In?
As stated above, it’s important to know the risks and rewards involved before making any financial investment. Deciding whether Bitcoin is the right investment for you also depends on what your goals are. If you’re looking for a low-risk investment, Bitcoin is definitely not the right option for you.
Investing in Bitcoin 10 years ago when it was worth only a few cents would’ve provided little risk with a high potential reward, because it was unlikely you were going to lose much money. However, investing in Bitcoin now, with the value of the digital asset a lot higher, poses a greater risk to you losing everything.
However, if you’re looking to expand your portfolio and can afford the risk, Bitcoin is a great investment as cryptocurrency isn’t likely to go away anytime soon.
If investing in crypto is of interest, Bitcoin doesn’t have to be the only option. There are other digital assets (called altcoins) to consider, which will heap dramatically bigger returns but also carry much larger risks and volatility. Some of these cryptocurrencies, like Ethereum, Solana, Polkadot, Polygon and Tron offer more advanced features than Bitcoin, as they host DeFi and NFT protocols. Then again, if Square’s Jack Dorsey has anything to do with it, Bitcoin will also soon be DeFi-friendly.
Whatever you decide, make sure you apply these 5 core Bitcoin investment rules:
- DYOR (Do Your Own Research).
- Buy low, sell high.
- Don’t ever invest more than you can afford to lose and set a limit for yourself.
- Try to dollar cost average, by investing periodically and consistently, irrespective of the price. This way, you avoid short term market fluctuations.
- Keep those diamond hands shiny!