Bitcoin (BTC) is making some early investors millionaires in a few short months. While there are no guarantees when it comes to the future of this cryptocurrency, the digital cash system shows signs that it won’t be written off as a bad investment. In fact, throughout the first few months of 2021, its price rose exponentially. For instance, on January 1, 2021, one coin cost roughly $32,000. As of February 22, 2021, this has elevated to over $56,000. When or where it’ll plateau or dip, no one is sure. According to research from Ark Investment, this number could reach $125,000 by 2025. As, chief strategy officer of CoinShares Meltem Demirors tells CNBC’s “Squawk Box Asia,” “The best time to invest in bitcoin was yesterday—the second-best time to allocate is today.”
Yet, there are still a lot of unknowns when it comes to investing in cryptocurrency. This has made many potential investors apprehensive about adding it to their portfolio.
In this article, find out what Bitcoin is, how it started, how it works, where to purchase it, and other important information to know before deciding whether or not it’s the right type of investment for you.
What is Bitcoin?
Bitcoin is a decentralized currency that uses blockchain technology to record transactions on a public ledger system. Unlike storing money in a bank, no people, agencies, or governments manage or circulate the currency. Instead, owners monitor the activity of BTC purchases, sales, and transfers in this peer-to-peer-regulated digital cash system. This falls in line with the core philosophy behind the cryptocurrency: putting more power into the hands of those who’ve invested in it.
When Did Bitcoin Launch?
On January 3, 2009, the creator of Bitcoin, Satoshi Nakamoto mined the “Genesis Block” or the first recorded block on Bitcoin’s public ledger. Besides the initial transaction, he wrote: “The Times Jan/03/2009 Chancellor on brink of second bailout for banks.” While there was no explanation as to what he meant, followers believe it was a coded message. The reference points to an article on banks in need of government bailouts in 2008 published by The London Times. One might assume Nakamoto is alluding to the idea that Bitcoin is the antithesis of central banks.
Who Created Bitcoin?
Satoshi Nakamoto is only a pseudonym. The true identity of the person (or group of people) who started the cryptocurrency is unknown as of 2021. It’s as if this person only existed from the years 2007 to 2010, and then disappeared.
While Nakamoto vanished, he left investors with the ideology they need to keep the currency alive. Many of the old emails he sent to those on a cryptography email list are available on the internet. Additionally, Nakamoto formerly communicated on the Bitcoin forum, which can also be viewed. Yet, his 2008 whitepaper is the most valuable resource provided to the public. For those interested in understanding the “what,” “how,” and “why” behind Bitcoin, this paper lays it all out.
For more information on this, check out “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Reasons for Satoshi Nakamoto’s Anonymity
One of the reasons some people haven’t invested in Bitcoin is because Nakamoto’s anonymity seems untrustworthy. Yet, supporters claim cryptocurrency wouldn’t work without this particular strategy. For example, founders and CEOs have an incredible amount of influence that can affect their various endeavors’ successes or failures. Think about how much power Elon Musk has on the market with one tweet.
Additionally, Bitcoin isn’t a product or service—it’s a commodity. As cryptographer Adam Back, a theorized Nakamoto contender, tells Changenow, “If you read about a technology, you try to figure out who is the CEO of a company, and people want to ask questions. Because bitcoin is more like digital gold, you wouldn’t want gold to have a founder. For Bitcoin to keep a commodity-like perception, I think it’s a very good thing that Satoshi stays out of the public.”
Finally, the creator doesn’t want a target on their back. As cryptocurrency gains popularity, so will its regulation. A named leader would be responsible for ensuring it operates legally and complies with governmental laws in a multitude of countries. Because some people make illegal, illicit, and unethical purchases using bitcoin on the dark web, the founder would constantly be in trouble with authorities.
Beyond governmental regulations, if hackers knew who Nakamoto was, he’d certainly be under attack. It’s estimated he owns around 1.1 million bitcoin. As of February 26, 2021, that’s worth close to 47 billion dollars.
How Bitcoin Works
All of this information begs two questions, “Is it safe to invest?” and “How does Bitcoin actually work?” Potential investors want the answers to both before deciding whether or not to add it to their portfolio.
Blockchain technology, how the cryptocurrency operates, makes theft highly unlikely. Since BTC is decentralized, it does not operate from a single or majority-held source of computing power. Instead, a network of thousands of “nodes,” or high-powered computers, validate, verify, and store transactional history. For this reason, hacking the network would be nearly impossible. Attackers would need to control over 51 percent of the Bitcoin’s hash rate, or the total amount of computational power the network uses.
It’s much easier for hackers to target individuals by stealing usernames and passwords. Once a hacker accesses the software where people store their bitcoin, they can make unauthorized transfers. This is why it is always best to create and regularly update secure passwords and set up two-factor authentication for websites and apps storing important personal information.
How to Store Bitcoin
Wallets and keys are other important aspects when it comes to protecting oneself. When someone invests, they need to select a bitcoin wallet. A wallet is simply computer software that stores cryptocurrency. Transactions happen through wallets, too.
There are two types of wallets:
A “hot wallet” that stores data on cloud-based servers.
And a “cold wallet” that takes data offline. Here, the bitcoin is located on a portable device about the size of a USB flash drive.
Examples of popular wallets include:
Understanding Keys
When someone buys bitcoin, the system generates two types of encrypted “keys” that allow transactions in a wallet. One is public, the other is private. Blockchain expert Harsh Agrawal explains how these work in a CoinSutra article with an easy-to-understand analogy. “Similarly, just like your house/flat number, anyone in the Bitcoin world can know your public address (Bitcoin address) to send you bitcoins. And to unlock (spend/send) those bitcoins, you would require your private address (or key) for which you need to take full responsibility, just like the keys of the mailbox,” he writes.
If there’s one thing to take away from this article, this is it: Whatever you do, don’t lose your private key code. While a public key can be recovered from a private key, there is no remedy for finding a misplaced private key. In January 2021, The New York Times reported on Stefan Thomas, a German programmer who owns $220 million dollars worth of inaccessible bitcoin thanks to a lost private key. Needless to say, it isn’t a bad idea to keep an extra copy of the private key’s code in a safe or another secure place.
Mining Bitcoin
If you’re interested in investing in bitcoin, you might be wondering if there’s any other way to get a few without purchasing them. If you have a high-powered computer, you may have wondered how to mine bitcoin. The other way of obtaining bitcoin is by becoming a “miner” or a person who validates bitcoin transactions. Think of crypto mining as a decentralized network of independent auditors who prevent corruption. Subhan Nadeem explains in an article for freeCodeCamp that during this process, bitcoin miners “select one megabyte worth of transactions, bundle them as an input into the SHA-256 function, and attempt to find a specific output the network accepts. The first miner to find this output and publish the block to the network receives a reward in the form of transaction fees and the creation of new bitcoin.”
Once a miner completes a block, it is verified by the network of nodes. Next, the data is chained to all of the previously validated blocks of code, hence the name “blockchain.” Each block holds enough data for 6.25 bitcoin. On average, miners dig up 144 blocks per day or around 900 bitcoin. But, because there is only a finite amount of bitcoin (21 million to be exact), the system halves mining amounts every four years. By 2024, this number will drop to 3.125 bitcoin per block, 1.5 in 2028, and so forth. With this information in mind, it’s estimated that mining will be complete in 2140.
Aside from circulating more bitcoin, crypto miners also play an important role in protecting the integrity of the blockchain. If hackers or computer bugs jeopardize the network, miners also have the power to fork to a new blockchain. This makes full-scale outside attacks nearly impossible.
So, Is It a Good Idea to Invest in Bitcoin?
Like every investment decision, there are risks—Bitcoin is no different. While there are many positive signs Bitcoin is a good investment, nothing is certain. Those who want a sure-fire ROI might become frustrated by the lack of a definite outcome when it comes to this cryptocurrency. For this reason, people who enjoy the process of watching Bitcoin’s future unfold are more likely to be apt candidates for this type of investment.
Find a short-list of the top pros and cons of purchasing Bitcoin below.
Advantages of Investing in Bitcoin
- Bitcoin offers a haven for those who don’t want their money under the care or control of institutions like banks, which can fail in an economic depression.
- There are lower transaction fees.
- Transfers don’t need to be made during certain operating hours.
- No third-parties are involved in peer-to-peer transactions.
- Payments can be made and accepted from across the world.
- It is the oldest modern cryptocurrency, making it perceived as the most reliable and steadfast digital currency system.
- From January 2020 to January 2021 Bitcoin had a 300 percent gain.
- By mid-February 2021, Bitcoin’s year-to-date gains had already risen to 81 percent.
- Companies like Microstrategy Inc., Tesla, and Square Inc. have heavily invested in bitcoin, which has bolstered its credibility and value.
- There is only a limited amount of bitcoin, which can raise its total value during periods of demand.
- If you don’t have enough money to buy a whole bitcoin, sites like Coinmama or Coinbase allow people to purchase fractions of the cryptocurrency. These are called “satoshi.” One satoshi is worth 100 millionths of an entire bitcoin.
Disadvantages of Investing in Bitcoin
- Hacking is a real threat and something to consider before investing in BTC. Inside Bitcoins reports that since 2011, $11 billion dollars worth of cryptocurrency has been stolen.
- Bitcoin has volatile price swings. In 2017, the price rose from around $1,000 to $20,000 by the end of the year. A year later, this number dropped down to around $7,000. Yet, over the course of 2020 and 2021, the value exponentially escalated. Nevertheless, it could drop below the $10,000 mark again.
- Bitcoin is an uninsured asset.
- Transactions are irreversible.
- As it grows in popularity, governments are taking note of the cryptocurrency. For instance, Bitcoin is heavily regulated in countries like China, Russia, Vietnam, Bolivia, Columbia, and Ecuador. It is banned in Algeria, Egypt, and Morocco. While countries like the U.S. and Canada are more bitcoin-friendly, it could be more regulated in the future.
- A 2020 HSB study found only “one-third of U.S. small and medium-sized businesses accept cryptocurrency as payment for goods and services.” This means it isn’t a common way of making transactions between consumers and businesses yet.
Top Apps and Sites to Purchase Bitcoins
If you’ve weighed the pros and cons and decided investing in Bitcoin is a good choice, there are a few ways to buy it.
The most common way to purchase bitcoin is with a cryptocurrency exchange like:
Additionally, brokers like TD Ameritrade, Charles Schwab, Robinhood Crypto, and TradeStation provide options for bitcoin trading.
People can also participate in peer-to-peer trading on sites like LocalBitcoins, LocalCoinSwap, LocalCryptos, and Paxful.
Finally, kiosks called Bitcoin ATMs are one more place people can get bitcoin with a credit or debit card. To find one near you, visit LocalCoin.com.
If you do choose to buy bitcoin, remember to follow best practices for internet security. This includes developing creative, unique passwords, not clicking suspicious links sent to your phone, email address, or social media accounts, and ensuring you have a cybersecurity plan in place. While a cyberattack is unlikely, it’s still important to think through how you’re protecting digital assets in your investment portfolio.
