Bitcoin has proven to be all the rage in the investing world over the last year or so. While the cryptocurrency has been around for several years now, it’s just now really turning heads. Early investors understood the potential of Bitcoin, but now the rest of the world is taking notice. For anyone interested in potentially jumping on board of the Bitcoin investment opportunity, it is important to educate oneself not only on cryptocurrency but why this particular digital currency is a valuable opportunity. Here are five things to know before investing in Bitcoin this coming year.
Unlike Some Cryptocurrencies, Bitcoin is Scarce
There are hundreds of cryptocurrencies out there on the market. Some are nearly as old as Bitcoin while others popped up earlier in the year. The best way to identify a form of digital currency that will last is to understand the reasoning behind its creation. Most cryptocurrencies are created in order to address some sort of issue. There are currencies designed to improve transaction times while others are specific for gaming platforms. Each has its own, unique place in the world of digital currencies. With that said, while the currencies may prove useful, it doesn't mean all cryptocurrencies are valued investments.
This is one of the ways Bitcoin sets itself apart. Bitcoin is limited. In many ways, it can be compared to gold. Gold is a physical commodity with a set limit. While there are gold mines around the world (some likely have yet to be discovered), it takes work to locate gold. The same is true with Bitcoin. According to Buy Bitcoin World Wide (2018), there are only 21 million Bitcoins in existence. And with every single newly “mined” coin, it becomes more and more difficult to discover the remaining coins. Once the coins are all uncovered, the cryptocurrency will continually increase in value. This is where gold and Bitcoins do differ in terms of an investment. It’s impossible to know when the entire worldwide surplus of gold is discovered. With Bitcoins, it will be documented. To the relative scarcity of the digital currency, Bitcoins are likely to become more and more valuable as fewer are left to be mined.
The combination of providing a useful service while remaining scarce makes Bitcoin a valuable investment and monetary growth opportunity. While there are 21 billion total Bitcoins, nearly 17 billion are currently in circulation. As Statista (2017) indicates, while Bitcoins currently in circulation continues to grow every quarterly, newly discovered Bitcoins have slowed down. Between the fourth quarter 2015 and fourth quarter 2017, a total of two billion new Bitcoins entered circulation. Despite growing popularity, this number dropped from three billion new coins between the fourth quarter 2013 and the fourth quarter 2015, and down from four billion new coins between 2011 and 2013. These numbers indicate it’s becoming more difficult to mine Bitcoins.
The Price of Bitcoin
This is where some investors are a bit confused (initially) when it comes to Bitcoin. There is no established price for Bitcoin. It is, in reality, whatever someone is willing to pay for it. In this way, it’s best to think of obtaining Bitcoins (outside of mining) like buying an object at auction or a piece of real estate. It doesn't matter what someone paid for the object years ago, but instead, it's all about how much someone is willing to pay for it now. When the real estate market booms, investors are likely to spend far more on the property then they would have years earlier, even if the property is exactly the same.
For individuals who are interested in what the current going rate for a Bitcoin is they can check out CoinDesk. This website shows the latest price points for the cryptocurrency. This is helpful as it can show what a current investor may need to pay in order to obtain the currency. These prices can differ. If someone is willing to purchase several Bitcoins, that current holder may be more likely to take a lower price, simply because they can sell a larger quantity. By selling the larger quantity at a lower per-coin price it will show up as a reduced selling point, which in turn can affect the sales of subsequent Bitcoins by other currency holders.
Currently, the value for a single Bitcoin (as of March 2018) is over $9,000 per coin (Forbes, 2018). With that said, there are investors who are not going to want to pay that kind of money for one Bitcoin (or have the money to purchase one coin). It is possible to buy fractions of coins, similar to buying grams of gold instead of an ounce. It is possible to buy nearly any denomination of coin. While the price of a Bitcoin will completely depend on the going rate at which buyers are willing to pay, it is possible for an interested investor to obtain a portion of a coin that best fits their current budget.
Keeping Bitcoins Secure
Bitcoins are a bit different when it comes to keeping the investment safe. Monetary investments conducted through a bank are federally secured and protected. Other kinds of investments come with insurance and other safeguards in place. Should someone steal or find a way to confiscate the investment, insurance may cover it and other protective measures will reimburse the investor for the loss. Even when someone invests in gold they do not actually keep the gold in their home, but instead, have a certificate indicating the amount of gold they "own." Bitcoin is different though because it isn’t actually protected by any financial institution or government. Due to this, if someone hacks in and steals Bitcoins from a person, the Bitcoins are lost forever. One of the allures of the cryptocurrency is the ability to conduct untraceable transactions. When a person owns a Bitcoin they actually only own a code that unlocks the “block” within a blockchain of information. The block is the Bitcoin (the visual below from CDEMI explains further what a blockchain transaction is). If someone else steals the code they, in turn, take over control if the block (Bitcoin). As there are no external corporations or governments protecting Bitcoin, it is extremely important to protect the digital investment in some other manner.
How does someone go about protecting their Bitcoins from scammers and Internet hackers? It is important to take advantage of what is known as a Bitcoin wallet. These wallets are similar to online banks in that security features are provided to help protect the Bitcoins. Most of these security wallets create what is known as an offline wallet.
As mentioned earlier, when someone owns a Bitcoin they actually own a specific code that grants them access to the Bitcoin. When people mine for Bitcoins, a computer program randomly inputs numbers in order to guess a code. Should a computer eventually guess the correct code it unlocks the unclaimed Bitcoin. Skilled hackers can attempt to crack the code of a Bitcoin already claimed. This is where an offline wallet comes in. Bitcoin is an Internet-based currency which requires an Internet connection to not only use but to gain access to. If the currency is stored in an offline wallet it becomes impossible to hack into the wallet and steal the Bitcoin code. When a Bitcoin holder wants to use their digital currency, they can log online and transfer the offline code to an online holding account within their wallet.
For anyone looking to move into the world of Bitcoin investing, it is crucial to find a quality wallet that offers ample security protection. Blockchains are designed to offer exceptional protection and security. However, in terms of preventing hackers from stealing the Bitcoin, it’s only as safe as the wallet in use.
What is Bitcoin Mining, and Should Someone Invest in It?
Bitcoin mining was covered in brief earlier but understanding exactly what it is can help educate potential investors on whether it is financially feasible to bypass buying into Bitcoins and instead of turning to mining.
A Bitcoin is a single block of information. When the block of information is transferred or used in a financial transaction, it creates a new block. This new block contains slightly different information as ownership of the Bitcoin block has shifted. The transition from one block to the next creates a chain (thus why it is known as a blockchain). Every single transaction adds another chain and block. When attempting to capture the correct passcode for a particular Bitcoin, someone mining for the coins (searching for the correct code) must follow the chain. When it reaches a block a computer program will begin to input random codes until the correct code is entered. When the correct code is entered it opens up the block. If the block contains a Bitcoin in it, the computer program that correctly entered the passcode now has the correct passcode in its memory. However, if this doesn’t open a block with an unclaimed Bitcoin, it simply sends the program down the chain and to the next block, where the process is repeated. Basically, it is a hallway of doors, where the person going down the hallway has no idea what individual doors will lead to.
As a computer program can randomly guess a Bitcoin’s passcode, some may wonder if purchasing a computer program to randomly guess the codes would prove a better financial investment. According to BlockChain Info, it takes on average nearly 1.8 billion attempts before a correct passcode key is identified. That number, however, will continue to increase. As more and more Bitcoins are identified and collected it takes additional attempts to pinpoint the correct passcode key for subsequent Bitcoins. This means every new Bitcoin will be slightly more difficult to unlock. As more and more potential investors look to jump into the Bitcoin mining opportunity, it reduces the chances of one individual uncovering a passcode.
Bit Coin Mining (2018) offers three different computer systems specifically designed to mine for Bitcoins. The top of the line device costs nearly $2,000 and, on average, will earn .3603 Bitcoins per month (when running 24 hours a day, 7 days a week). This system may pay for itself within a month or two (after figuring for energy costs). For those with the money, investing in available mining systems may prove financially beneficial over the long haul, but it is important to understand there's no guarantee of ever actually uncovering a passcode. As the graph from Hashing It (Updated 2017) points out, solo mining operations are not always profitable. 90% of miners will earn eight Bitcoins over a six-month span, while five percent of people will not make a cent.
Is It Even Legal?
Before moving into the world of Bitcoin at cryptocurrencies in general, it’s important to know whether or not ownership of the digital currency is even legal in the given country. For residents in the United States and Canada, Bitcoin and other digital currencies are perfectly fine and legal. However, according to Life Wire (2017), there are several different nations where transactions using such a currency are strictly against the law.
Morocco first outlawed the use of cryptocurrencies beginning in November of 2017. Both sending and receiving payments using any form of digital currency (such as Bitcoin) can come with a hefty fine. Use of the currency in several South American nations is also illegal (digital transactions are difficult to track and tax, which can mean less money for the federal governments). In Ecuador, crypto coins have been illegal since 2014. In Bolivia, usage has actually never been legal and, if caught, can be punishable by both fines and jail time.
It might surprise some investors that Bitcoin trading in China is illegal (since September 2017). However, due to the widespread usage of mining technology, using the currency remains popular and transfers often occur via in-person transfers or through texting/IM applications. Nepal, much like China has made digital currencies illegal and comes with punishments of fines and jail terms. As Nepal is a smaller nation, cryptocurrency transactions are easier to track and, as such, fines are often harsher on those caught using the currencies (Life Wire, 2017).
As is the case with any other form of investment, it is very important to understand how Bitcoin works and what the potential downfalls are. Knowing the risk of an investment is a must. Not all investments are right for all people, so putting money into a cryptocurrency might not work for certain individuals, depending on their current portfolio and what they're looking for. However, for those who are looking for a digital cryptocurrency and are still interested after going through the five things to know before investing in Bitcoin, now may just be the perfect time to jump onboard.’
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