Gone are the days when cryptocurrencies were seen as just mere hype. From finance, healthcare, and food supply chain to the Internet of Things (IoT), real estate, and online shopping, enterprise blockchain powers industries. It holds great promise for streamlining processes at scale and simplifying data exchange.
Digital currencies are still making headlines among investors. Since 2018, there has been a jump in momentum for Bitcoin among younger investors in the U.S. With fewer investors now risk-averse, the market for Bitcoin among American investors continues to expand.
So how does Bitcoin compare with other mainstream assets like real estate investments or mutual funds? Which is the wiser investment choice for you? In this article, we take a look at how Bitcoin works, the pros and cons of Bitcoin investment, and ways to make money with cryptocurrencies.
What is Bitcoin, and How Does It Work?
Bitcoin is virtual money—it’s a cryptocurrency or digital currency that people use to pay for goods and services. Bitcoins are stored in an app called a digital wallet, which also lets anyone send or receive the online assets. One can think of it as transferring digital money from one online account to another.
Like any other cryptocurrency, Bitcoin is powered by blockchain technology, an immutable, public digital ledger that manages and records every crypto transaction. Most people find cryptocurrencies attractive because transactions do not involve central or financial authorities like banks and middlemen with hefty fees, saving them on costs.
Bitcoin is gaining traction among younger investors because it is easy to buy, sell, and trade online. More and more companies are also accepting it as payment, and most platforms allow Bitcoin purchases through credit cards.
What are the Pros and Cons of Investing in Bitcoin?
Looking to be an investor and jump into cryptocurrency to reap financial rewards? As with any investment, Bitcoin comes with advantages and risks. Let’s look at the pros and cons of investing in Bitcoin to see if it’s a good fit for you and your portfolio.
Benefits of Investing in Bitcoin
Accessibility and Liquidity
Bitcoin is very accessible and versatile; you can easily obtain a digital wallet, buy Bitcoin, and mine. The digital currency can conveniently be traded on any cryptocurrency exchange. You don’t have to deal with additional fees or red tape if you’re making international transactions.
More and more merchants are also accepting Bitcoin payments because of its lower transaction fees than other digital payment methods. Plus, Bitcoin is still the most popular cryptocurrency and enjoys greater liquidity compared to its peers.
Autonomy, Anonymity, Privacy, and Transparency
Once a Bitcoin transaction is made and confirmed, it cannot be changed. Blockchain keeps Bitcoin transactions safe from fraud and makes it very difficult for malicious entities to manipulate them. If you keep your private keys secure, nobody can access the coins stored in the digital wallet.
Bitcoin’s built-in privacy protection also prevents identity theft because transactions cannot be traced back to the involved parties.
Cryptocurrencies also give you more autonomy and control because they are not regulated by any third party, so you won’t have to rely on any financial institution to make Bitcoin transactions. Plus, it is improbable for anyone to freeze or seize your coins.
Potential for High Returns
Bitcoin has a fixed supply cap of 21 million coins. This means the digital currency can never be inflated because there will always be a limited number of Bitcoins in circulation. Its value increases based on the demand of new users. Bitcoin’s growing popularity among investors also boosts high return potential. Plus, the long-term trend of digital currency over the past years has been exponential.
Downsides of Investing in Bitcoin
Highly Volatile Market
The Bitcoin market is very volatile and subject to bull runs and market crashes; prices can change drastically on a monthly—or even daily—basis. For example, in November 2021, Bitcoin reached an all-time high of over $68,000, but in just five months, in April 2022, it slipped below $40,000.
The Bitcoin market is a complicated ecosystem that not all investors want or have the patience to deal with. To make the most out of a Bitcoin investment, investors must know the ins and outs of the decentralized financial system and be familiar with how blockchain technology works.
Bitcoin transactions are irreversible, which means nothing can be done if you commit an error like sending the wrong amount or sending Bitcoins to the wrong recipient. Plus, your Bitcoins cannot be recovered, and you risk losing all your digital assets if you lose access to your private key. Cyber attacks targeting the cryptocurrency industry are on the rise, and your digital funds are still vulnerable to hacks and scams.
What You Need to Consider Before Investing in Bitcoin?
The decision of whether or not to invest in Bitcoin all boils down to how much money you are willing to risk. The process can be very confusing, daunting, and frustrating at the start. But once you learn how to go about the Bitcoin market, you can avoid uncalculated risks and increase your chances of gaining profits. Here are some things you need to consider to make smart choices regarding your Bitcoin investments.
1. Research, research, research
Do your due diligence and take the time to learn more about Bitcoin and other cryptocurrencies, understand how they work, and the different ways to invest in the Bitcoin market. Read reviews and seek the advice of expert crypto traders or analysts. Learn as much as you can about Bitcoin trends and price projections.
2. Know where to buy and sell Bitcoins
Find out more about different cryptocurrency exchanges or where people buy and sell Bitcoins. Try online tools that let you easily explore different Bitcoin investment opportunities. These automated trading platforms feature step-by-step guides that help you analyze the factors you need to look into when buying or selling Bitcoins.
3. Know where to store Bitcoins
Each type of crypto or digital wallet has its pros and cons, as well as security and technical requirements. Learn more about your hosting options to find out which digital wallet is best for your investment.
4. Prepare for volatility by diversifying your portfolio
Be prepared for dramatic Bitcoin price swings. Don’t panic when prices fluctuate wildly. Diversification is the name of the game if you want a well-balanced and comprehensive strategy. Look into investing in other cryptocurrencies or check out other assets you can put your money into.
5. Be cautious
Don’t rush to invest in Bitcoin, and never invest an amount you can’t afford to lose. Check your cash flow and start by investing a small amount of your disposable income. Keep in mind that a Bitcoin investment is not a get-rich-quick scheme. Treat it as a long-term investment, so you get better chances at reaping significant returns.
How Do You Invest in Bitcoin?
The ways by which people can make money from Bitcoin are ever-evolving. Some crypto traders consider Bitcoin investment a major side hustle, while others see it as a full-time, work-from-home job. They do that by keeping track of the highs and lows of the coin and actively trading based on the fluctuations. The rise of NFTs has also made the crypto investment space more complex and diverse. Here are some of the common ways people invest in Bitcoin:
Purchasing Bitcoin helps you be better exposed to the cryptocurrency market and its price movements. This way, you can evaluate price performance to determine your next moves and transactions. Explore online platforms and apps that allow you to own Bitcoins, get the keys to your Bitcoin holdings, and transfer the assets to your wallet.
This involves waiting for the price of Bitcoin to go up before selling at a higher cost to make a profit. Many analysts recommend this long-term approach because it enables investors to iron out market dips. Plus, they may benefit from a greater probability of significant positive returns when they sell their Bitcoins.
Grayscale Bitcoin Trust (GBTC)
This is the largest publicly traded Bitcoin fund in the world. It’s one of the ways for people to invest in Bitcoin right on the stock market. You don’t need to set up a digital wallet to buy shares because GBTC trades like a stock. It works by letting investors trade shares in trusts that hold large pools of Bitcoin.
Cryptocurrency exchange-traded funds (ETFs)
Think of it as an indirect way for you to invest in bitcoin. This approach lets you get in on crypto without buying any coins. You’ll put your money in diversified index funds or ETFs that include holdings of businesses involved in or profit from the blockchain industry. ETFs are popular among investors because of their proven record of long-term growth in value.
Bitcoin can be exciting from an investment perspective, but you have to invest in the asset responsibly to build long-term profits. Protect yourself from the cryptocurrency market’s volatility by diversifying your investment portfolio. Take your time to figure out the right Bitcoin investment strategy to minimize risks and increase returns.