Marcus de Maria, Founder and Chairman of Investment Mastery.
Over recent years, Bitcoin has been steadily growing in popularity among today’s investors. At the same time, there has been a lot of debate about Bitcoin, and other cryptocurrencies, and their value.
Its supporters argue that it is the future of currencies and investment; its critics are adamant it’s not all it’s cracked up to be and might not make the big profits people are expecting.
To better understand its true stature in the market, we need to look at recent developments. For instance, Bitcoin’s valuation has risen by more than 763% in just one year, easily surpassing the rise in the traditional stock market.
With more and more people buying Bitcoin, it is now gaining the attention of the mainstream financial institutions and platforms, when once Bitcoin was derided, joked about and said would never last.
Fast forward twelve years since its’ launch, and we have Tesla and SpaceX mastermind Elon Musk recently announcing that his car empire will not only buy $1.5 billion-worth of Bitcoin, but will accept cryptocurrencies as payments in the future.
And well-known FinTech companies such as Square and PayPal have also announced their intention to support Bitcoin in the future.
Despite this, the most important Bitcoin development is, perhaps, the recent initial public offering (IPO) of Coinbase Global, Inc. (NASDAQ: COIN), today’s leading cryptocurrency exchange platform.
There is no doubt: Bitcoin is gaining momentum. Recent developments have contributed to the sharp rise in the value of Bitcoin, and asset proponents believe this is just the beginning.
Bitcoin background
Bitcoin was created in 2008 by a programmer, or group of programmers, under the pseudonym “Satoshi Nakamoto”. Twelve years on, and the true identity of Bitcoin’s inventor is still unknown, adding a little mystique to this already enigmatic entity!
Essentially, Bitcoin is a cryptocurrency. A cryptocurrency is a virtual “coins” or “tokens” and used in digital cryptocurrency systems instead of physical cash.
Similar to physical fiat currencies, digital coins have no intrinsic value, and are not backed by gold or silver.
Bitcoin is one of the most widely used of the thousands of cryptos now available to the investor.
Considering that the great attraction to crypto is that it’s a decentralized currency, thousands of different types of coin in “circulation” is a big giveaway to how popular it is among users and investors.
What gives Bitcoin its value is the fact that there will only ever be 21 million bitcoins “minted” or “mined” to give its proper definition (more on this in the future).
It’s this scarcity that provides the value, although one Bitcoin can consist of multiple denominations, the smallest being a “satoshi” which is 0.00000001 of one Bitcoin (or BTC as it is also known).
Bitcoin & The Blockchain: How does it work?
Bitcoin exists solely on the “blockchain” in “wallets.”
A wallet is the digital equivalent of a traditional bank account for fiat currencies such as dollars, sterling, yen, etc.
The blockchain is a public ledger that is totally transparent and accessible to everyone who uses the blockchain and bitcoin, and now any crypto that is in existence.
Transactions on the blockchain are “peer-to-peer”, meaning the transaction doesn’t go through a “middleman” (i.e. third party that would normally charge a fee for making the transaction).
Crypto transactions also undergo thorough verification and confirmation.
Crucially, every transaction and record of bitcoin activity is encrypted which means no one knows who owns any one bitcoin or where it goes to and from, unless they publically declare it (although the identities can eventually be detected under special police powers in cases of suspected fraud).
Only the transaction itself is recorded and is made visible to anyone.
That is why Bitcoin is a cryptocurrency (or crypto), because it has an extremely high level of privacy to it via cryptography.
“Crypto” comes from the Greek word “kryptos,” meaning hidden.
Bitcoin wallets operate via secret key.
This key is used to “sign” transactions. It provides mathematical proof that the transaction has come from your wallet (or owner of the transacting wallet).
This secret verification stops the transaction from being tampered with once it has been issued.
All transactions are confirmed and appear on the block chain network within 10-20 minutes.
It is this security and the fact YOU – and not the banks – are truly in control of your digital money that is so appealing to users and investors alike.
What to consider when investing
Firstly, and arguably most importantly, is risk-factor. Investing in Bitcoin as an individual is a lot less risky than investing as a business.
The mentality must be, ‘this is my business’s money. I won’t speculate with my business’s money, and I am not going to risk my employee’s livelihoods. Yes, I would be crazy not to invest but it would be crazier to risk it all.’
It’s very easy to go all-in and invest a large sum of money when you have it, but that is not really a sensible strategy.
So, to start with, entrepreneurs and business leaders should consider the risks, diversifying their portfolio and starting small.
Other Bitcoin Investment Options
There are different options when it comes to investing in Bitcoin.
First, you can invest in a company that uses Bitcoin technology so you will be exposed to it without purchasing it directly. When the value of Bitcoin goes up, the company shares go up too, providing a return on your investment.
I can’t invest in Bitcoin through my ISA, but investing in a company such as Block (previously known as Square) means I have an indirect tax-free investment opportunity in Bitcoin. Investing in a company that utilizes Bitcoin can be more volatile than Bitcoin itself, so more money can certainly be made.
Investing solely in Bitcoin is different, as it doesn’t move so much in value, but the individual company using Bitcoin can go up and down sometimes by 80%.
Buying Bitcoins directly from an app like Coinbase allows investors to “physically” own the asset.
This is an important distinction to make, as Coinbase allows investors to actually buy Bitcoin and store it in their own crypto wallet. That way, investors will be able to gain access to the coin’s price performance and use it as the currency to make other trades.
Owning a standalone Bitcoin is no different from owning any other currency, except for the incredible fluctuations in value.
To invest directly into Bitcoin here’s how to get started:
- Sign up to an Exchange
- Enable two-factor-authentication for security
- Get a Bitcoin wallet
- Connect the wallet to a standard fiat bank account
- Place your Bitcoin order
- Manage your Bitcoin investment
When the set-up is complete, what you really need to consider is, how much do you know? I am a firm believer in spending at least 20 minutes a day educating myself on investing. I’ve seen too many beginner investors ignoring that advice and rushing in without understanding how it all works.
Surround yourself with people that understand crypto investment and dedicate time to reading up on strategies and tips that will benefit all investments you make.
Bitcoin is certainly a crypto asset you should be investing in alongside a diversified portfolio. It is certainly a highly volatile asset with large and rapid price swings, which in turn can offer the potential for large returns but also carries a high level of risk.
Before making any decisions, it is critical that you learn how to invest in Bitcoin responsibly and utilise proven, reliable strategies. Once you feel confident with your approach, take that first brave step.
As Warren Buffet once famously said, “Be fearful when others are greedy, and greedy when others are fearful.”
