Since it was created 9 years ago, and more so in the past few years, cryptocurrency market has gained popularity and piqued the public’s interest. At the same time, its impact outside of the internet-savvy circles may be a bit overrated. There is still much confusion, misconception or even total unawareness of the whole phenomena. And this is actually not surprising as the concept of cryptocurrency and the technology behind it can be quite complicated or just confusing. So, here are a few basic hints on what bitcoin and cryptocurrency is and what should be considered when investing in it.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” – Thomas Carper, US-Senator
Bitcoin, being the first crypto currency of its kind, is a type of electronic cash, available only in digital form. It is the most valuable digital asset and also the most successful so far. Other cryptocurrencies, released after Bitcoin, are generally known as altcoins. Some of them are Ethereum, Litecoin, Ripple, Dash, Monero, etc. The Bitcoin peer-to-peer network has become the most widely used alternative money system and thus making bitcoin itself the most trusted and dominant among all the virtual currencies, despite their increasing number (now over 1600).
Fundamental to Bitcoin’s success and overall appeal is the technology related to it, namely the blockchain technology. It is a digital database/directory and consists of records of transactions between users belonging to a network. Those transaction entries are organized in “blocks”, which are linked to each other in a hierarchy to create a chain secured with cryptography. The blockchain formation is permanent but still ever-growing. So, once created and stored, the data can be viewed, but not deleted or edited, besides new blocks are potentially and constantly added to the chain. In other words, the entries of transactions are easily distributed, verifiable, fixed and secure. The blockchain is also designed in a way that it does not need any mediator- like a central server or trusted authority – to validate the transactions. The transfers or so called transactions are facilitated through the use of public and private keys for security purposes.
Like physical money, bitcoin is anonymous in the sense that it cannot be traced back to a particular individual. However, it is not fully anonymous but pseudo-anonymous because transactions are publicly and chronologically registered in the “blockchain”. Summarizing all the features of the blockchain, one could definitely say it is a really clever technology with several advantages.
The crypto market grew by a large percent in 2013 and since. And so it is no wonder people are questioning its credibility and stability. After all, can an asset such as Bitcoin be trusted when it showed such a huge lift-off? It may have been better to invest 1 year ago, 2 years ago or 5 years ago. But if you are well-informed on how it works and understand the potential and you still haven’t done it, maybe it’s a good idea to consider it sooner rather than later.
Investing has been defined as buying an asset that actually creates products, services or cash. Additionally, Bitcoin is said not( or any other currency) to have an intrinsic value or any useful qualities on its own, so it is worth something only if you are ever to sell it, also that it is only a well-known way to use a clever technical invention (the blockchain). These statements may have some points, but they are not necessarily and entirely true. The general definition of investment is the action or process of acquiring an asset with the goal to gain a profit so the actual focus is on the possible and desirable return. In this case, it does not matter whether bitcoin or any other altcoin has an intrinsic value or whether it does something useful by itself, it is still a sort of investment.
As of now, people are not typically buying Bitcoin, because they have a practical use for it in daily life. They are buying it, mostly because they expect other people to buy it from them at a higher rate. And since the price is volatile and changes often and irregularly, Bitcoin can hardly qualify as a medium of exchange though it was initially meant to be such.
As tricky and risky investing in cryptocurrency might be, it is getting more and more appealing. The importance of taking into account the risks is not as eminent as it should be. This is not just a simple or standard investment because of its relation to a market which is in its early stages of development. It is dynamic, highly unpredictable and could be full of other insecurities. Those early stages, though, also indicate a huge potential for growth and transformation. Plus, it has already shown profit and return rates almost impossible to achieve with traditional investment. Some people call trading with cryptocurrencies just a speculation, not a real investment. Others call them the future of money. Either way, they exist for a reason. And while Bitcoin itself may be considered a bubble, the blockchain technology is believed to be potentially influential in several areas of social life.
- Do your homework and be cautious.. Get well-acquainted with the different altcoins and their specifics.
- Take some time to observe and analyze the market and then act. Check the prizes and exchange rates and use an online calculator .
- There’s no general rule on timing – just don’t get too worked up if the price is at a peak or a low, you’d better look for relative stability and buy in when the cost is comparatively low.
- When/if you already own some coins – Don’t sell too early. Try not to be tempted to get to daily trading without any experience, stick to holding.
- Invest only as much as you can afford to lose. Here is the thing – there is risk and there is reward. Although, the reward can be great, the same is true for the risk and sometimes all of your investment can be instantly lost, so be prepared.
“I always tell them [my family] that the second most stupid thing they could do right now is to own an amount of bitcoins they cannot afford to lose and the most stupid thing they could do would be to not own any. “
Wence Casares, CEO of Xapo
- Strive for balance- Minimize the risk by diversifying your portfolio or crypto “wallet” –it is best to undertake multiple small investments in several different crypto currencies.
- Don’t act on emotion or fear of missing out