Bitcoin is prone to price volatility, with wide swings to the upside and downside. The most recent upswing comes alongside growing institutional demand for the cryptocurrency as an attractive asset class.
Will this upward trajectory continue, or is Bitcoin’s value likely to start plummeting again in the immediate future?
That’s not an easy question to answer, and buying Bitcoin isn’t a simple decision. Before you enter the market, you need to understand both Bitcoin and the wider crypto market. Read on to learn the basics.
Conceived as a virtual alternative to fiat currency, Bitcoin is built atop blockchain technology, which it uses for both validation and security. Blockchain itself is a distributed digital ledger of transactions, operating through a combination of private keys, public keys and network consensus.
How it works is deceptively simple. Each Bitcoin transaction adds a new “block” to the ledger, identified by a 64 digit encrypted hexadecimal number known as a hash. Each block uses the block immediately preceding it to generate its hash, creating a ledger that theoretically cannot be tampered with. Bitcoin miners collectively attempt to guess the encrypted hex code for each new block — whoever correctly identifies the hash then validates the transaction and receives a small amount of Bitcoins as a reward.
From an investment perspective, Bitcoin toes the line between being a medium of exchange and a speculative digital asset. It also lacks any central governing body to regulate its distribution. As one might expect, these factors together make Bitcoin quite volatile, and therefore somewhat risky as an investment target.
As for the source of this volatility, Bitcoin’s value is primarily influenced by five factors.
Only a certain number of Bitcoins are released each year, and this rate is reduced every four years by halving the reward for Bitcoin mining. The last of these “halvings” occurred in May 2020, and the next one is due this April. When it happens, there may be a significant increase in Bitcoin demand, largely driven by media coverage and investor interest.
Bitcoin demand is also strengthening in countries experiencing currency devaluation and high inflation.
It would be remiss not to mention that Bitcoin represents an ideal mechanism for supporting illicit activities — meaning that increasing cybercrime could itself be a demand driver.
Despite that fall, Bitcoin remains the dominant force in the cryptocurrency market and is the marker by which many other cryptocurrencies determine their value. However, there is no guarantee that this will always remain the case. There are now scores of Bitcoin alternatives, known collectively as altcoins.
A ban in either region could be devastating for Bitcoin’s overall value.
As with any speculative commodity, Bitcoin is greatly influenced by the court of public opinion.
First and foremost were the harsh economic conditions of 2022. In order to combat supply shortages and inflation, the US Federal Reserve hiked interest rates aggressively. The war in Ukraine introduced even further uncertainty.
In response, most investors reined in discretionary spending and became less willing to speculate on risky or volatile assets. The catastrophic failure of crypto exchange FTX also left a sour taste in the mouths of investors to the tune of a nearly US$1 billion loss. Already wary of Bitcoin, many took FTX’s failure as a sign that their initial instincts were correct.
According to Buffet, Bitcoin is an unproductive asset with no unique value. He also feels that it doesn’t count as a true currency — in fact, he called it “rat poison”. Moreover, he believes that the crypto market as a whole will end badly.
Bitcoin is more stable than it’s been in years, and the next halving is fast approaching. Taking current market conditions into account, now might well be the perfect time to invest, so long as you remain cognizant of the risks.
But if you opt to jump into the market … what comes next?
The good news is that investing in Bitcoin is actually quite simple. If you’re purchasing through a stockbroker, it’s a similar process to buying shares of a company. Otherwise, you may need to gather your personal information and bank account details. It’s recommended to secure your network with a VPN prior to performing any Bitcoin transactions.
Once you’ve chosen an exchange, you’ll need a crypto wallet. Many first-time investors choose a software-based or “hot” wallet either maintained by their chosen crypto exchange or operated by a service provider. While simpler to set up and more convenient overall, hot wallets tend to be less secure as they can be compromised by data breaches.
Another option is a “cold” wallet — a specialized piece of hardware specifically designed to store cryptocurrency. It’s basically a purpose-built flash drive. If you plan to invest large amounts in crypto, a cold wallet is the better option.
Once you’ve acquired and configured your wallet, you may choose to connect either the wallet or your crypto exchange account to your bank account. This is not strictly necessary, and some seasoned investors don’t bother to do this.
Finally, with your wallet fully configured and your exchange account set up, it’s time to place your order.
The most important thing to remember about Bitcoin is that it is a high-risk asset. Never invest money that you aren’t willing to lose. Treat Bitcoin as a means of slowly growing your existing wealth rather than an all-or-nothing gamble.
Make decisions based on your own market research and advice from trusted — and more importantly, certified — professionals. If you’re putting up investment capital based on an influencer’s tweets, you are playing with fire.
You should also start small. A good rule of thumb is not to dedicate more than 10 percent of your overall capital to cryptocurrency. Even that number could be high — again, it’s all about moderation.
Make sure to prioritize cybersecurity as well. Cryptocurrencies are an immensely popular target for cybercriminals. In addition to maintaining a cold wallet, make sure you practise proper security hygiene. That means using a VPN and a password manager while also exercising mindfulness in how you browse the web and what you download.
Finally, make an effort to understand what cryptocurrencies are and how they work. One of the reasons Sam Bankman-Fried was able to run FTX as long as he did was because many of his investors didn’t fully understand what they were putting their money into. Don’t let yourself be fooled by buzzwords or lofty promises about Web3 and the metaverse.
Do your research into the technology behind it all. That way, you’ll be far better equipped to recognize when something is a sound investment versus a bottomless money pit.
Generally speaking, Bitcoin is subject to the same rules as any investment. That is to say, you should always try to buy low and sell high. Unfortunately, given how dramatically Bitcoin’s value tends to fluctuate, that’s often easier said than done. Again, it’s prudent to pay attention to the market and listen to the experts.
Given Bitcoin’s volatility, it’s understandable that you might be leery of making a direct investment. The good news is that you don’t have to. You can indirectly invest into the crypto space through mutual funds, stocks and ETFs.
Do a bit of research and touch base with your stockbroker or financial advisor before you go in this direction.
Bitcoin is a fascinating asset. Simultaneously a transactional tool and a speculative commodity, it’s attracted the attention of investors almost since it first hit the market. Unfortunately, it’s also incredibly volatile.
For that reason, while current market conditions are favorable for anyone considering buying Bitcoin, it is an asset you should purchase only at your own risk. Because while Bitcoin may have the potential for significant returns, you may also lose most of your investment. If that knowledge doesn’t bother you, then by all means, purchase away.
Otherwise, there are better — less volatile — options for your capital.
Reality and price predictions rarely match up as forecasters have no way of predicting major events like Russia’s war with Ukraine or the COVID-19 pandemic. On top of that, the further away the time period, the less realistic the prediction will be.
This is an updated version of an article first published by the Investing News Network in 2023.
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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