Digital currencies are already dominating the news, with some analysts forecasting that bitcoin’s price will reach $100,000 by 2022.
Cryptocurrencies, on the other hand, have alarmed authorities and central banks, with the price of bitcoin plummeting to $40,000 in January. So, should you run a mile or join the craze?
The concept of digital money that you utilise on the internet is not overly sophisticated. After all, the majority of us are used to transferring funds from one online bank account to another.
Bitcoin is a digital asset that functions similarly to traditional currency but with several noticeable characteristics. Cryptocurrencies are peer-to-peer payment systems that do not require banks to take a share of each transaction. The coins are also not available in a tangible form.
An encrypted code, consisting of a string of numbers and letters, is used to produce (or mine) each bitcoin. The same mathematics that created the code can also be used to “unlock” it (like a virtual key).
Other significant aspects of bitcoin include:
- Cryptocurrencies, like as bitcoin, ethereum, and cardano, are digital currencies that use blockchain technology to transport data across the internet.
- Each bitcoin must be mined separately.
- It’s limited: there are only 21 million bitcoins available for mining.
- Cryptocurrencies are “decentralised,” which means they are not regulated by a financial institution such as the government or central banks.
- The majority of platforms will accept credit card payments for bitcoin purchases.
What caused the price of bitcoin to plummet?
Bitcoin and several other main cryptocurrencies saw significant price drops in December 2021, and prices have continued to tumble in 2022.
According to Coinbase*, the price of bitcoin is currently about $40,000. That’s a long way down from November’s all-time high of $69,000.
The following factors have contributed to the recent upheaval:
- Uncertainty about rising interest rates in the United States and the United Kingdom has caused a sell-off in risky assets.
- The Chinese government has made cryptocurrency transactions illegal.
- Russia is rumoured to be considering banning cryptocurrency trade and mining, leading values to drop.
- Further regulation of bitcoin investments has also been threatened in the future.
Should I invest in Bitcoin?
Bitcoin is a highly volatile currency. If you’re prepared to take the risk, be sure you know what you’re getting into and that you have a crypto investment strategy in place.
Also, make sure you’re not investing just out of a fear of missing out. Before you become involved, there are a few questions you should ask yourself:
- Do I have a good understanding of what I’m investing in and how bitcoin and the cryptocurrency market operate?
- Is the level of risk acceptable to me?
- Is it significantly more expensive now than it was a few months ago? If that’s the case, why do I want to buy anything just because it’s more expensive? I don’t do that anywhere else in my life.
- Is there any evidence that prices will continue to rise?
- Who do I think will buy it from me for that greater price if I acquire it now with the intention of selling it for
- even more later?
- Why, if an asset is so valuable, did I pass it up when it was much cheaper?
- Have I persuaded myself that I am “in the know” in some way?
- It’s generally not a smart idea to invest if you don’t know the answers to these questions. If you do buy bitcoin,
- make sure you aren’t putting money you need on the line. Read more about cryptocurrency tips (and mistakes to avoid) here.
If you are new to investing and want to know more about the general principles and how to get started, check out our guide here.
Before you invest in bitcoin, there are a few things to think about.
Cryptocurrency, like any other investment, has risks and rewards. Cryptocurrency is extremely dangerous when compared to other sorts of investments.
Before you invest, consider the following points:
- We do not advise you to put all of your life savings into cryptocurrency markets.
- It’s best to think of it as a form of gambling, so just invest a small portion of your discretionary cash and expect to lose a lot.
- Never put more money into anything than you can afford to lose, and don’t simply focus about the near term.
- If you don’t have much money left at the end of each month, it’s advisable to avoid crypto and instead focus on saving.
First, weigh the advantages and disadvantages:
Pro: Cryptocurrencies are worldwide, which means they have the same worth in all countries and are not subject to exchange rates.
Con: Cryptocurrencies are a very dangerous investment because they are incredibly volatile, vulnerable to bull runs and market crashes. People have also reported having to wait for their money due to technological difficulties.
Bitcoin’s highs and lows
Fans celebrate it as a market-disrupting emancipation, while many personal finance professionals see it as a dangerous creation. One thing is certain: bitcoin is extremely volatile.
Bitcoin has had tremendous ups and downs since December 2020. We’ll go over a few of them here: Is a Bitcoin crash on the way?
The issue is that cryptocurrency prices are not supported by any inherent value. One factor determines it, according to Mark Northway, investment manager of Sparrows Capital.
So be prepared for a rocky ride if you decide to invest.
Is it possible to lose all of your money in bitcoin?
Yes, without a doubt. Cryptocurrency is a high-risk investment that differs from traditional stock market investing.
Bitcoin’s worth is entirely based on speculation. This is in contrast to corporate stocks, which fluctuate in value depending on how well the company performs.
Important: Cryptocurrencies are not regulated by the Financial Conduct Authority in the United Kingdom.
There are three main ways to lose all you money with bitcoin:
- The value drops, and you sell: cryptocurrency is highly volatile, with its price decided by public opinion. Though you only lose money if you sell an investment for less than what you paid for it. “Crystallising your losses” is the term for this.
- Your recollection: According to crypto analytics firm Chainalysis, 20% of all cryptocurrency has either been forgotten about or lost, with a current value of roughly $140 billion.
- According to Atlas VPN, hackers and scammers are expected to steal over $10 million worth of cryptocurrencies every day.
Some people choose to take their assets offline and store them in a cold wallet, also known as a hardware wallet or cold storage, which is comparable to a USB stick. While this protects you from online attacks, it also puts your assets at risk.
Do your homework before investing, and don’t put all your eggs in one firm or one cryptocurrency.
Invest only what you can afford to lose and distribute your money around to spread the risk.
How to Make Money Investing in Bitcoin
Making money depends on the price at which you acquire and sell an item, just like any other investment. You will profit if you sell it for a higher price than you paid for it.
You will lose money if you sell for less than what you paid for it.
Consider the following scenario:
- You would have made a 300 percent profit if you had bought bitcoin in January 2020 and sold on December 31, 2020.
- If you bought bitcoin in January 2018 and sold on December 31, 2018, you would have lost 73 percent of your investment.
Because Bitcoin is so volatile, the key is to avoid panicking and crystallising your losses by selling when its value declines. This holds true for all investments.
Investing in bitcoin in a variety of ways
The most frequent approach to invest in bitcoin is to buy coins (or units of a coin) on a cryptocurrency exchange.
However, there are alternative possibilities:
Invest in bitcoin-related businesses.
You might buy shares in firms that accept bitcoin as payment or invest in cryptocurrency exchanges.
ETFs that invest in bitcoin
You could buy a bitcoin ETF (exchange-traded fund). This mirrors the price of bitcoin, allowing you to invest in the fund without actually trading bitcoin.
Invest in companies that use blockchain technology
You could put your money into the blockchain network (the system for recording information about crypto). For example, the software platform Solana claims to be the world’s quickest blockchain.
Bitcoin funds are being launched by a number of investing firms.
It will still be volatile, but selling your investment and getting your money back may be easier than investing directly.
There are funds that invest in bitcoin as well as traditional assets such as stocks and bonds.
These are a form of financial derivative that gives you the right to buy or sell bitcoin at a set price (known as a strike price) before a certain date of expiry.
Unlike buying Bitcoin cryptocurrency outright, bitcoin options enable you to take a speculative position (up or down) on the future direction of a market price.
If you feel the market price will rise, you would buy a call option:
You’d be able to acquire bitcoin at the pre-specified price if your prediction was true and the market price increased over the striking price of the bitcoin option. The amount of profit you’d make depends on how far the bitcoin price rose past the strike price.
You may let the options contract expire and only lose the premium you paid to open the transaction if your prediction was incorrect and the price of bitcoin decreased.
Is it true that bitcoin is harmful to the environment?
According to academics from the University of Cambridge, the digital currency consumes as much energy as the Netherlands every year, with only 30 countries using more.
Bitcoin mining computers consume up to 1% of the world’s electrical supply.
While some of bitcoin’s use (an estimated 39 percent) is renewable, fossil fuels are still utilised to power the digital currency’s mining and maintenance.
This is why Tesla, the electric car company, has ceased taking cryptocurrency payments, leading bitcoin to plummet. More information can be found in our guide to eco-friendly cryptocurrencies.
What are the costs of purchasing bitcoin?
There are frequently costs to pay when buying and selling bitcoin, such as:
- Fees for transactions
- Fees for deposits
- Fees for withdrawals
- Fees for trading and escrow
These normally cost a small percentage of the transaction’s overall value.
Is bitcoin supported by financial institutions?
Bitcoin and other cryptocurrencies are being intensively scrutinised by governments, authorities, and businesses.
Companies adopting bitcoin include:
Is there a way to invest in crypto that is less risky?
According to Gavin Brown, associate professor of financial technology at the University of Liverpool, “stablecoins” could be a less dangerous way to invest in cryptocurrencies.
Brown mentions tether, the most popular stablecoin, which is backed by a dollar per coin. On April 26, 2021, it surpassed the $50 billion threshold, but he warns that tether isn’t definitely the next big thing.
“It will never be worth more than a dollar in theory.” However, it may be an interesting alternative for any diverse portfolio, and it could provide some stability if [other] things start to struggle.”
The stablecoin has also been a source of controversy, with the New York Attorney General fining it and banning it from the state for a year.
You could also purchase stock in bitcoin-related companies.
Some funds and investment trusts also have cryptocurrency exposure, which is a less dangerous manner of investing than purchasing the currencies directly.
“Because of the high volatility and the fact that the use case for crypto currencies is still in its early stages, traders should only invest money they can afford to lose.”