You do not have to be a math genius to understand how digital money works. After all, the majority of us are familiar with the process of transferring funds from one online bank account to another.
Bitcoin is a digital asset that works like currency but includes inherent significant differences. It uses peer-to-peer methods, which involve paying each other directly, without the banks earning a percentage. Coins aren’t printed, so there are no physical copies available.
A Bitcoin is created by encrypting (or mining) a string of numbers and letters. Using the same equation that produced the code, you can unlock the device by using the same key (like a virtual key).
Bitcoin’s other essential features include the following:
- In the digital world, cryptocurrencies such as Bitcoin, Ethereum, and Cardano are paid for using blockchain technology.
- It is necessary to mine each Bitcoin.
- There are a total of 21 million Bitcoins that users can mine.
- Decentralized financial systems, like cryptocurrencies, are not regulated by government agencies or central banks but are instead governed by the market itself.
- You can typically purchase Bitcoin with credit cards on most platforms (but you will likely have to pay a fee to your credit card provider).
- Bitcoin has dropped recently. Why is this?
- Is Bitcoin worth investing in?
- Before you invest in Bitcoin, here are some things to consider
- Bitcoin’s ups and downs
- Is it possible to lose all your money?
- What is the environmental impact of Bitcoin?
- How much does it cost to buy Bitcoin?
- Is Bitcoin supported by financial institutions?
Bitcoin has dropped recently. Why is this?
A market crash in December 2021 led to a drop in Bitcoin and several other leading cryptocurrencies, and prices have been declining ever since.
During the Fed’s interest rate decision meeting in January, crypto and other stocks fell.
Currently, the Bitcoin price stands around $43,000, as of 24 February. That’s a far cry from the all-time high of $69,000 seen in November.
Recently, the situation has been tumultuous because:
- Due to rising interest rates, a sell-off of risky assets in the US and UK
- Cryptocurrency transactions are prohibited in China
- Russia is said to be considering banning cryptocurrency trading and mining which would cause prices to plummet
The future regulation of cryptocurrency investments has also been threatened.
Is Bitcoin worth investing in?
There is a lot of volatility with Bitcoin. When taking on the risk of investing in crypto, make sure you understand what you are doing and have a crypto investment strategy.
Don’t invest simply because you’re afraid of missing out. Consider these questions before investing in Bitcoin:
- How do Bitcoin and the crypto market work? Do I understand what I’m investing in?
- Is the risk level acceptable to me?
- What is the price difference now between a few months ago and now?
- Could prices rise even higher?
- What if I buy it now with the idea of selling it for more later? Who is likely to buy it from me at a higher price?
- What made me not interested in such a great asset when it was much cheaper?
- Have I made myself believe I am “in the know?”.
It may not be a good idea to invest if you can’t answer these questions. Don’t put your life savings on the line by buying Bitcoin.
Before you invest in Bitcoin, here are some things to consider
The risks and rewards of cryptocurrency investments are the same as any other investment. But Bitcoin is arguably even riskier compared to conventional investments.
Before you invest in Bitcoin, consider these factors:
- Cryptocurrency markets aren’t a good place to invest all your life savings.
- Think of it as a bit like gambling. Invest only a small part of your disposable income, and be prepared to lose it all.
- If you cannot afford to lose the money you invest, then you should not invest.
- If you don’t have much money left at the end of the month, skip crypto and work on saving instead.
- It would help if you treated cryptocurrencies as long-term investments to maximize your chances of making money.
- Market crashes and bull runs are common in cryptocurrencies.
Bitcoin’s ups and downs
Bitcoin is considered a market disruptor by many personal finance experts. Bitcoin is volatile, for sure. While you could say that many stocks are volatile, Bitcoin can see dramatic rises and falls in one single day.
The Bitcoin price has fluctuated dramatically since December 2020. Is a Bitcoin crash imminent? It’s hard to say, but it does bear examination.
Cryptocurrencies lack intrinsic value, which is why their prices are so volatile. Be prepared for bumpy rides if you decide to invest.
Is it possible to lose all your money?
Yes, of course. Cryptocurrency is very risky and completely unlike conventional investing.
Cryptocurrencies like Bitcoin are purely speculative. Unlike company stocks, which fluctuate based on the company’s performance, the share price is independent of any company’s performance.
When it comes to Bitcoin, there are three ways to lose all your money:
- You sell when the value plummets: crypto’s price fluctuates with sentiment. In theory, you only lose money if you sell an investment for less than you paid for it. This is called “crystallization of losses.”
- You actually forget you have it. Maybe 20% of cryptocurrency is either forgotten about or lost, with a value of $140 billion at the moment.
- Approximately $10 million worth of cryptocurrency is stolen every day by hackers and scammers.
Cold wallets, or hardware wallets, are physical devices that store holdings offline and are similar to USB flash drives. Although they protect your holdings from online attacks, you may lose them.
When investing, do your research, and don’t bet everything you have on one company or one cryptocurrency.
Don’t invest more than you can afford to lose, and spread your money around to spread the risk.
What is the environmental impact of Bitcoin?
In terms of energy use, cryptocurrencies use as much power as the Netherlands every year. This is a staggering amount, and one of the major issues people have with Bitcoin is the vast energy demand it presents.
Approximately 1% of the world’s electricity is consumed by computers that mine Bitcoins.
Even though Bitcoin is fueled mainly by renewable energy (an estimated 39%), it is still mined and serviced using fossil fuels.
Tesla no longer accepts crypto payments, which has caused Bitcoin’s decline.
How much does it cost to buy Bitcoin?
Generally, there are fees associated with buying and selling Bitcoin, including:
A few percent of the total transaction value is usually charged for these services.
Is Bitcoin supported by financial institutions?
Bitcoin and other cryptocurrencies are closely scrutinized by governments, regulators, and companies.
The following companies have adopted Bitcoin:
The following investment companies are showing interest:
- Two BlackRock funds offer the possibility to buy Bitcoin futures.
- Five months after adding Bitcoin to its multi-asset portfolio, UK-based Ruffer Investment Management pulled out with a $1.1B profit.
- A major index provider, S&P Dow Jones Indices, announced in 2020 that it would index more than 550 of the most traded cryptocurrencies by 2021.
There are discussions about the possibility of a central bank-backed digital currency at the Bank of England.
The Federal Reserve and other central banks have been doing the same thing. This could help to calm dramatic price fluctuations as more institutional investors buy crypto assets for capital gains.
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Bitcoin is exciting and still relatively new in the field of investments. Tread carefully, focus on managing risk, and you should find that it can be a lucrative part of your portfolio.