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5 Things You Need To Know Before You Buy Bitcoin

#bitcoin #investing Jun 09, 2021

5 Things You Need To Know Before You Buy Bitcoin

Bitcoin has officially gone mainstream, but FOMO and hype should never drive your investment decisions. While there are thousands of cryptocurrencies available, Bitcoin is the king of all cryptocurrencies, and for good reason.  It is responsible for the creation of an entire industry, and Bitcoin itself hasn’t fundamentally changed – and maybe it never will.

If you’re curious about this new of asset class and considering it as an investment, read on.

Here are 5 things you need to know before you open that hot wallet and start to buy Bitcoins:

  1. Bitcoin is electronic only. There is no physical “coin” or token associated with bitcoin, it is completely digital. It can be misleading when there are images of “coins” that have the bitcoin symbol stamped on it.  You can own as many of these as you want, but they are for decorative use only!
  2. Bitcoin is decentralized. Bitcoin is known as the world’s first decentralized digital currency. It was created in 2009 to rebuild a safer, more transparent, and more fair financial system. In other words, it is a new way to transact the exchange of value without the oversight of governments or regulators.  It is peer-to-peer and provides a direct transaction between the buyer and the seller.  This innovation is what makes Bitcoin so unique. There is no organization deciding when to make more bitcoin, deciding how many to produce, or be responsible for keeping track of where they are. It presents a viable alternative for some of the problems we’re seeing in the world at the moment with corruption and inequality.
  3. Bitcoin is secure. All transactions are completed on an open ledger blockchain.  Blockchain is the technology that underpins Bitcoin, which collects groups of information online and holds each set of information in a block in a chronological order, hence the name “blockchain”. “Crypto” is short for cryptography, which means there is a private key and public key ensure integrity and authenticity of all transactions. Now you may be wondering, if there is no central bank or government involved with bitcoin, who exactly is overseeing all these transactions?  There is no central database when it comes to blockchain technology.  It is a spread out across a huge network of computers controlled by all bitcoin users around the world. Bitcoin cannot be duplicated, copied, or hacked.
  4. Bitcoin can be taxed. You can’t escape the taxman. Bitcoin can be used as an inflation hedge, as an investible asset class, or to pay for goods and services, just like you would with cash. All cryptocurrencies can be taxed as capital gains or income tax. For many people, the taxes will be paid on the gains made between the time it was bought to the time it was sold (or used to purchase something).
  5. Bitcoin is finite. Source code was written to ensure that there will only ever be 21 million bitcoins produced through mining.  It has not fundamentally changed in function or mathematical design in any way, and never will.  This is what makes Bitcoin so unique and a potential store of value for those who are seeking an alternative use to paper currency.

Companies like Home Depot and Starbucks now accept Bitcoin as a form of payment.  The problem with buying goods and services like this, however, is the price volatility.  In November 2020, 1 bitcoin was equal to $14K USD and in early 2021 it reached highs of $63K USD before plunging to $38K USD in May 2021.  This is driven by speculation and emotions in the marketplace, which makes using Bitcoin as a form of everyday currency difficult to do.  A $3 cup of coffee could end up costing you $15 in bitcoin, depending on when you purchased the bitcoin and what the transaction fees are.

In addition to this, mining Bitcoin via the blockchain consumes a huge amount of power, and many say it it’s not sustainable.  This environmental issue, along with the volatility of the prices, continues to keep Bitcoin a speculative investment. 

While I do believe there are benefits to bitcoin in the future, I like to think of it as something with long-term potential.  If you decide to start buying for yourself, I suggest that you never buy or invest more than you are willing to lose. 

If you want to learn more about Bitcoin, listen to my interview with Elisabeth Prefontaine of Octonomics on my podcast.  She runs an independent research and consulting firm focused on Bitcoin, and you can listen to the interview here.  

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