Investing In Bitcoin: Is $2000 A Good Start?

Bitcoin is a cryptocurrency, a virtual currency that uses blockchain technology to record transactions. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. Since then, it has become the most well-known and largest cryptocurrency in the world. Bitcoin is renowned for its highly volatile price, which has seen wild swings over its short existence. In this article, we will explore the risks and potential benefits of investing 2000 dollars in bitcoin.

Bitcoin's volatile price history

Relative Infancy

Bitcoin, introduced in 2009, is still relatively new compared to traditional assets like gold or fiat currencies. As a result, it is still in the price discovery phase, and its value is yet to stabilise.

Supply and Demand

The basic economic principle of supply and demand significantly influences Bitcoin's price. With a limited supply of 21 million coins, the closer the circulating supply gets to this limit, the more significant the price impact of changes in demand.

Investor Behaviour

Bitcoin's price volatility is also driven by investor behaviour. Large investors, often referred to as "whales," can influence the market by buying or selling substantial amounts of Bitcoin. Additionally, fear of missing out (FOMO) and greed can lead to panic buying or selling, further contributing to price volatility.

Media Influence

Media outlets, influencers, and industry experts can impact Bitcoin's price through their predictions, opinions, and news coverage. Positive or negative sentiment from these sources can create investor concerns or excitement, leading to price fluctuations.

Regulatory Changes

Government and central bank actions towards Bitcoin and cryptocurrencies can significantly impact its price. For example, China's ban on cryptocurrency transactions in 2021 caused a drop in Bitcoin's price as miners were forced to relocate.

Competition from Other Cryptocurrencies

The emergence of competing cryptocurrencies can also affect Bitcoin's price. As investors have more options, they may choose to invest in alternative coins, reducing the demand for Bitcoin.

In summary, Bitcoin's volatile price history is a result of a combination of factors, including its relative newness, market dynamics, investor behaviour, media influence, regulatory changes, and competition. This volatility has resulted in significant price swings, creating opportunities and risks for investors.

The risks of investing in Bitcoin

Bitcoin is a digital payment system with no intermediaries or banks. It was invented by a person or group using the alias Satoshi Nakamoto and released as open-source software in 2009. The U.S. Treasury has categorised it as a decentralised virtual currency, though some believe it is best described as a "cryptocurrency".

Bitcoin has seen incredible growth since its inception, but it is not without its risks. Here are some of the main dangers of investing in Bitcoin:

Volatile and Fluctuating Market

The price of bitcoin is constantly changing. For example, on November 6, 2018, one bitcoin was worth $6,461.01. If you purchased a bitcoin on December 17, 2017, the price topped $20,000. Days later, on the 24th, buyers could not sell their investment for more than $14,626. With such an unpredictable market, there’s no telling if you will get a return on your investment.

Cyberattacks and Fraud

Bitcoin is a technology-based investment, which leaves it open to cyberattacks. Hacking is a serious risk, as there is no way to retrieve your lost or stolen bitcoins. Many reports suggest that many buyers lose their investments on exchanges and mining losses. Additionally, there is a fair amount of fraud in the bitcoin market, with fake exchanges duping unsuspecting investors out of their bitcoins.

Little or No Regulation

Currently, the bitcoin market is operating without any major regulations. The government doesn’t have a clear stance on cryptocurrency; the market is just too new. It is not taxed, which can make it enticing as an investment opportunity. However, a lack of taxation could lead to problems should bitcoin pose competition for government currency. There’s no telling what the state of the bitcoin market could be in a few years.

Technology Reliance

Bitcoin is an online exchange that relies entirely on technology. Without the technology, cryptocurrency is worthless. With Bitcoin and other cryptocurrencies, there is no physical collateral to back it up. Bitcoin owners are more vulnerable to cyber threats, online fraud, and system shutdowns.

Block Withholding

New bitcoins are created by solving mathematical equations called "blocks". A mining pool can use computational power to mine a block and hide it from honest miners instead of reporting the new block to the network. This is a way for a select few to reap the benefits, while others are left with nothing.

Ponzi Scheme

Bitcoin has been referred to as a Ponzi scheme, with people at the top benefiting from the ignorance of others. As more people buy into bitcoin, it creates a bubble economy. When the bubble bursts, bitcoin will become useless, and many people will be left holding cryptocurrency, unable to sell.

Lack of Acceptance

Bitcoin may be a step towards a new monetary exchange, but few companies accept it as a viable form of currency. Currently, only a handful of online stores allow cryptocurrency exchanges, and bitcoin owners can use their funds for travel with only a few companies. Many companies do not recognise bitcoin as a legitimate exchange.

How to buy and sell Bitcoin

There are several ways to buy and sell Bitcoin, each with its own advantages and disadvantages. Here is a step-by-step guide on how to get started:

Step 1: Choose a Crypto-Trading Service or Venue

You can purchase bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, and Crypto.com. These exchanges offer a variety of features and cryptocurrencies for trading. They also enable investors to buy, sell, and hold cryptocurrencies and allow users to transfer crypto to their online wallets for safekeeping. It is important to do your research and compare the different fees and consumer protections offered by each exchange before choosing one.

Step 2: Connect Your Exchange to a Payment Option

Most exchanges will require you to connect your bank account or link a debit or credit card to make a purchase. It is important to note that using a credit card to buy bitcoin can incur additional processing fees and the risk of fraud. Additionally, credit card companies may treat bitcoin purchases as cash advances and charge high fees and interest rates.

Step 3: Place an Order

Once you have set up your exchange account and connected a payment method, you can place an order to buy bitcoin. Cryptocurrency exchanges offer various order types, such as market and limit orders, and some also provide stop-loss orders. You can also set up recurring investments on some exchanges, allowing you to dollar-cost average into your chosen cryptocurrency.

Step 4: Safe Storage

After purchasing bitcoin, it is important to store it securely. You can use a hot wallet or a cold wallet for storage. Hot wallets are online wallets that are connected to the internet and are typically apps on devices such as computers or phones. They are convenient and allow for faster transactions, but they are more vulnerable to hacking and theft. Cold wallets, on the other hand, are offline wallets that are not connected to the internet, such as hardware wallets or paper wallets. They provide more security but may require technical knowledge to set up and make transactions take longer.

Step 5: Selling Bitcoin

You can sell bitcoin at the same venues where you purchased it, such as cryptocurrency exchanges and peer-to-peer platforms. The process of selling is similar to the process of purchasing, and most exchanges charge a percentage of the crypto sale amount as fees. It is important to note that exchanges may have daily and monthly withdrawal limits, so large sales may not be immediately available for withdrawal.

Throughout this process, it is crucial to prioritize privacy and security. Keep your private keys and passwords secure, and be aware that bitcoin and cryptocurrency investments are not insured by the Securities Investor Protection Corporation (SIPC) in the same way that traditional stock brokerage accounts are. Additionally, be sure to check the legal, regulatory, and tax status of purchasing and selling bitcoin in your jurisdiction.

Bitcoin's viability as a currency

Bitcoin was introduced to the public in 2009 as a decentralised cryptocurrency. It was designed to act as money and a form of payment outside the control of any one person, group, or entity. This means that, unlike traditional currencies, it does not require a trusted third party, such as a bank, to verify transactions. Instead, it uses blockchain technology, which is a distributed ledger that records transactions in blocks. Each block contains a hash of the previous block, creating a chain of encrypted blocks that contain information from all previous blocks. This makes it very difficult to change the record of transactions without changing all other blocks in the chain.

Bitcoin has several features that make it a viable currency. Firstly, it is decentralised and does not require a trusted third party to verify transactions, reducing the cost of transactions. Secondly, it is based on blockchain technology, which is secure and transparent, with each transaction being recorded in a public ledger. This makes it difficult for transactions to be altered or tampered with. Thirdly, Bitcoin is divisible to eight decimal places, allowing for smaller transactions. Finally, Bitcoin is accepted as a means of payment by many merchants, retailers, and stores, and can be easily purchased on several exchanges.

However, there are also several drawbacks and risks associated with using Bitcoin as a currency. One of the main concerns is its volatility, as the value of Bitcoin has fluctuated significantly since its creation. This makes it an unstable medium of exchange, as the purchasing power of a single Bitcoin can vary widely over time. Another concern is the lack of regulation and central authority, which can make it difficult to resolve issues or recover lost Bitcoins. Additionally, Bitcoin transactions are not completely anonymous, and there have been instances of fraud and theft associated with its use.

In conclusion, Bitcoin has some features that make it a viable currency, such as its decentralised nature, blockchain technology, divisibility, and wide acceptance. However, it also faces several challenges, including volatility, lack of regulation, and security risks. As such, it is important for individuals to carefully consider the risks before investing in or using Bitcoin as a currency.

The technology behind Bitcoin

Bitcoin is a digital payment system with no intermediaries or banks. It was invented by a person or group using the alias Satoshi Nakamoto and released as open-source software in 2009. Bitcoin uses blockchain technology to record its transactions.

A blockchain is a distributed ledger, a shared database of information that is chained together via cryptographic techniques. It is stored on many computers rather than on a centralized server. A network of automated programs installed on these computers maintains the blockchain and performs the functions necessary for it to operate.

Each block on the blockchain contains a cryptographic hash of the previous block, a timestamp, and transaction data. The transaction data includes the time, amount, asset, price, and ownership data. Once a block is filled with transactions, it is added to the end of the "chain" in sequential order, and a new block is created. Each block contains the hashed information of the previous block, creating a chain of encrypted blocks that contain information from all previous blocks.

Bitcoin uses the SHA-256 hashing algorithm to encrypt the data stored in the blocks on the blockchain. Transaction data stored in a block is encrypted into a 256-bit (64-digit) hexadecimal number. That number contains all the transaction data and information linked to the blocks before that block.

The blockchain works as a ledger, tracking every Bitcoin transaction, and is self-verifying. The entire network of nodes—different computers participating in the network—will constantly check and secure every movement. Here is where the “miners” come in: their high-powered computers do the heavy lifting of maintaining the chain and, in return, they receive Bitcoin as a reward.

Bitcoin blockchain is also decentralized, meaning it is not stored in one master computer or controlled by one company. It is distributed on many computers within the network.

Frequently asked questions