The Ultimate Bitcoin Investment Guide

Bitcoin is a highly popular cryptocurrency and the world's largest crypto asset by market capitalization. It has grown from being virtually worthless at its launch in 2009 to a price of around $30,000 per bitcoin in 2023, representing growth of millions of percent. Bitcoin's underlying blockchain technology, its decentralized nature, and its limited supply of 21 million tokens make it a compelling investment option for those looking to diversify their portfolios and hedge against inflation.

However, it is a risky and volatile investment option, and investors need to be aware of the potential for substantial gains as well as losses. This article will explore the key advantages and disadvantages of investing in Bitcoin, providing an overview of the cryptocurrency's performance, functionality, and unique features to help investors decide if and how to add it to their portfolio.

Bitcoin's growth and track record

Bitcoin's track record is equally impressive. It has consistently surpassed its all-time highs, achieving full recovery after a price crash or other setbacks. For instance, in 2017, Bitcoin was trading at $1,000 at the turn of the year. By the end of the same year, it had hit highs of $20,000, representing a growth of 1,900% in just 12 months. Bitcoin has continued to hit all-time highs, including a peak of over $68,000 in November 2021.

Bitcoin's growth has been significant, with long-term investors generating gains that cannot be rivalled by the stock market. For example, the Dow Jones index, which tracks 30 blue-chip stocks, has grown by 38% over the past five years, while Bitcoin's five-year growth stands at 317%.

Bitcoin's user base has also grown exponentially. According to data, the number of Bitcoin users grew from 45 million in January 2020 to 65 million in January 2021, a 44% increase in just one year. Currently, there are approximately 100 million Bitcoin wallets with value, and 1 million users transact with Bitcoin daily.

Bitcoin's resilience and ability to recover from setbacks make it a solid investment choice. Its ever-growing user base, consistent track record of surpassing all-time highs, and status as an inflation hedge due to its limited supply, present it as a compelling investment option for those looking to diversify their portfolios.

Liquidity and low inflation risk

Liquidity

Bitcoin has liquidity, but it is much less than that of the currency trading market. Liquidity is essential for any tradable asset, including Bitcoin. Liquid markets are deeper and smoother, while an illiquid market can put traders in difficult positions to exit. The higher the daily volume, the more liquidity cryptocurrency has, making it more convenient to use.

Bitcoin's average 24-hour trading volume was between $9 billion and $100 billion in the first few months of 2024. In comparison, the average turnover in the forex market was about $7.5 trillion daily, according to the Bank for International Settlement's (BIS) Triennial Central Bank Survey in 2022.

The increased acceptance of Bitcoin at brick-and-mortar stores, online shops, and other businesses can help boost its usability and reduce its volatility. The more Bitcoin is used as a medium of exchange, the more liquid it becomes. The launch of Bitcoin-to-cash payment cards and ATMs boosts the usability and acceptance of Bitcoin, increasing liquidity while maintaining security.

Low Inflation Risk

Bitcoin has a hard cap on the total number of coins that will ever be minted. Only 21 million Bitcoins have been released, and all the BTCs will be mined by the year 2140. As the growth of the money supply overtakes the growth in the supply of Bitcoin, the price will increase.

Bitcoin is currently inflationary. Every four years, the rate at which new Bitcoin is issued is reduced by half. The supply of Bitcoin is hard-capped at 21 million. According to the current algorithm, this threshold won't be reached until the year 2140.

Bitcoin is also compared to gold, which is generally seen as an inflation hedge. The correlation between Bitcoin and gold has been close to zero since June, meaning Bitcoin's price hasn't moved together with the gold price.

Simplified trading

Trading in Bitcoin is much simpler than stock trading. It does not require a certificate, license, or broker. Investors can simply buy or sell Bitcoin on exchange platforms and store them in their digital wallets, making the process more straightforward and minimalistic.

For example, to buy Bitcoin through Crypto Dispensers, investors can use their Bitcoin ATMs or the CDReload service. The ATMs allow for cash deposits to buy Bitcoin, and the CDReload service lets users deposit cash at over 16,000 retail stores nationwide, which can then be used to purchase Bitcoin directly.

Another user-friendly platform for beginners is eToro, which is authorized and licensed by FINRA (US), ASIC (Australia), CySEC (Cyprus), and the FCA (UK). It is trusted by more than 30 million investors, many of whom are complete beginners. It’s easy to get started with an eToro account, and the process takes just minutes.

EToro also makes it simple to deposit funds, accepting bank transfers, debit/credit cards, and a selection of e-wallets. The first-time minimum deposit is just $50 for most investors, reduced to $10 when depositing from the US or UK. eToro charges a reasonable 0.5% fee on all supported payment types, and the fee is waived for deposits in US dollars.

Once the eToro account is funded, investors can buy Bitcoin at a commission of just 1%. Investors can buy any amount of Bitcoin from $10 upwards, and the tokens will be added to the investor’s eToro wallet, which is safeguarded through institutional-grade security.

Other Ways to Buy Bitcoin

There are thousands of financial products and services available for investing in Bitcoin, and it can be challenging to know which is best. Here are some other popular exchange platforms:

• Coinbase: One of the most popular and best cryptocurrency exchanges because users can invest directly with USD. It currently offers Bitcoin, Ethereum, and Litecoin, among over 30 other coins and tokens.
• Uphold: A simple solution for trading multiple assets, as users can trade multiple assets directly without having to go back to cash. Uphold is also one of the few exchanges that allow users to trade XRP and DOGE.
• Kraken: One of the original crypto trading platforms, offering a good selection of coins and tokens to trade and invest in, including DOGE and other riskier tokens.
• Gemini: One of the largest and most popular crypto platforms, supporting most major cryptocurrencies and paying competitive interest rates on assets.
• Bitstamp: One of the oldest and most well-established cryptocurrency exchanges, founded in 2011 and offering over 70 tokens to trade.
• Crypto.com: One of the largest and fastest-growing crypto exchanges, based in Hong Kong but offering support for US-based customers. It provides access to over 90 tokens and coins worldwide and 50 tokens and coins in the US.
• Binance: A great platform for getting into currencies like Cardano or Neo, with one of the most robust trading platforms. However, it can be challenging to use, and US options are limited compared to worldwide options.
• M1 Finance: Allows users to create a custom asset allocation of cryptocurrencies, with dynamic rebalancing for new deposits. Only supports 10 tokens at the moment, with a 1% spread on crypto transactions.

Decentralisation and security

Decentralisation

Decentralisation in blockchain refers to the transfer of control and decision-making from a single entity to a distributed network. In the case of Bitcoin, this means that any participant can verify and record transactions onto a public ledger, without the need for a central authority. This is known as a "peer-to-peer network".

Decentralisation has several benefits, including:

• Providing a trustless environment: In a decentralised blockchain network, each member has an identical copy of the data in the form of a distributed ledger. If a member's ledger is altered or corrupted, it will be rejected by the majority of the network.
• Improving data reconciliation: All entities have access to a real-time, shared view of the data, reducing the opportunities for data loss or incorrect data.
• Reducing points of weakness: Decentralisation can reduce over-reliance on specific actors, preventing systemic failures and improving the consistency of service provision.
• Optimising resource distribution: Decentralisation can help ensure that promised services are provided efficiently and consistently, reducing the likelihood of catastrophic failure.

However, it is important to note that increasing decentralisation can lead to decreased transaction throughput and slower performance, as each member node must validate all data added to the ledger.

Security

The security of Bitcoin and other cryptocurrencies is based on cryptographic systems and encryption algorithms. In the case of Bitcoin, security is maintained through the "Proof-of-Work" (PoW) protocol, which requires miners to solve complex computational problems to verify transactions and add them to the blockchain. This process is known as "mining".

The difficulty of solving these crypto-puzzles, known as "blockdifficulty", is adjusted based on the history of the blockchain and the algorithm. If new blocks are added faster or slower than the average of 10 minutes, the blockdifficulty is adjusted accordingly. This feature prevents fraudulent manipulation of the blockchain.

Additionally, the decentralised nature of Bitcoin and blockchain makes it more secure by removing single points of failure. With no central authority, there is no single server that can be targeted by attackers.

However, there are some security concerns with Bitcoin and blockchain, including the potential for 51% attacks, where a miner or group of miners gain control of more than 50% of the network's mining hash rate, allowing them to reverse transactions, block new transactions, or double-spend coins.

Overall, the security and decentralisation of Bitcoin are closely linked and depend on the healthy competition among a large number of miners. While Bitcoin is designed as a decentralised system, economic forces may push it towards centralisation, with a few large miners dominating the network.

Medium of exchange and store of value

Bitcoin is designed as a peer-to-peer cash system. To work as a currency, it must be stable or be backed by a government. However, due to its high volatility, most empirical studies classify Bitcoin as an investment.

Medium of Exchange

Bitcoin already operates as a medium of exchange across the world. As the world’s first censorship-resistant money, Bitcoin excels as a medium of exchange in otherwise harsh legal environments, where authoritarian governments use the financial system to oppress their citizens.

In more politically stable regions, Bitcoin has not gained the same traction as a medium of exchange. Some critics claim that this is an indication that Bitcoin has failed. This conclusion is short-sighted. In fact, the same factors that have slowed Bitcoin’s adoption as a medium of exchange ultimately make it the best money in history.

Gresham's Law states that "bad money drives out good". In an economy with two monies, the bad money will be used in circulation, and the good money will be held as savings. Thus, according to Gresham's Law, there should be very little demand to spend bitcoin on day-to-day purchases while there exists a strong demand to accumulate and hold bitcoin for the long term.

Bitcoin will be used as a medium of exchange only when inferior monies are refused by merchants. Since governments typically make refusing their local currency illegal, this might take a long time, but in the meantime, Bitcoin will continue to succeed and gain adoption in other realms.

Store of Value

Bitcoin is an excellent store of value. Its deflationary design and the decentralized and global nature enhance the store of value property and make it unlikely that any country will adopt it as an official currency and thus lose control over the money supply and its monetary policy. Excess volatility appears to be inconsistent with a store of value but if the store of value is volatile only in the short run but relatively stable (or rising) in the long run, volatility may not be the major issue for Bitcoin as a store of value.

Bitcoin’s price has skyrocketed as it’s become a household name. In May 2016, you could buy one bitcoin for about $500. As of Aug. 6, 2024, a single bitcoin’s price was around $55,175. That’s a growth of 10,935%.

Frequently asked questions