Don’t know your Bitcoin from your blockchain? We’re here to help.
Is there a Bitcoin barrier to entry? For many curious investors yet to dip their toes in the proverbial waters, the biggest thing holding them back may be summed up in one word – knowledge.
The more you try to wrap your brain around the technology behind Bitcoin, the more confused you may be about its actual investment value. How exactly is Bitcoin mined? What is a hard fork? And proof of stake versus proof of concept? Head-scratchers abound.
If we haven’t lost you yet – good! While you may never master the concepts of blockchain and how cryptocurrency is created, in reality, you don’t need to when it comes to investing. All you really need to know is why cryptocurrency has value, how that value compares to traditional currencies and what investing means in the long run.
With platforms like eToro, users can deposit as little as $50 to fund an account, where you can buy, sell and hold Bitcoin, along with a dozen other cryptocurrencies.
So, what makes crypto different than investing in traditional currency, like the US dollar? Here are a few key distinctions.
One of the big issues with investing in the US dollar is inflation, which has been made increasingly evident during the Covid-19 pandemic. As the US dollar weakens at a more rapid rate, with trillions printed by the Federal Reserve, it’s no shock that investors will look to unique ways to diversify their money.
How does inflation affect Bitcoin? In the current context, it doesn’t. That’s because Bitcoin has a finite amount of 21 million coins, so while the value can increase, the maximum amount in circulation cannot. Currently, there are 18.6 billion Bitcoin in circulation, meaning there is still some left to be mined. As a result, many investors look to Bitcoin as a hedge against the damaging effects of inflation.
Store of value
Bitcoin’s finite supply lends to its store of value over time. While gold was the original intrinsic asset, its cumbersome nature led to it being replaced by fiat (i.e., paper) money. A store of value, meanwhile, is an asset that maintains its worth and can be exchanged in the future with no deteriorating value – this can’t be safely said for current physical US currency.
Bitcoin, meanwhile, checks all the major boxes as a strong store of value over time. It has a steady level of scarcity thanks to its finite supply, it is easily divisible (up to eight decimal points), it has growing use as a utility (i.e., form of currency) in transactions, it’s easily transportable through digital wallets, it’s durable as a non-physical currency and it’s nearly impossible to counterfeit, thanks to blockchain encryption technology.
The problem with Bitcoin’s value in the past is it was mostly driven by retail investment, which ebbed and flowed based on how consumer investors felt about the crypto’s future. In recent months especially, however, major players in tech and financial sectors have either plunked money into Bitcoin or adopted the currency on their platforms.
Companies like MicroStrategy, Square and Tesla have invested huge chunks of capital in Bitcoin, while both traditional (Visa, MasterCard) and modern (PayPal) financial institutions are starting to integrate crypto as a feasible form of currency. The more Bitcoin becomes mainstream, the more legitimate it becomes as a long-term investment.