A spike in the price of Bitcoin is piquing the interest of mainstream investors again as memories of the cryptocurrency bubble fade.
Last week, Bitcoin topped $10,000 for the first time in about 15 months, recouping more than half of its historic increase and up from a near-term low of $3,100 in December 2018.
The recent rally is eye-catching, but buying Bitcoin isn’t for the fainthearted. It’s important to arm yourself with all the facts before parting with your hard-earned cash. Here’s what you need to know.
Bitcoin is extremely volatile
Bitcoin’s price has been on a rollercoaster ride since the digital coin was launched a decade ago.
At the end of last week (June 21), Bitcoin rose by 5% to around $10,500. In 2017, it surged by 1,400% to an all-time high of $19,511, but this was followed by a 74% collapse in 2018.
Why is Bitcoin so volatile compared with other investments? Part of the reason is that although Bitcoin’s market cap has been increasing, it is still smaller than more traditional asset markets such as the global stock market. Small markets are much more vulnerable to manipulation and external events than large markets are. If a few large traders suddenly sell their holdings at the same time, it can cause a huge drop in the asset’s price.
Bitcoin also has relatively low liquidity compared with other assets – this means it can’t be bought or sold as quickly as, say, FTSE 100 stocks. Low liquidity is thought to exacerbate price fluctuations.
Regulation, news events, and general investor sentiment are other reasons behind Bitcoin’s volatile price.
The high volatility of Bitcoin means it’s important not to invest more money than you can afford and are willing to lose. Buying Bitcoin is speculative and there’s a real chance you could lose more money than you put in.
Security is vital
When you’re buying Bitcoin, it’s extremely important to ensure your coins are secure. If you lose your Bitcoins, there is no way of recovering them – they are gone forever.
Many exchanges hold your crypto for you. This is a convenient option, but since exchanges are a major target for hackers, you are better off storing your Bitcoin in a digital wallet.
Wallets come in various different formats. Hardware wallets such as Trezor and Ledger are considered the safest, although they are expensive. With a hardware wallet, you don’t need to enter your private key on the computer itself. Instead, you input a pin code on the wallet.
Software wallets are based on computer software and come in three formats: desktop, mobile, and online. Desktop wallets are computer programmes that store your currency locally on your PC, mobile wallets operate through an app on your phone, and online wallets are web based. Online wallets aren’t considered as safe as other wallets because your private key is stored by the website owner rather than locally on your device. You need to be sure the wallet owner is trustworthy and operates high levels of security.
Not all exchanges are equal
In order to buy Bitcoin, you need to join a Bitcoin exchange. There are a wide range of exchanges out there, but they aren’t all created equally. Their service, reputation, reliability, security, and fees vary considerably.
It’s a good idea to do your research before buying Bitcoin through an exchange. If no one has ever heard of the exchange, or it’s based in a remote part of the world, you’re probably better off avoiding it since some exchanges are actually scam sites that are out to steal your money.
Popular exchanges to consider include Coinbase, Binance, and Bittrex. You can also buy Bitcoin via peer-to-peer marketplaces such as LocalBitcoins, where individual sellers and buyers agree on trade terms.
Buying Bitcoin could be an exciting and rewarding venture as long as you keep your wits about you. Make sure you use a trustworthy exchange, keep your coins secure, and never hand over money if you’re not comfortable with the fact you could lose it all.