The price of the cryptocurrency Bitcoin reached a record high of $ 30,000 in early 2021. For many, however, the whole cryptocurrency thing seems rather abstract. According to the latest price developments, there is no question that Bitcoin is the best investment you can make — but with a lot of risks. It is because of this risk that you should definitely know what you are getting yourself into.
Bitcoin has been around for about 12 years. It arose during the global financial crisis that caused chaos in the financial markets at the time. The trigger for the crisis was, among other things, that many banks in the USA entered into very risky deals that ultimately failed. One bank after another began to totter. Confidence in banks was shaken. Satoshi Nakamoto — who exactly is behind this name is still unclear. At the end of 2008, this person (or group) published a concept for a purely decentralized payment system in which banks are overdue: Bitcoin.
Bitcoin is a currency that can even be used to pay. The difference to other currencies such as euros or dollars: Bitcoins only exist digitally, there are no bills or coins. In addition, there is no central bank or other central authority that protects the currency from depreciation. There is no bank behind Bitcoin, but a technology: blockchain.
If you want to pay with Bitcoin, you need a digital wallet just like your trading partner. Money is digitally exchanged between sender and recipient. All that is required: an internet connection. All data incurred in this transaction are stored in an encrypted data block. This block is attached to a chain that only consists of such blocks: the blockchain. All transactions that have ever been made with Bitcoin are stored there — one gigantic ledger. Blocks are created by miners worldwide, who have a copy of the blockchain stored on their servers. To combine a transaction into a new block, a cryptographic task must be solved. Whoever manages that first publishes the block in the network. Everything is stored decentrally, not in a central location. There is no authority behind it that holds everything together. Because the miners keep the system running, they receive new bitcoins themselves as a reward.
How can a data set have a value?
Bitcoin is a data set made up of numbers and letters, so it only exists abstractly in digital space. How can that have any value? Just like other currencies, Bitcoin gets its value because people believe in it. If you give value to this system, it gets value. Almost a question of faith. However, this also applies to traditional currencies such as the euro. If no one believed anymore that the Euro really have a value and all the euro bills were just a piece of paper, then our currency system would not work. It only works because everyone thinks the currency is valuable and believes that you can really do something with the money. In short: the more people believe in Bitcoin, the more it increases in value.
One main reason is that not only private investors are getting in, but that more and more institutional investors are discovering crypto assets for themselves. A lot of money is flowing into the market, and Bitcoin is becoming increasingly popular as an investment. Ultimately, it’s a question of supply and demand. If the demand is high, the price rises.
The chance of extremely high profits is always associated with risk. There were other times: just one year after Bitcoin reached its peak of 20,000 US dollars in 2017, it was only worth a little over $ 3.000. A minus of 85%. That means 1,000 dollars in Bitcoin, a year later, would only be worth 150 dollars. The price also fluctuated very strongly eversince, this is called volatile.
Another risk: the market may not be liquid enough. In other words: you may not always be able to find a buyer if you want to sell your Bitcoin — and vice versa.
Because the system is decentralized, it is secure by definition. However, many crypto transactions are processed via crypto exchanges. Purchased Bitcoins are stored by this exchange, there is a right to it, but that is not in your own hands. Exchanges are an attractive target for hackers. To get around this, you can save your crypto money on hardware — a ledger. There it is safe from hacker attacks, but there is of course the risk of losing the hardware. In short: when investing in cryptocurrencies, you cannot shift responsibility to a bank or an advisor, you have to take the responsibility yourself.
Bitcoins can bring very high profits, but there is a high risk, as the price is very volatile. That means, only money that you can do without in the long term should be invested in Bitcoin. If you have time and can handle the risk: Bitcoin can be an interesting investment.