Important Things to Know Before Buying Your First Bitcoin

Bitcoin is one of the most popular and attractive investment assets out there. With the asset getting more popular, you may want to buy your first bitcoin and hope to follow in the footsteps of successful investors. Like any other investment, understanding the characteristics of bitcoin is an essential determinant of successful trading or investment in this niche. While it is impossible to learn everything about bitcoin investment in a day, there are some fundamental points you should understand before you buy your first bitcoin.

1. Understand what Bitcoin is and How it Works

Bitcoin is a peer-to-peer digital currency. Just like traditional currency, Bitcoin can be used as a store of value, a medium of exchange, and a unit of account. Additionally, it can be traded, just like traditional currencies.

However, bitcoin is significantly different from traditional finance. Bitcoin is decentralized, meaning no central authority or government controls it. The rules guiding traditional investments, including forex and stock are set by individual players such as Individual forex bureaus, commercial banks, and companies. They may define the prices of the currencies and stocks that are publicly traded on forex and stock markets. However, in Bitcoin, no single player sets rules for trading bitcoin. Instead, the prices are largely determined by the interplay of demand and supply factors.

While bitcoin is a peer-to-peer cross-border currency, it is still relatively new, with low adoption compared to most fiat currencies and popular stocks. Therefore, it has low liquidity which makes the market less stable compared to traditional finance. People who control large volumes of bitcoins (Bitcoin wales) can move the market if they perform large transactions.

• Bitcoin has Risks

The internet is full of stories of people who have created fortunes from bitcoin investments. However, it is important to keep in mind that buying bitcoin does not guarantee profits.

While Bitcoin is far from a pyramid scheme, it is equally not a get-rich-quick scheme. Bitcoin has made a lot of early investors rich. Bitcoin has had over 17500% return on investment over the past decade. Despite this good performance, there is no guaranteed return on Bitcoin investment.

Bitcoin is highly volatile, which can result in losses to traders. For example, in November 2021, Bitcoin attained a record high, with each bitcoin selling at over $68,000. A year later in November 2022, the price of one bitcoin fell to around $16,000. This translates to a 70% price drop. The volatility of bitcoin makes investing in it highly rewarding and risky at the same time. Many people lost their hard-earned money when the market suddenly went against them. It is better to follow the golden rule of never buying bitcoin for what you cannot afford to lose. Additionally, it is important to remember that bitcoin is still in its infancy. There is still much uncertainty about its future.

• There are Fraudsters in the Bitcoin Space

Bitcoin is still relatively new, making it a good ground for scammers to launch their attacks. More than $3.8 billion was stolen from the crypto space in 2022 alone.

The bitcoin network itself is immutable and highly transparent. However, hackers can still find security holes through other service platforms such as bitcoin wallets and exchanges. Bitcoin exchanges have built-in wallets where users can send and receive their bitcoin funds. These wallets are more convenient than cold wallets since users can log in from anywhere at any time to perform a transaction. These exchanges are like banks of the bitcoin market. However, they pose a big security challenge.

Exchange wallets are custodial, meaning they do not give you your wallet’s private keys. You might easily use your funds if such exchanges mismanage their operations.

Additionally, exchanges are ideal targets for hackers since many people keep their bitcoin in such wallets. Hackers often develop elaborate schemes to penetrate exchanges and steal funds since the reward is high. Mt. Gox (2014) and KuCoin (2020) are some of the exchanges that have experience hacks leading to the loss of hundreds of millions of dollars in crypto.

Wrap Up

Now that you understand how bitcoin works and how it is different from traditional finance, you may decide to buy bitcoin. However, considering the highlighted risks above, it is important to do your own research before investing your funds. You can research bitcoin prices, the safest exchanges to buy bitcoin, and even safe wallets to use.

In addition, it is important to remember that there is no single way to purchase bitcoin safely and fast. Instead, it depends on many factors including location and even your preferred payment method. Research the various available exchanges to find out the one that is available in your location. Also, consider the exchange fees. More on bitcoin exchange review in another guide article.