After Bitcoin launched in 2009, many people had no idea what it was. While some fascinated investors bought the cryptocurrency that was worth less than a penny then, most never imagined it would be worth nearly $70,000 by the end of 2021. Bitcoin had its ups and downs over the years.
Bitcoin, commonly called BTC, is the most valuable cryptocurrency by market cap and is the pioneer that inspired all other cryptocurrencies. Although people understand that it is valuable, there are still some things many may not know. These are five important things to understand about BTC before buying it for the first time.
1. Learn How To Keep It Secure
It can be nearly impossible to recover lost cryptocurrency. There are plenty of crypto scams, and people often lose BTC and other currencies without proper precautions and a reliable wallet. Today, many wallets are based online. These are also called hot wallets or hot-storage wallets. There are also cold wallets, which are not based online. They are typically hardware wallets that are external storage devices. Since they are not connected to the internet, they offer an extra layer of security from hackers. When using an online wallet, set up two-factor authentication. Also, always make sure to have a secure connection for initiating any transactions.
With any type of wallet, never share private keys with anyone. Make sure to also back up any software wallet often. For a cold wallet, write down the recovery phrase on paper to keep in a safe place. In the event the device is lost, that phrase is necessary to recover stored funds. Do not store a recovery phrase on a computer. Another way to keep BTC and other cryptocurrencies secure is to use a separate wallet for transactions or frequent use and store larger balances in an offline wallet. This ensures that not all funds are lost in the event the transaction wallet is compromised.
2. Where To Buy It
Another important part of safety is buying Bitcoin from a trusted source. It can be tempting to click a link or buy from a site that advertises a promotional free balance or other enticing offers. However, these are often scams. There are online exchanges that sell Bitcoin and other cryptocurrencies. These are the most popular places to buy cryptocurrencies and are considered reliable.
It is important to remember that even reliable sites can be targets. A good example of this was the former Mt. Gox, which was a Japanese exchange that used to be the biggest one in the world. Hackers targeted it and stole $460 million, which led to the collapse of the exchange in 2014. This emphasizes the importance of also using a good wallet and ensuring there is a backup. Some people still worry about the security of their credit or debit cards they use to initially buy a cryptocurrency. Today, an alternative way to buy cryptocurrencies with cash is through a bitcoin ATM.
3. Recognize Its Use Limitations
Bitcoin is usually bought as an investment for trading. If that is the purpose for buying it, the cryptocurrency can have great potential. However, people who buy it to use in place of regular currencies for transactions are often disappointed. While some online merchants like Wayfair and a few others accept BTC payments, there are still fees to pay. Even for crypto asset purchases, there are often other currencies that are less expensive to use for transactions.
4. Understand Price Fluctuations and Volatility
A quick glance at historic price movements of BTC shows that it has certainly increased in value over the years. However, its value rises and falls considerably in short periods as well. For example, in 2013, its value jumped from around $13 to $1,000. The supply and demand of the currency affect its price movements. While the circulating supply is limited, there are new coins mined. The process is complex and is not something that most investors participate in since the hardware and power demands for successful mining are high.
Investors who are looking for long-term investments or stability must be aware of the volatility of BTC. Also, investment insurance options are limited. While SIPA covers some types of securities, cryptocurrencies are not included. There are some independent entities that may offer crypto investment insurance. However, not all are reliable, and the coverage offered is different than SIPA.
5. Be Aware of Common Misconceptions
When buying BTC for the first time, it is important to be aware of a few common misconceptions. A common one is that BTC only comes in whole coins. One BTC is highly valuable, and many people cannot afford to buy an entire coin. However, the coin does come in increments of up to eight decimal places. That tiniest unit is called a satoshi. Many BTC transactions are for less than one BTC. Also, the transaction fees can be incremental.
Another misconception is that the currency is completely anonymous since transactions do not reveal the personal information of users. Bitcoin history is completely visible on the blockchain by design, which means that people can read transaction history if they want. In this way, it is possible to trace BTC transactions and possibly back to the person buying the currency. The only way around this would be to use a different address for each BTC purchase and to buy it without a traceable funding source. Some wallets change addresses for users.
An additional misconception is about taxes. Although BTC is not recognized as currency, earnings and sales from BTC are still taxable. For example, if a person sells BTC and turns the funds into cash, the money is taxable. People are responsible for self-reporting crypto earnings. It is important to read all IRS rules for cryptocurrency taxes before buying BTC.
Is Bitcoin Right for You?
Now that you know the basics of BTC, buying it and keeping it secure, you can decide if it is right for you. If you are looking to invest and trade with it as a short-term solution, it can be a great choice. Many people discover that it is not ideal for using toward everyday transactions. Today, there are also plenty of other cryptocurrencies to use for trading or buying digital assets.
- Bitcoin: Mine It, Buy It, Use It
- Bitcoin Podcasts for Beginners to Listen To
- What Makes Bitcoin Valuable?
- Common Bitcoin Questions Answered
- Starter Guide to Bitcoin