Top 3 Things to Look for Before Buying Bitcoin

Investing in cryptocurrencies can be a daunting endeavor. There are tens of thousands of options, making narrowing down the list a difficult task. And while most digital assets aren’t worth a single penny of your savings, the best crypto, Bitcoin (BTC 0.25%)deserves a much closer look.

That said, here are three of the most important factors investors need to consider before buy Bitcoin.

Bitcoin is extremely volatile

This probably goes without saying, but Bitcoin is extremely volatile, even more so growth technology stocks. Daily price fluctuations of 10% are par for the course. And worse, Major bear markets is a common occurrence. In 2021, Bitcoin’s price fell more than 50% from peak to trough at one point, only to shoot up again. And currently, Bitcoin is down about 69% from its all-time high of nearly $69,000 reached last November.

For anyone looking to put some money into Bitcoin, understand that you need to be able to withstand the inevitable ups and downs. Otherwise, you will be inclined to sell quickly after any major price movement and lose the potential for monster returns in the very long term. Volatility is normal in this situation. In fact, it should be expected for such a new (Bitcoin is 13 years old), still in development and nascent asset.

If Bitcoin continues to gain widespread use as a legitimate store of value, it will not be in a straight line. That’s because it will continue to fall in and out of favor with investors based on various factors, such as the macroeconomic environment, any regulatory updates and their own personal finances. Therefore, it is best to only allocate to Bitcoin what you are willing to lose, such as 1% to 2% of a well-diversified portfolio.

Bitcoin runs a proof-of-work consensus mechanism

Unlike Ethereum after “The merger,” plus Cardano and Solana currently, Bitcoin operates what is known as a proof of work consensus mechanism. This means that large amounts of electricity are needed to solve complex mathematical problems to validate new transactions and create new Bitcoin, a process known as mining. Bitcoin detractors claim the network is terrible for the environment, often citing data showing it uses the same amount of energy as a small country.

However, Bitcoin mining flows to the cheapest sources of energy, such as wind and solar. And not only does Bitcoin support the development of renewable energy, but it can also help balance out a power grid. When excess energy is produced, instead of it being wasted, it can be used to mine Bitcoin. And in times of high power demand, such as during a major heat wave, miners can quickly shut down their machines and sell energy back to the grid. This is an incredible feature that most people don’t consider.

The next time someone tries to tell you that Bitcoin is inefficient and bad for our planet, just remember the quirks you just saw. We may reach a point in the future when Bitcoin is powered entirely by green energy while also acting as a demand-balancing part of the power grid. The one-two punch would certainly be viewed positively by society.

Bitcoin aims to exchange money

While Web3 and its potentially disruptive applications are getting a lot of attention, primarily from venture capitalists, Bitcoin is attacking arguably the largest addressable market in the world – money. Sure, its use as a medium of exchange is essentially non-existent today, and it’s mainly seen as a store of value like digital gold.

Bitcoin’s network is only capable of processing fewer than five transactions per second (TPS), and each new block is created on average every 10 minutes. On the other side, Visa, the largest payment network in the world, has the capacity to handle a whopping 65,000 TPS. It is strikingly clear that for Bitcoin to be used in day-to-day transactions, something needs to change.

Fortunately, developers are hard at work on a layer-2 solution, known as the Lightning Network, that runs on top of Bitcoin’s main blockchain. The idea is that different parties can open payment channels with each other, so that transactions can be instantaneous with almost zero fees. For example, I can open a channel with my local coffee shop, where my balance decreases (and the coffee shop’s balance increases) every time I buy something. Once a month, or at any frequency for that matter, this channel can be closed and the final balance settled on the Bitcoin main network, thus reducing congestion on the main blockchain.

Bitcoin could fundamentally change the nature of money, which today is heavily controlled and manipulated by the actions of governments and central banks. To be fair, it will be a long and bumpy road for Bitcoin to achieve mainstream adoption, but the potential is definitely there.