These days, it’s hard to navigate the internet without hearing news or discussions about cryptocurrencies. Headlines about six-figure returns on cryptocurrencies like Bitcoin have made these blockchain-based assets more popular amongst investors. A study from PewResearch revealed that in 2021, about 16% of Americans have participated in the cryptocurrency trade. Though that percentage may seem low, it’s a staggering increase from 2015 figures, which showed that only 1% of Americans had traded, collected, or used Bitcoin.
Still, for the most part, the majority of Americans only have a passing knowledge of Bitcoin. According to the PewResearch survey, 86% of Americans only know a little about cryptocurrencies in general, while 13% said they have heard nothing at all. To help you gain a deeper understanding of the world’s oldest and most popular cryptocurrency, we’ve listed a few important things investors need to know about Bitcoin.
What Is Bitcoin?
Bitcoin was invented by developer Satoshi Nakamoto in 2008. Nakamoto aimed to make a decentralized currency, that could be exchanged between users on a peer-to-peer network without the need for intermediaries like governments or banks.
How does this work? Every time you use, trade, or buy Bitcoin, your transactions get recorded in a decentralized database known as the blockchain. Transactions get verified through a complex process called “mining,” in which a network of volunteer miners solve a cryptographic puzzle to add your transaction block into the chain. Because the network needs to reach a consensus about the validity of your transaction, it is very difficult for hackers to copy, counterfeit, or double-spend their coins. It is this feature that allows Bitcoin to be trustless and decentralized.
Why is Bitcoin valuable?
Satoshi Nakamoto designed Bitcoin with the goal of making a completely decentralized currency, one that could replace fiat currencies and reduce human dependence on traditional institutions. However, though many businesses have begun to accept Bitcoin payments, Bitcoin has yet to earn the level of acceptance it needs to be used as a viable currency.
Fortunately, endorsements from respected public figures such as Tesla’s Elon Musk, Twitter’s Jack Dorsey, and Shark Tank’s Mark Cuban have helped to propel public trust in cryptocurrencies. As demand rises, so do Bitcoin prices, giving high returns to those that invested early. Many people invest in Bitcoin today in anticipation of a future where cryptocurrencies are more widely used.
Disadvantages of investing in Bitcoin
Bitcoin, as well as other cryptocurrencies, are highly speculative investment vehicles that are not backed by any underlying assets. This means that Bitcoin prices hinge almost entirely on how the general public perceives its utility. Good publicity can swing Bitcoin’s price dramatically upward, but bad publicity can also cause drastic losses.
Additionally, the IRS considers any effort to make money as “business,” regardless of whether you’re officially registered as a business owner. This means that you are obligated to pay taxes on whatever you earn from investments. Unfortunately, this includes cryptocurrencies. Though most cryptocurrencies were designed to act as units of exchange, most governments do not recognize Bitcoin as a currency. In the United States, profits from cryptocurrencies price changes are classed as capital gains, which means that traders that invest in cryptocurrency may lose some of their profits to capital gains tax.
The technology behind Bitcoin shows a lot of promise. However, because the cryptocurrency landscape has only existed for a little over a decade, it’s important to approach Bitcoin investment with caution. Only invest what you can afford to lose.