What Is Bitcoin and Why It Will Always Be a High-Risk Asset?

If you set yourself a goal to make a list of the most popular assets of the last couple of years, Bitcoin is bound to be at the top - for many reasons, due to the excitement, which was created around it due to its increased rate, when it turned from a little-known but cheap crypto into a high-value asset for investments costing tens of thousands of dollars. In turn, this led to the popularity of digital currencies in general, they began to be noticed and actively traded by all: from retail traders to the largest financial institutions in the world.

Investing in cryptocurrency is a popular decision. But before you start doing it, it is worth understanding the mechanism and learning about the pitfalls.

Investing In Cryptocurrency

Cryptocurrency can be a very lucrative asset, but it remains in a high-risk area. Consequently, nobody can advise buying it necessarily and to everyone. Read carefully everything that is written below.

Experts agree that it is better to buy proven options, which are Bitcoin, Ethereum, Litecoin, and Tether, aka USDT. All of these have proven to be fundamental and indestructible. With their capitalization, they prove their strength: all over the world, people have bought them and thus voted in their favor.

Some professionals call digital funds "steroids for finance". They are high-risk assets that can multiply an investment portfolio. But just mindlessly buying crypto is likely to lose everything. Study the types of cryptocurrencies that interest you. Each cryptocurrency has a story behind it and it makes sense to learn more about the assets you are interested in so you understand the current situation and prospects.

How Can You Buy Cryptocurrency?

Banks have their system, but cryptocurrencies have their own. You can't keep bitcoins in the bank, and dollars on your hard drive. It is desirable to make a transition from one system to another through stablecoins: this is, for example, USDT.

The most reliable way to buy cryptocurrencies is to register on a well-known cryptocurrency exchange, fund your account with dollars, buy USDT with them - and then convert them to other digital coins and tokens.

Tokens and cryptocurrency. These are technically different elements. Cryptocurrency is mined through the process of mining. It has a blockchain and must be stored in a digital wallet. It's derived from a complex deciphering of code. Tokens can be issued by any person or company. They usually don't have a blockchain and a wallet.

Many people try to separate these concepts, to establish a single terminology. But it is a futile exercise. New words are constantly appearing in economics, but it is of no use - it just makes it harder to understand.

It is more important to understand the principle of work. As soon as there is an opportunity to buy something for a token, it becomes cryptocurrency. Now we can say that any digital asset is cryptocurrency. The main thing is that it can be spent.

If a token has no liquidity and cannot be used to buy anything, why is it needed at all? If it is liquid and its value grows, it makes no difference whether it is a token or a cryptocurrency.

What Is Bitcoin (BTC)?

Bitcoin was created by a group of people. Satoshi Nakamoto, who grabbed all the glory, created the core code - the core - in 2009 and uploaded it to the network. Other programmers joined the process, and eventually, the first cryptocurrency was born.

The creators of Bitcoin wanted to make decentralized currency without ties to banks. When you make a payment or transfer through a bank, the officials of the banking system keep track of all the processes: from withdrawing your funds from your account to transferring it to the issuer and then to the receiving point. But when you buy or transfer bitcoins, all the processes take place without a human intermediary, through blockchain technology. It is a huge network of data. Within it, all participants have equal rights.

Most crypto investors follow the rule to buy and keep buying, no matter how much it costs. To sell, you have to wait for the moment when it will rise at least twice as much.

The Bitcoin mining scheme is simple but costly. Satoshi Nakamoto opened a blockchain network for Bitcoin miners. Now anyone can join its service and get Bitcoins for it. To participate, one needs powerful equipment, because maintaining the network and decrypting new blocks requires high computing power. In the recent past, a computer with a powerful video card was enough to do this, but today such equipment is scarce. Miners buy specialized equipment, build installations, and even entire farms for mining.

Once Bitcoin has been mined, i.e. once a calculation has been made, nothing can be changed in it. Each block in the chain is linked to previous blocks, so the record of new Bitcoins is based on a huge number of records of previous blocks. This makes Bitcoin immutable, but it is also heavy and clumsy. Therefore, there is a small chance that it will be replaced by a lighter version. For example, the cryptocurrency Ethereum.

Bitcoin's heaviness is an additional risk for investors because of the high cost of transactions. And they are inconvenient because they are energy intensive. That is why Bill Gates called Bitcoin an environmentally unfriendly tool: it greatly increases electricity consumption and heat generation. At the same time, the severity of transfers benefits miners, who have acquired powerful equipment. When they get all the Bitcoins, they will continue to earn only on servicing transactions.

At the same time, Cathie Wood's analysts believe Bitcoin has no energy problem. Using cheap electricity, miners create something much more valuable. In addition, legacy financial transactions and global gold mining are much more energy intensive.

Bitcoins are getting harder to mine every day. They are running out, there are fewer of them being produced every day. The system was originally designed to have a finite amount of 21 million BTC. By January 2023, miners have already mined 19,274 million BTC, which is more than 95%. But the last block will be mined only in 2140. The speed of mining is also initially programmed, and every 4 years it decreases in half.

An interesting fact: the number of Bitcoins in circulation is steadily decreasing. The only way to store passwords is with a private key or wallet password. Passwords, keys, and carriers are being lost. According to some estimates, a quarter of mined bitcoins are already lost. And don't forget: you can't replace them with new ones.

The finite amount of cryptocurrency and the fact that people are actively using it leads to Bitcoin inevitably increasing in price. Bitcoins will run out, but users will not. Bitcoin is constantly in circulation: there is speculation on the exchange, someone buys it for the first time, and someone has already tried it out and decided to buy more.

Bitcoin has had a long way to approval as an asset before its rise in value. Ten years ago you could buy two pizzas with 10,000 BTC. In 2023, that 10,000 BTC is worth $249 million. Bitcoin has proven that people need it. It is mostly used as a speculative medium as well as for storing and building capital. As a means of payment, Bitcoin is still rarely used but keeps gaining popularity.

As a result, Bitcoin has grown steadily year after year. It has high volatility and sometimes drops in value a lot. Surely it will fall and rise more than once. But after a fall, it will still rise, overtaking previous tops. So Bitcoin is a very good asset among risky ones in general and cryptocurrencies in particular. By investing in it for a few years, you can increase your capital considerably.

Why Will Bitcoin Always Be a High-Risk Asset?

It is a human technology where there is a possibility of error. No matter how strong the mathematical evidence for the infallibility of the Bitcoin code is, the possibility of technical error remains. It is very small, though: a huge number of programmers all over the world were working on the system, checking each other out. That's why we think it's reasonable to bet on the credibility of such titanic work.

There is also a legal risk - Bitcoin can be banned. Each country's legal regime views cryptocurrency differently. In Japan, it is an official means of payment. Along with the Bitcoin mining ban, China's regulatory bodies outlawed all crypto trading and transactions. Presently, anyone who works for a Chinese tech firm associated with crypto can face jail time.

But that's not all. Bitcoin has put the world economy in a kind of tug-of-war: any change in its legal status will lead to an increase in its value. If Bitcoin is officially allowed, it will be bought by those who were previously afraid to buy digital currency or could not do so because of bans. The demand will increase and the value will increase. If it is banned, the price of Bitcoin will rise anyway: it will be an offshore hidden means for P2P transactions between people and in the shadow market. Assets that allow the shadow market to grow are always growing. People don't like paying taxes and want independence and decentralization.

Of course, if Bitcoin gets banned everywhere, there will be panic in the market. At first, the price would fall. But then it will go up anyway. In our world, shadow markets are a big part of it. The largest trading floors of the anonymous Darknet are already dealing in Bitcoins and are unlikely to stop. Moreover: it was Darknet users who raised Bitcoin - on deals with weapons, drugs, and smuggling. Some will be surprised, but that was the main use of Bitcoin only until 2020. Now the use has shifted to the legal side.

Bitcoin could be replaced by a more convenient cryptocurrency: after all, it is heavy and energy-consuming. But again, this is unlikely, and here's why.

Bitcoin has the immutability we talked about above. It is open source with no duplication, no copying of transactions, and no single author who can control the entire stock of cryptocurrency. Other cryptocurrencies almost certainly have backdoors. In the language of the developers, these are deliberately left loopholes in the software code to change the original terms. Bitcoin is the only cryptocurrency that does not have a manipulative founder behind it.

In 2016-2017, ICOs - "initial coin offerings" - became popular. At one time it was a fairly easy way to raise capital for your project. Unlike an IPO, which offers investors shares of companies through brokers, an ICO offers digital tokens of companies to all willing internet users.

The process looked like this: during the primary stage, the pre-ICO, the startup team publishes information about the new project and offers investors to invest finances or cryptocurrency into the project.

In exchange for funds and cryptocurrency from investors, the company distributes tokens. The investors' fiat and cryptocurrency are sent to a special digital vault, and the tokens confirm that the investor owns part of the company.

But more often than not, even if everything looked honest on the surface (investors' funds were protected, public information was trustworthy: there was token distribution, and vesting - planned distribution of capital to the team, and policies on marketing costs, etc.), unfortunately, most ICOs, especially during their peak in 2016-2018, were fictitious, had the so-called backdoor, allowing to change the conditions of access to the investors' funds for part of the team. And it usually ended like this: the ICO ended, the founder got the funds, changed the terms, took all the funds, and disappeared. The investors were left with worthless tokens.

Most modern projects have backdoors. Finding them is very difficult. Developers and hackers will do anything to make sure nobody can find a backdoor. These backdoors exist in different situations. Taking all the funds is only one option. You can change the conditions slightly so that no one will notice, but at the same time, it will be essential. You can set someone up. That's why a backdoor is always a risk. It's better if there isn't one.

A cryptocurrency that can replace Bitcoin must be just as transparent and decentralized. It should be a powerful development, comparable to the result of the strongest modern programmers from all over the world. In addition, the new product will have to compete with the established status of Bitcoin. It will need time and a very powerful PR campaign to eclipse its predecessor which is pretty impossible.

As statistics show, for all its volatility, Bitcoin grows strongly over 3 years. So crypto investors say "buy it no matter how much it's worth right now." Of course, the moment when one decides to sell it should not coincide with a period of value failure. You have to wait for an upturn. It's now worth almost $25,000. Some say that one day it will be worth $100,000, which may make sense due to its limited emission.

Conclusion

Investing in cryptocurrency and Bitcoin, in particular, is a relatively new way of increasing your wealth. But given the financial situation in the world and the inexpediency of classical investments, buying cryptocurrency can be pretty beneficial. Before investing, it is crucial to read the opinion of experts about a particular cryptocurrency, to understand whether there are prerequisites for the growth of the rate and assess all the potential risks.

About AdroFx

Established in 2018, AdroFx is known for its high technology and its ability to deliver high-quality brokerage services in more than 200 countries around the world.  AdroFx makes every effort to keep its customers satisfied and to meet all the trading needs of any trader. With the five types of trading accounts, we have all it takes to fit any traders` needs and styles. The company provides access to 115+ trading instruments, including currencies, metals, stocks, and cryptocurrencies, which make it possible to make the most out of trading on the financial markets. Considering all the above, AdroFx is the perfect variant for anyone who doesn't settle for less than the best.