Bitcoin is prone to price volatility, with wide swings to the upside and downside.
Several notable events already occurred in the Bitcoin space this year, including the much-anticipated launch of the first US spot Bitcoin exchange-traded funds (ETFs) in January, the fourth Bitcoin halving event that occurred on April 19 and a global financial rout that wiped around US$600 billion from the entire cryptocurrency market cap.
The most recent upswing comes alongside President-elect Donald Trump’s impending return to the White House.
Bitcoin has skyrocketed by 40 percent since November 4, as a wave of new investors, fueled by hopes of a crypto-friendly administration, floods into the market.
Buying Bitcoin isn’t a simple decision. Before you decide if Bitcoin is a good investment for you, you need to understand both Bitcoin and the wider crypto market. Read on to learn the basics.
What gives Bitcoin its value?
Bitcoin was the world’s first cryptocurrency, created in January 2009 by the mysterious Satoshi Nakamoto.
Conceived as a virtual alternative to fiat currency, Bitcoin is built atop blockchain technology, which it uses for both validation and security. Blockchain itself is a distributed digital ledger of transactions, operating through a combination of private keys, public keys and network consensus.
The best analogy to explain how this works in practice involves Google Docs. Imagine a document that’s shared with a group of collaborators. Everyone has access to the same document, and each collaborator can see the edits other collaborators have made. If anyone makes an edit that the other collaborators don’t approve of, they can roll it back.
Going back to Bitcoin, the virtual currency primarily validates transactions through proof of work. Also known as Bitcoin mining, this competitive and incredibly resource-intensive process is the means by which new Bitcoins are generated.
How it works is deceptively simple. Each Bitcoin transaction adds a new “block” to the ledger, identified by a 64-digit encrypted hexadecimal number known as a hash. Each block uses the block immediately preceding it to generate its hash, creating a ledger that theoretically cannot be tampered with. Bitcoin miners collectively attempt to guess the encrypted hex code for each new block — whoever correctly identifies the hash then validates the transaction and receives a small amount of Bitcoins as a reward.
From an investment perspective, Bitcoin toes the line between being a medium of exchange and a speculative digital asset. It also lacks any central governing body to regulate its distribution. As one might expect, these factors together make Bitcoin quite volatile, and therefore somewhat risky as an investment target.
As for the source of this volatility, Bitcoin’s value is primarily influenced by five factors.
1. Supply and demand
It’s widely known that no more than 21 million Bitcoins can be produced, and that’s
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