Should I Buy Bitcoin Now?

Conversations about cryptocurrency often start and end with Bitcoin. What was once an anarchistic idea founded by a pseudonymous internet figure is now a worldwide phenomenon. The rise of Bitcoin has paved the way for the entire cryptocurrency industry, making it the grandfather of all digital assets. As the world’s most popular and well-known cryptocurrency, Bitcoin already has a leg-up on its competition. Does this mean Bitcoin will be the new standard digital currency, or will it fade into technological oblivion like many advancements that have come before it?

This guide will help you better understand Bitcoin as a technology, its origins, and its future. As such, we hope this guide will be a playbook in helping you determine if you should buy Bitcoin now.

A Brief History of the Bitcoin Market

To understand where Bitcoin is going, you must first understand where it has been. In 2008, a mysterious person on the internet going by the name of Satoshi Nakamoto published a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. The paper outlined a methodology for creating a new, digital form of currency that operated on a peer-to-peer network. This paper was not widely circulated, and only a select few actually knew of the idea when it was formed.

Then, on January 3, 2009, the first block on the Bitcoin blockchain was mined by Nakamoto. Slowly, Nakamoto began to retract himself from the project, with Gavin Andresen becoming more of a public figure as the lead developer at the Bitcoin Foundation.

One of the first notable transactions of Bitcoin came in 2010 when Laszlo Hanyecz agreed to pay 10,000 BTC (worth about $41 at the time) for two pizzas. This transaction can be looked back on in humor, but at the time it was a significant milestone that a digital currency could be used to make a real-world purchase. 

Mt. Gox hiccup 

Even as its popularity grew, Bitcoin came into a few road bumps along the way. At one time the cryptocurrency exchange Mt. Gox was handling 70% of all Bitcoin transactions, until it was unexpectedly hacked in 2011. In total, $450 million in Bitcoin — or 7% of the cryptocurrency’s total supply — was stolen, leading to a major breach in trust of the cryptocurrency. 

Price begins to soar, but volatility raises eyebrows

After Mt. Gox, it took another few years for Bitcoin to become public-facing and start to gain notoriety. By 2012, Bitcoin was being discussed on traditional financial channels and in popular culture, albeit mostly in jest. The following year the price of Bitcoin began to skyrocket, first climbing above $100 and then rising above $1,000 in late 2013. By the end of 2017, the price of Bitcoin would top out at close to $20,000 before the market came back down to earth in the following years. 

Unlike other currencies, it isn’t uncommon for the price of Bitcoin to fluctuate multiple percentage points in a 24-hour period, and even upwards of 10% on select days. One of the tenets of sound money is price stability. You wouldn’t want to use currency today that could be twice as valuable tomorrow, and conversely, you wouldn’t want to earn wages in a currency that could lose half its value in the next year. This uncertainty as compared to fiat currencies is what makes Bitcoin’s price volatility concerning for many people.

In order for Bitcoin to move to its next phase in adoption, its price will have to eventually settle and become more stable. This doesn’t mean the price of Bitcoin will level out and never grow, it simply means that the longer Bitcoin displays price instability at this large of a level, the less likely it will be that it becomes a universal, global currency.

The Current State of the Bitcoin Market

Bitcoin Benefits

The price of Bitcoin isn’t rising just because of unwarranted hype. The digital asset provides significant benefits to other currencies and stores-of-value. In fact, Bitcoin excels in many areas when compared to fiat currencies and gold, making it a better, more evolved form of money.



Bitcoin

Fiat Currency

Gold

Total Value (approx.)

$210 billion

$80 trillion

$7.8 trillion

Portability

Highly portable

Highly portable, with restrictions

Moderately portable

Divisibility

Easily divisible

Easily divisible

Not easily divisible

Scarcity

Very scarce, fixed supply

Not scarce

Moderately scarce

Security

Secured by a decentralized network

Secured by governments

Secured by physical asset

Ease of transaction

Difficult to transact, but becoming easier

Very easy to transact

Difficult to transact

Verifiable

Verified on a public blockchain

Printed by central bank but can be counterfeited

Difficult to counterfeit due to physical properties

Cross-border transacting

Why is it that in 2020 it’s so hard to send money across borders? Common methods of sending funds globally have high costs and can take several days to settle. Bitcoin is a trustless, fast way to send funds anywhere around the world. Also, because all you need is a private/public key combination, Bitcoin can be taken across borders quite easily, whether it be via a hardware wallet, mobile wallet, or even by memorizing private/public key information.

Hedging against fiat uncertainty

This current historical moment is marked by volatility and uncertainty. A global pandemic flipped the world upside down. Meanwhile, politicians and those in power seek to maintain a status quo that isn’t working for the majority of global citizens. Bitcoin is not just a new currency, it has become a rallying cry for underserved populations and those looking to take control of their financial future. While citizens of most western countries don’t usually view their fiat currency as in any threat, this isn’t the case for other countries. Take nations like Turkey and Venezuela as examples. Citizens of these countries have seen the value of their hard-earned money deteriorate in front of their eyes. Bitcoin is a way to maintain wealth even in the face of domestic uncertainty. Who knows, as inflation concerns rise in the United States, maybe even the US Dollar will be at risk, making Bitcoin the new standard.

The strongest network around

When it comes to network strength, Bitcoin cannot be beat. As the largest, longest-lasting blockchain network in the industry, Bitcoin has proven that it is a stable network that is not prone to attacks. More users are flocking to the Bitcoin network due to its strength, creating more economic impact as a result. This phenomenon is known as network effects. Due to network effects, the Bitcoin network provides the most value because it has the most network participants. Think about it this way: a network that has only 100 active participants interested in sending and receiving currency has a very limited potential. But, a network of tens of thousands of participants transacting on it creates significantly more value. Today, Bitcoin is already processing 300,000 transactions per day and growing. 

Receding volatility

A historical negative aimed at Bitcoin has been its volatility. But the general view of this has evolved in recent years. Yes, the cryptocurrency is still more volatile than its fiat counterparts, but this must be put in context. The US Dollar went through periods of more intense volatility in the mid-1980s when the US Dollar Index had a 31.7% decline. In recent years, the volatility of Bitcoin has greatly declined, and even though it is still not at the stability of fiat, it is becoming a more trusted currency over time.

Hurdles to Adoption

Even with all of its benefits, Bitcoin still has a ways to go to become a viable currency alternative. In fact, there are several hurdles which the network must first overcome before it can be seen as a viable, global currency and store-of-value.

Regulatory questions

The relationship between Bitcoin and government entities is still murky. It seems that each day there is new government regulation and/or restrictions around the cryptocurrency, and these rulings vary greatly from nation to nation or even state to state within the US. Some countries are embracing this technology, and working with Bitcoin in many ways, while others are banning the use of it altogether for fear that it will circumvent traditional finance in a way that’s uncontrollable. 

Ease of use

As far as Bitcoin has come, it’s still not easy to use for the average person. Someone who is tech-savvy and comfortable with digital transactions might have no problem picking up on the nuances of using Bitcoin, but for everyone else, the process is still too convoluted. Consumers have to learn all about Bitcoin wallets, exchanges, and the transaction process to even stand a chance at using the currency successfully. Imagine telling a new user that they sent their Bitcoin to an incorrect address and there is nothing they can do to resolve this mistake. 

Public sentiment

Throughout the past decade Bitcoin has had to battle attacks from all sides. Economic experts have attacked Bitcoin as nothing more than a fluke that has no value, while fraudulent activity elsewhere in the cryptocurrency industry has brought down the public sentiment of Bitcoin. It is estimated that about $76 billion in illegal activity per year is conducted via Bitcoin transactions. This doesn’t bode well for the trust of this new currency, but one way the illicit use of Bitcoin can be mitigated is through increased regulation. 

To date, Bitcoin has been declared dead over 380 times in just 10-years. Will one of these obituaries eventually come to fruition?

Centralization

Over the years Bitcoin miners have banded together into mining pools in order to collectively utilize their resources for the sake of more efficiently mining the blockchain. Some of these pools have gotten so big that they account for a sizable amount of the entire network’s hashrate. In fact, 5 mining pools command more than 50% of the entire network hashrate. In theory, if these pools banded together they could execute a 51% attack on the blockchain, and severely damage the security of the entire network. The Bitcoin community is well aware of this and is taking steps to augment the mining process so as to ensure more decentralization across the network.

Competition

Heavy is the head that wears the crown. Bitcoin is the king of cryptocurrency and therefore has a target on its back. Each new cryptocurrency project that is released takes a shot at Bitcoin and attempts to dethrone the world’s largest peer-to-peer currency network. Some of these projects have gained significant traction (Ethereum, XRP, Litecoin, etc.) but none have yet to match Bitcoin in its network strength. There is no way to know if a new form of decentralized currency will find its way to the top of the industry. Bitcoin is still the cryptocurrency king, for now. 

What Does US Monetary Policy and Government Intervention for Buying Bitcoin

It was clear from the start that Nakamoto’s impetus for a digital currency came at least partially from the desire to remove money from government systems. In the very first block on the Bitcoin blockchain — also known as the genesis block — Nakamoto embedded a message relating to government intervention in the UK which reads, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.

The vision of Nakamoto continues to this day, as monetary actions taken by the US government threaten to devalue the US Dollar. Most recently, the COVID-19 epidemic forced the US Federal Reserve to print trillions of dollars out of thin air in order to buy debt and prop up the domestic economy. This action, while advantageous in the short-term, could have extremely negative repercussions for the US Dollar. It is actions like these that have devalued the dollar and made it such that dollar holders have seen their purchasing power decline steadily since the 1940s. All-in-all, this makes the US Dollar look like an asset that might not be worth holding in the long-run.

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Source: https://fred.stlouisfed.org/series/CUUR0000SA0R 

The mistrust of fiat currency is growing so large that some financial companies are starting to take action. Financial giant MicroStrategy announced it will now use Bitcoin as its primary reserve currency and invested $250 million into Bitcoin as a result. The company made it clear their trust in Bitcoin outweighs the rest of the economy:  

“Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively...We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”

Meanwhile, institutional investors are beginning to come around to Bitcoin as a viable alternative investment. A recent report by Fidelity highlighted that 36% of institutional investors are already invested in cryptocurrencies, while 80% believe these assets should be considered for a balanced portfolio.

It is these moves by institutional investors and the traditional banking system that could propel the entire financial system into an age where Bitcoin is the new standard. 

Questions to Ask Yourself Before Buying Bitcoin

Buying Bitcoin should first be treated like any investment. This means, you should ask yourself the same set of initial questions you would ask before making any investment. These include:

  1. What are your goals? Are you looking at Bitcoin as a day trading opportunity or are you evaluating it as part of a long-term investment portfolio?
    • As with any investment, understand your time horizon and goals. Maybe you see Bitcoin as a short-term play because of recent economic news. Or, maybe you believe in Bitcoin for the long-run. 
  2. What is your level of risk tolerance? 
    • The price of Bitcoin can swing more drastically than other assets. If you can’t deal with this type of price volatility, Bitcoin might not be for you.
  3. Have you considered other, similar assets?
    • Bitcoin isn’t the only cryptocurrency on the market. Make sure you fully believe that Bitcoin is a better purchase than other digital assets.
  4. Have you decided on a Bitcoin wallet to use? Or ok having an exchange or third-party hold your bitcoin?
    • Security is of the utmost importance. Before you buy Bitcoin, make sure to have a plan in place on how you will securely store your new asset. This could be a hardware wallet for extra security, an exchange wallet for short-term trading, or anything in between.

Understanding Bitcoin Halving And Its Impact on the Bitcoin Market

One of the major differences between Bitcoin and fiat currencies is its supply schedule. Bitcoin is a deflationary currency, meaning, there is a set amount of Bitcoin (21 million) that will be created over time. After these Bitcoins are created, no more Bitcoin will ever be created again. This fixed supply limit is diametrically opposed to fiat currencies such as the US Dollar which continues to be printed as per the guidance of the Federal Government. 

New Bitcoin are created through the process of mining. After each new block is secured, a set amount of Bitcoin are minted and given to miners as a reward for their work. The amount of Bitcoin minted after a block is on a fixed schedule. The mining reward is cut in half every 210,000 blocks. The first Bitcoin halving occurred in November, 2012 which cut the mining reward from 50 to 25. The most recent halving occurred on May 11, 2020, where the reward was cut to 6.25 Bitoin per block, and the next halving is scheduled for some time in 2024 based on current blockchain conditions. 

How halving can affect price

The process of halving has huge implications on Bitcoin as a currency. While fiat currencies can be printed as often as desired, Bitcoin’s monetary base is slowly shrinking. This means, eventually, no more Bitcoin will be created and if there is use for the digital currency in the future, there likely won’t be enough supply to meet this demand, therefore raising its price to match the market equilibrium.

When examining Bitcoin’s chart, it’s clear that the price continues to rise after a halving event. However, the price increase is not instantaneous following the halving event, and is therefore not necessarily correlated with the halving event itself. Instead, the rising price could be a result of many other factors that play into the price of the digital asset. 

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Source: https://twitter.com/ChartsBtc/status/1296321918925025280 

There are varying ways in which Bitcoin halving events are viewed in the community. One side believes that with each halving less Bitcoin becomes available, and therefore the price of Bitcoin should increase drastically. This belief leads many to purchase Bitcoin before halving events, hoping for sharp price increases directly thereafter. The other side believes that because halving events are predetermined at a set block and everyone knows when they will happen, these events are already priced into Bitcoin and won’t have a significant effect on the price. 

Key Data to Look at When Deciding Whether or Not to Buy Bitcoin

As previously mentioned, Bitcoin should be viewed as another financial investment, and as a result, standard financial data should be examined before making an investment in Bitcoin. Here are some tools we recommend using to examine this type of data.

Financial data points:

Blockchain data points:

Where Should You Buy Bitcoin?

If you come to the conclusion that Bitcoin is a worthwhile purchase you have a variety of exchanges or platforms on which to make your purchase. These platforms have different fee structures, technology, user experience, and more. The following platforms will all allow you to purchase Bitcoin, but each one of them has its pros and cons.

Exchange/Platform

Pros

Cons

Coinbase

Easy to use

Expensive deposit/withdrawal fees

Robinhood

Access to other assets (stocks, ETFs, etc.)

Platform reliability on busy days

Coinbase Pro

Good security

Bad mobile app

Kraken

Low transaction fees

Complex interface

Binance

Fast order execution

Global platform not available in US

Square Cash

Easy to use

Relatively new and unproven in crypto

Futures market

There is an alternative for those who are looking to get exposure to Bitcoin as an asset but aren’t comfortable purchasing, or perhaps are an entity that is not authorized to purchase the cryptocurrency outright. Some exchanges like Binance offer Bitcoin futures, while traditional exchanges like CME also provide a similar service. The advantage of cash-settled futures is that you don’t have to worry about how to store Bitcoin and keep it safe, and instead, can take advantage of a financial derivative directly tied to the asset’s price.

Execution and Timing When You Buy Bitcoin

Once you have identified that Bitcoin is a worthwhile investment, it’s time to start thinking about how and when to execute a Bitcoin trade. There are a variety of things to consider and strategies to employ when making a Bitcoin purchase.

Exchange prices

Unbeknown to many people, the price of Bitcoin can vary from exchange to exchange. As a result, two Bitcoin purchases can be made on different exchanges at the same time for different prices. This is why tools like CoveTrader are so important. CoveTrader analyzes Bitcoin prices across a variety of exchanges to help users get the best price for their purchase.

Type of order

There are two primary order types to consider when looking to make your Bitcoin purchase. A market order will guarantee that your order will be executed but cannot guarantee a price for the order. The order will be executed immediately at the current market price. Alternatively, a limit order allows you to set a predetermined price for your order and will execute the order only when the market conditions allow for your purchase at that limit price. A limit order risks the order not being filled at all if there are no sellers willing to part ways with their Bitcoin at your set price.

Liquidity periods

Unlike traditional markets, the Bitcoin trading market is open 24/7/365. However, there are certain times where Bitcoin may be more liquid than others. For instance, holidays and overnight hours might not have a lot of trading activity and liquidity could be lower. But this will depend on the geographical user base of each exchange. . Additionally, large volatility in the market can affect liquidity. The historical price features on CoveTrader have shown that a 7% fall in the price of Bitcoin can result in a temporary increase of 400% in the bid-ask spread on exchanges, thus creating less liquidity in the market.

Exchange fees

Most Bitcoin transactions are going to come with an exchange fee. Depending on how much the exchange fee is, it can eat into your profit over time. Exchanges like Coinbase have high fees, but are easy to use. At the same time, Coinbase Pro (the more advanced version of the exchange) is slightly more technical but has lower fees. Exchanges like Kraken, Bittrex, and Binance have even lower fees. Make sure to examine your exchange’s fees before placing a Bitcoin trade. 

Strategy: Averaging down

When it comes to purchasing an asset, the ideal situation is to buy the asset at its lowest price. Unfortunately, timing the bottom of an asset price is extremely difficult. Should you buy the asset today, or will its price decrease tomorrow and you can purchase it cheaper? This conundrum becomes even more important for those looking to make large purchases.

One way to resolve this issue is to average down. Averaging down is a strategy in which you cut your order into smaller slices and make multiple purchases if the price decreases. This way, the average price of your Bitcoin purchase is, on a whole, lower. 

Is it time to buy Bitcoin?

Deciding whether or not to buy Bitcoin is a decision that only you can make, since everyone’s situation and preferences are a bit different. Our hope is that this article has better equipped you with the knowledge and tools you need to decide whether or not a Bitcoin purchase makes sense for you in a given moment. Like any investment, Bitcoin is subject to the broader global uncertainties that impact the marketplace, making it challenging to pinpoint precisely what the future may hold for the popular cryptocurrency.

Of all cryptocurrencies, Bitcoin has the strongest network and most viability as a global, digital currency. On the flipside, the lack of certainty around regulation and some of the lingering challenges around day-to-day use mean there is still ground to be gained in terms of broader global adoption. The choice of whether to buy Bitcoin today is yours, but at the very least, now you fully understand what makes Bitcoin the biggest, most important cryptocurrency on the market.

Disclaimer: This article is for information purposes only. It is not intended to be investment advice. Seek a licensed professional if you require investment advice.

Scott Knudsen is CEO of Cove Markets. He spent 14 years at IMC Trading, working in Chicago, Amsterdam, and Hong Kong. Follow him on Twitter here.

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