Bitcoin Ecosystem
How is Bitcoin used?
Bitcoin was initially designed and released as a peer-to-peer payment method. However, its use cases are growing due to its increasing value and competition from other blockchains and cryptocurrencies.
Payment
To use your bitcoin, you need to have a cryptocurrency wallet. Wallets hold the private keys to the bitcoin you own, which need to be entered when you're conducting a transaction. Bitcoin is accepted as a means of payment for goods and services at many merchants, retailers and stores.
Brick-and-mortar stores that accept cryptocurrencies will generally display a sign that says 'Bitcoin Accepted Here'; the transactions can be handled with the requisite hardware terminal or wallet address through QR codes and touchscreen apps. An online business can easily accept bitcoin by adding this payment option to its other online payment options: credit cards, PayPal, etc.
El Salvador became the first country to officially adopt bitcoin as legal tender in June 2021, which was followed up in 2022 by the Central African Republic, making it the second country to adopt bitcoin as legal tender.
Investing and speculating
Investors and speculators became interested in Bitcoin as it grew in popularity. Between 2009 and 2017, cryptocurrency exchanges emerged that facilitated bitcoin sales and purchases. Prices began to rise, and demand slowly grew until 2017, when its price broke $1,000. Many people believed bitcoin prices would continue to climb and began buying them to hold. Traders began using cryptocurrency exchanges to make short-term trades, and the market took off.
Risks of investing in Bitcoin
Speculative investors have been drawn to Bitcoin after its rapid price appreciation in recent years. Bitcoin had a price of $7,167.52 on Dec. 31, 2019, and a year later, it had appreciated more than 300% to $28,984.98. It continued to surge in the first half of 2021, trading at an all-time high of $69,000 in November 2021 — it then fell throughout 2022 to hover around a current price of roughly $20,000.
Thus, many people purchase Bitcoin for its investment value rather than its ability to act as a medium of exchange. However, the lack of guaranteed value and its digital nature means its purchase and use carry several inherent risks. For example, many investor alerts have been issued by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Consumer Financial Protection Bureau (CFPB) regarding Bitcoin investing.
Regulatory risk: The lack of uniform regulations about Bitcoin (and other virtual currencies) raises questions over their longevity, liquidity and universality.
Security risk: Most individuals who own and use Bitcoin have not acquired their tokens through mining operations. Rather, they buy and sell Bitcoin and other digital currencies on popular online markets, known as cryptocurrency exchanges. Bitcoin exchanges are entirely digital and— as with any virtual system — are at risk from hackers, malware and operational glitches.
Insurance risk: Bitcoin and cryptocurrencies are not insured through the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). Some exchanges provide insurance through third parties. In 2019, prime dealer and trading platform SFOX announced it would be able to offer FDIC insurance to Bitcoin investors, but only for the portion of transactions involving cash.
Fraud risk: Even with the security measures inherent within a blockchain, there are still opportunities for fraudulent activity.
Market risk: As with any investment, Bitcoin's value can fluctuate. Indeed, the value of the currency has seen wild swings in price over its short existence. Subject to high volume buying and selling on exchanges, it is highly sensitive to any newsworthy events. According to the CFPB, the price of Bitcoin fell by 61% in a single day in 2013, while the one-year price drop record in 2014 was as large as 80%.
How does Bitcoin make money?
The Bitcoin network of miners make money from Bitcoin by successfully validating blocks and being rewarded. Bitcoins are exchangeable for fiat currency via cryptocurrency exchanges and can be used to make purchases from merchants and retailers that accept them. Investors and speculators can make money from buying and selling bitcoins.
Is Bitcoin a good investment?
Bitcoin has a short investing history filled with very volatile prices. Whether it is a good investment depends on your financial profile, investing portfolio, risk tolerance and investing goals. You should always consult a financial professional for advice before investing in cryptocurrency to ensure it is right for your circumstances.
Last updated