After losing 65% of its value in 2022, Bitcoin (BTC 1.56%) experienced a major resurgence last year, as the digital asset soared more than 150%. Anticipation was likely building for the approval of spot exchange-traded funds (ETFs), of which there are now 11 on the market.
Bitcoin's strong price momentum might encourage you to quickly buy the world's leading cryptocurrency. But before doing so, here are four things you need to know.
Decentralized with no single authority
Although it utilizes innovations that came about before its launch, like public key cryptography, digital cash, and the internet, Bitcoin was a huge breakthrough. For the first time in history, something of value could be sent digitally between two parties without the use of an intermediary.
That might not seem like a big deal, but just consider all of the parties involved when sending money to someone in a different country. There are multiple banks, payment processors, financial institutions, and even governmental bodies involved, and all of them want their share of the transaction.
Bitcoin's entire ethos is that there's no single authority that's in charge. Yes, there are key stakeholders, like users, node operators, miners, and developers. But no one has any control over technological updates or any other changes to the network. Everything is driven by the community.
Fixed supply cap
Skeptics question whether Bitcoin has any inherent value. It doesn't represent equity in a business that sells products and services, generating revenue and cash flow. Nor is Bitcoin like a bond that produces fixed income at periodic intervals.
However, perhaps Bitcoin's most important property, and where all of its value actually comes from, is the fact that there will only ever be 21 million coins in circulation (about 19.6 million circulate now). This is a hard cap that was etched in Bitcoin's software from the beginning. And it's unlikely to ever change.
Observers might compare Bitcoin to gold, a commodity that has long been viewed as a store of value. But the key difference is that Bitcoin is an absolutely finite asset. In other words, its supply can't increase at a faster rate if demand rises. If all of a sudden there was a huge spike in demand for gold, companies would rush to find new ways to mine more of the precious metal, thus increasing the supply that hits the market.
Proof-of-work system is a key feature
Bitcoin's energy usage is a hot topic. The network's proof-of-work consensus mechanism requires huge amounts of energy and computational power to process transactions and keep Bitcoin secure. Some estimates even suggest that Bitcoin uses as much energy as a small country.
While this is true, it's better to dig deeper than immediately attacking Bitcoin's use of electricity. More than half of Bitcoin's energy usage comes from renewable sources.
But the energy coming from traditional sources isn't for nothing. Relating to the previous point of the fixed supply cap, in order for it to be difficult to create new units of an asset, there must be some sort of physical constraint. This is in stark contrast to how the U.S. government operates, where new money is created magically out of thin air. That helps explain why the U.S. dollar has lost more than 90% of its purchasing power since 1933.
Well off its peak price
From the start of 2013 through the end of 2023, Bitcoin's price skyrocketed a whopping 316,000%, easily making this one of the best-performing financial assets during that time. For comparison's sake, the S&P 500, with dividends included, returned 312%.
Bitcoin has proven to be volatile, but it has clearly done a wonderful job at increasing investors' purchasing power. And this is the ultimate goal of investing.
As of this writing, this crypto remains 39% off its all-time high, which was set in November 2021. Should Bitcoin even remotely experience the gains it has registered in the past, now looks like a great time to be a buyer.
