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5 Things You Need to Know Before Buying Bitcoin

For those about to begin their Bitcoin journey, there are five key points to know before proceeding.

  1. Bitcoin Is a Different Beast

There are certain things one should know before embarking on a journey, whether that’s a physical hike or a mental trip down the Bitcoin rabbit hole. Those new to the cryptocurrency space often assume that Bitcoin is simply the largest in a sea of many other coins. The reality is that Bitcoin lives in a world of its own. It is the only true macro asset out of the thousands of cryptocurrencies. It is the only cryptocurrency acknowledged as legal tender by a nation-state. It is the most decentralized, battle-tested, and secure cryptocurrency by a wide margin. Other cryptocurrencies often compare themselves to Bitcoin based on transaction speeds or fees. Unfortunately, these other projects almost always fail to disclose the negative tradeoffs: more centralization and less security. For anyone starting off their Bitcoin journey, it is critical to take claims made by other cryptocurrencies with a large grain of salt. Remember that there are two asset classes within the broader cryptocurrency space: there’s Bitcoin, and there’s everything else.

2. You Can Buy a Fraction of a Bitcoin

While any hardcore Bitcoiner knows that you can use small fractions of a bitcoin, many new users have no idea. It is highly common for newcomers to assume that they need to purchase an entire Bitcoin. Fortunately, this is not true at all, as Bitcoin is divisible into 100 million subunits called satoshis, or sats for short. Thus, rather than needing tens of thousands of dollars to purchase one full bitcoin, new users can simply purchase a fraction of a bitcoin, whether that’s $10,000, $100, or $10 worth of bitcoin. Even if people know they can buy a fraction of a bitcoin, they are still often convinced that Bitcoin is “too expensive” because of the price relative to other cryptocurrencies. For example, Dogecoin is less than a dollar, which makes it feel cheaper when compared to the Bitcoin price. For any users that fall into this unit bias trap, simply consider the price of sats rather than full bitcoins. At $50,000 per Bitcoin, you can purchase 1 sat for just $0.0005 – less than a penny! Considering sats allows newcomers to get comfortable with the price of bitcoin without being scared away into lower-quality assets.

3. Not Your Keys, Not Your Coins

In a world where cash usage is dwindling, people are less and less familiar with the concept of bearer assets such as Bitcoin. A bearer asset simply means that the physical owner of the asset is in control of it. If you have a one hundred dollar bill, the source of those funds does not matter; you are in possession of the bill, and therefore you have the power to spend it however you choose. The same is true with Bitcoin. There is no gatekeeper that says who can and cannot spend certain coins. As such, maintaining actual possession of bitcoin is important. Many new users will hold their bitcoin on exchanges. Unfortunately, these users do not technically own any bitcoin. In reality, the exchange owns the bitcoin, while the users essentially have an IOU: the promise of a certain amount of bitcoin guaranteed by the exchange. This leaves a massive hole for anyone looking to be able to use their bitcoin. If the exchange was to go down or be hacked, users may be completely out of luck in accessing the bitcoins they thought they owned. Instead, newcomers should learn the ways of self-custody to ensure they are in control of their bitcoin. With Bitcoin, the holder of the private keys is in true control of the bitcoin. In other words, if Cash App holds bitcoin private keys on your behalf, Cash App has ultimate control over the bitcoin, not you. The only way to hold true possession of bitcoin is to hold your own private keys. With easy-to-use mobile wallets like Muun Wallet or collaborative multisig options like Unchained Capital, self-custody of your own keys has never been easier or more secure.

4. Volatility vs. Risk

People in the financial industry often equate volatility with risk. In reality, these concepts have an important difference. Risk is the probability that something will fail, while volatility is the level of variability in the market’s perception of something. While insiders knew that the risk of Enron failing was extremely high, the volatility of Enron did not necessarily reflect this until it was too late. Conversely, Bitcoin is one of the most volatile assets on earth. Yet anyone who understands the underlying components of Bitcoin realizes that the risk of failure is becoming smaller by the day. Anyone thinking about buying Bitcoin should be prepared for incredibly volatile price swings, especially in the short-term. However, over the long-run, this volatility tends to move to the upside. In other words, when we zoom out on the price chart, we can see the price of Bitcoin has been exponentially rising over the years. Yes, there are often huge, rapid drawdowns in price, but Bitcoin tends to recover and march upwards in value as time goes on and adoption increases.

5. 21 Million Hardcap

At its core, Bitcoin is the premier store of value asset. Any good store of value has certain properties such as censorship -resistance, durability, and scarcity. Scarcity is the most important attribute for an asset to have in order to maintain its value over long periods of time. A scarce asset simply means that many more units of that asset cannot easily be created. A house, for example, is scarce in the sense that no exact replica of a house can be created in the exact same location. However, similar houses can and will be created, thus reducing the overall scarcity of houses. Gold is notoriously scarce, with the total supply increasing by less than 2% each year, despite the desire for gold miners to find as much new supply as possible. Bitcoin is the scarcest asset of all time. Thanks to the elegantly simple design of Bitcoin, the future supply schedule is known in advance. As of December 2021, 90% of all of the Bitcoin that will ever exist has already been created. The remaining 10% of the total Bitcoin supply will be mined over the next century-plus. While we cannot know what the future supply of houses or gold will be one hundred years from now, we can know the exact supply of Bitcoin one hundred years from now. This makes Bitcoin the only asset on earth where the future supply is completely predictable, meaning that no one can create new units to reduce the scarcity of Bitcoin. When considering where to hold the value of one’s labor, the easy mathematical solution is to choose the asset which cannot be unpredictably created out of thin air: Bitcoin.

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