Bitcoin dominance leads to new highs: Is the craze worth it?

bitcoin

What is Bitcoin?

Bitcoin is one of the earliest cryptocurrencies and one of the first digital currencies to work on blockchain technology. Bitcoin is also one the first example of a full-fledged decentralized currency that came into existence in 2009. Just as you buy and store gold, Bitcoin can also be treated as a digital format or gold (often called digital gold). Using Bitcoin you can buy and sell goods, use it as a store of value, trade-in it, or look at it as an investment avenue. It offers a bunch of features with the protection and security of the blockchain network.

How does it work?

Now that you recognize what is Bitcoin, let’s see how it works.

One of the key functions of Bitcoin was to facilitate peer-to-peer transactions without the intervention of the central bank. As Bitcoin works on the blockchain network, the transactions performed on the network are anonymous. This means if Mr ‘A’ transfers 2 Bitcoins to Mr ‘B’, the transaction will remain anonymous. This means it is extremely hard to find out the identity of Mr. A and B.

Every transaction of Bitcoin and other cryptocurrencies is recorded on the blockchain which is a public network. Any individual can verify the transaction but no one can alter or delete it. Due to these reasons, the popularity of cryptocurrencies is increasing and more individuals and institutions are adopting them due to their benefits.

Reasons behind the rally of Bitcoin

Bitcoin is the largest and most popular cryptocurrency with a market cap of more than $1 trillion. Recently in 2021, Bitcoin investors have witnessed a massive rally followed by a significant correction. The price of 1 Bitcoin in January 2021 was around Rs 30 lakh. From which it made a high of Rs 51.2 lakh in April before crashing down to Rs 23 lakh in July.

Also, Read – How to Buy Bitcoin: A Step-by-Step Guide

From Rs 23 lakh it rose all the way up to Rs 51.8 lakh in October. Even with such extreme volatility, Bitcoin has given more than 800% returns in the year 2020-2021.

The recent rally was the outcome of investors’ interest at lower levels followed by numerous external factors. Some of the reasons behind the rally were.

  1. Multiple Institutions adopt Bitcoin and other Cryptocurrencies

Cryptocurrencies have been gaining traction with multi-national companies realizing its use cases. Recently, Elon Musk the founder of Tesla announced that both Space X and he owns Bitcoin and will invest in the asset. The CEO of Twitter, Jack Dorsey also announced that cryptocurrencies will be, “a big part of the company’s future.” Many internet giants such as Amazon and Facebook are planning to expand their operations by integrating blockchain and cryptocurrency. Facebook is also expected to come up with its own crypto-token in the near future.

  1. Adoption of Bitcoin as legal tender

Countries like El Salvador have made Bitcoin its legal tender which acted as another positive catalyst to its price. This move is one of the key developments in technology. And as more countries adopt Bitcoin, the downside risk will be reduced. Even after the ban of cryptocurrencies by the Chinese government, the price of Bitcoin has managed to cross the previous all-time high. This proves the investor’s belief in the asset.

  1. Reduction in Supply

Also, people are taking loopholes to increase the supply of the coins. There are options to invest in mining farms to increase the supply of coins.

Should you invest in Bitcoin at current levels?

Bitcoin has been growing its user base all over the world but on the other hand, there are numerous threats. Drawbacks like government regulations, environment sustainability, energy usage, etc pose significant risks to its future usability.

Looking at the neverending rally, it might be unwise to make a lump sum investment at the current level. But believing in the underlying concept of cryptocurrencies you can make regular investments in the top crypto coins like Bitcoin and Ethereum through SIPs. By making regular investments in a SIP (Systematic Investment Plan) format you will stay invested and get an average cost on your investment over the long term.

Overall corrections of 20-25% in Bitcoin is not a rare scenario, hence you should double down on your investments whenever such a correction takes place.

Experts recommend diversifying your portfolio (in terms of investments) among many different Cryptocurrencies.

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