Basics of bitcoin
What is bitcoin?
Bitcoin is the oldest cryptocurrency, and currently the largest one by market capitalization. Unlike money issued by a central authority such as a country’s central bank, cryptocurrencies based on public blockchains are decentralized. That means no single entity has a monopoly on their creation and distribution.
There are thousands of computers running Bitcoin software across the world, forming a decentralized peer-to-peer network. Bitcoin transactions are recorded on a distributed ledger system called a blockchain. The Bitcoin blockchain is a chain of blocks, and each block contains a list of bitcoin transactions. Over time, as more transactions occur, the blockchain gets longer as more blocks are added to it. Transactions on the Bitcoin blockchain are pseudonymous, meaning that transactions are not linked to a user’s real name.
The idea for the Bitcoin network was initially proposed in a white paper posted online in 2008 by someone going by the pseudonym Satoshi Nakamoto. The Bitcoin network was subsequently launched in 2009. There are now thousands of cryptocurrencies in existence. In addition to Bitcoin, other blockchains that have gained prominence include Ethereum, Solana, Cardano and Terra.
Bitcoin’s supply is finite, unlike that of fiat currencies.
Unlike money issued by a government, which can be increased simply by printing more of it, there is a limit to the supply of bitcoin. There will only be 21 million of them in the world, of which around 19 million have been created so far.*
Bitcoin mining is the process through which new bitcoin are created and introduced into the system. For each new block to be added to the Bitcoin blockchain, miners compete with one another to solve a cryptographic puzzle. The first miner to solve the puzzle gets to propose the new block of transactions to the whole network. As a reward, the winning miner of the block gets newly created bitcoin.
Young investors are interested in bitcoin.
According to a 2021 study by the personal loan company Stilt, more than 94% of people who own crypto are millennials or Gen Z. There are several reasons why bitcoin may have become increasingly popular with younger investors. For instance, bitcoin has been heavily promoted by certain influential users of social media. In addition, many tout cryptocurrencies such as bitcoin as an alternative to so-called “fiat” currencies issued by national governments. They believe cryptocurrencies can help lessen the concentrated power of centralized entities such as governments and banks.
The price of bitcoin has risen dramatically with its popularity.
The price of bitcoin has fluctuated wildly over the years, making it attractive to those looking to make money quickly. Entire sections of popular online forums such as Reddit are devoted to cryptocurrencies and how to invest in them strategically. Bitcoin initially sold for a few cents, before beginning a meteoric rise in value. While the gains have been significant, the ride up hasn’t always been smooth. In 2017, the price of one bitcoin rose to over US$17,000 before falling back below US$4,000 by the end of 2018. Starting in 2020, the price shot up again dramatically, and peaked at around US$67,000 in late 2021, before falling back below US$40,000 in January 2022.
How can I invest in bitcoin?
Ways to invest in bitcoin include buying bitcoin on a cryptocurrency exchange platform or buying a bitcoin ETF. There are pros and cons to the different approaches. For example, one reason investors may choose to invest in a bitcoin ETF is that it can be held in a tax-advantaged registered account, such as an RRSP or an TFSA. On the other hand, while bitcoin trades 24/7 on cryptocurrency exchanges, investors can only buy and sell bitcoin ETFs during regular market hours. Fidelity Advantage Bitcoin ETF™ and Mutual Fund offer a safe and smart alternative that allows you to gain exposure to bitcoin while diversifying your portfolio with the world’s largest cryptocurrency.
Before you invest in bitcoin.
Investing in bitcoin provides exposure to an emerging technology and may bring potential return benefits. However, as the price of bitcoin has swung wildly in the past, you should think carefully about how you invest in it, and whether you are comfortable losing some of your money. How much you invest in bitcoin as a percentage of your portfolio should depend on your investment objectives and risk tolerance.
What’s next for bitcoin?
The wider adoption of bitcoin among users and investors depends on an evolving technological and regulatory environment. There may be increased regulation of bitcoin mining, or increased regulation of cryptocurrency custody, trading and other services that may affect financial institutions that want to offer cryptocurrency products and services to their clients. Ultimately, it is still an emerging technology, and future applications, regulatory treatment and investment potential will evolve over time.