Bitcoin explained: What is bitcoin and how does it work?

Cryptocurrency: Expert discusses success of Bitcoin

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The cryptocurrency craze has surged in recent months, prompted in part by attention from high-profile billionaires like Elon Musk. Some claim to have gotten rich from investing in cryptocurrencies like bitcoin. However, trading experts warn that many can miss out when investing in bitcoin as there are high risks involved in this type of trading.

What is bitcoin and how does it work?

Bitcoin is a type of cryptocurrency, which is a digital asset.

Paddy Osborn, Managing Director and Academic Dean at London Academy of Trading, told “Bitcoin is essentially an electronic currency. Individuals can exchange FIAT currencies (such as British Pounds) for bitcoins and these are stored in a “digital wallet”.

“You can buy and sell bitcoins (or a fraction of a bitcoin) or send them to other people.

“The value of bitcoin fluctuates in a similar way to other ‘real world’ currencies, although the fluctuations in the price of bitcoin can be extremely volatile.”

Why is investing in bitcoin high risk?

All investment involves risk, but cryptocurrencies are particularly risky investments because the market is so volatile.

Mr Osborn added: “Due to this volatility, people should make sure they manage their risk before investing; never invest more than you can afford to lose.

“Also, be prepared for an exciting ride when investing in bitcoin.

“The price can move 10 to 20 percent in just a few hours, so it’s not for the faint-hearted.

“That said, cryptocurrencies will no doubt become part of everyday life in the future, and since the amount of bitcoins in the world is limited, many investors see it as a very good long term investment.”

Anyone interested in cryptocurrencies should also be aware that cryptocurrency markets are largely unregulated.

Simon Crookall, InvestEngine founder, told “Following comments by Elon Musk and China’s announcement that it has banned crypto exchanges and initial coin offerings, the value of bitcoin once again showed it’s volatility.

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“Yet, for many, these hot stocks and cryptocurrencies seemed like a sure bet.

“While bull runs in unregulated instruments like cryptocurrencies might be tempting, they are still risky.

“When it seems like everyone around you is profiting on a trend, assets like these can lure investors – particularly novice investors – into a false sense of security.

“For all the winners of the novel ‘casino approach’ to investing, there are also losers – and lots of them.

“More often than not, they are novice investors, who don’t yet have an understanding of the fundamentals of investing, and get caught up in the buzz of free trading apps looking to capitalise on the public’s enthusiasm to make a quick buck.”

Rather than investing in cryptocurrencies with the hope of making money quickly, experts suggest there are better ways to make money that are longer-term.

Mr Crookall added: “For all the talk about returns, investors should equally consider risk.

“Is their portfolio prepared for the next crash? Taking a diversified, long-term approach to investing — in assets that are appropriate for them — should be the first step for any investor, rather than risky single-stock speculation. It will certainly help you sleep easier at night.”

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