Cheat Sheet: How To Answer Questions On Bitcoin
June 21, 2024
Read Time 3 MIN
What is Bitcoin?
- Peer-to-peer network: Bitcoin is a peer-to-peer network that allows users to transfer value directly to each other without intermediaries, using open-source software.
- Transparency: Transactions and addresses (akin to bank account) are publicly visible. Each transaction is recorded on a public ledger called the blockchain.
- Limited supply: With a capped supply of 21 million coins, bitcoin has become a popular store of value and emerging medium of exchange.
How does Bitcoin work/operate?
- Open to all: Anyone can download bitcoin core software and run it on a personal computer.
- Community-driven: Developers work on it voluntarily, for free, and the code is open for anyone to review and contribute.
- Verification: New/pending transactions are added to the ledger by hardware (miners) using computational power to solve complex mathematical problems.
- Consensus upgrades: Bitcoin upgrades are proposed and implemented through a voting process among the network participants.
How is Bitcoin valued?
- Digital gold: Bitcoin can be thought of like “digital gold”. Like gold, bitcoin offers investors a finite supply (there will only ever be 21 million bitcoins). This scarcity creates a store of value for investors.
- How big is Bitcoin?
- Bitcoin adoption and activity has grown tremendously.
- 19 million Bitcoin in circulation (again 21 million will ever be created).
- As of April 2024, its market cap was around $1.2 trillion USD.
- 1B+ unique addresses, about 600-800K use the network to transfer value every day.
Overall, there’s 2 trillion in wealth, the size of the ETF industry in 2014.
Is Bitcoin safe? Can it be hacked?
- Decentralization: Bitcoin operates on a decentralized network spread across the globe, eliminating a central point of control that could be attacked.
- Blockchain Technology: Bitcoin transactions are recorded on a public ledger called the blockchain, with each block containing a cryptographic hash of the previous one, forming an immutable chain. Altering any transaction would mean changing all subsequent blocks, a task made computationally infeasible by the network's immense computing power.
- Cryptography: Bitcoin transactions are protected by cryptographic keys: a public key (wallet address) and a private key. Users sign transactions with their private key, which can be verified by others using the public key. Keeping the private key safe ensures bitcoins remain secure.
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What is Bitcoin mining?
- Creation and verification: Bitcoin mining is the process by which new bitcoins are created and transactions are verified and added to the blockchain.
- Mathematical puzzles: Miners use computers to solve complex mathematical puzzles that validate and secure transactions.
- Network maintenance: Miners are essential in maintaining the Bitcoin network and are compensated with new Bitcoin and transaction fees.
What are the benefits of investing in Bitcoin?
- Potential inflation hedge: Bitcoin is not subject to the same inflationary pressures as traditional currencies, potentially making it a hedge against monetary stimulus and erosion of purchasing power.
- Diversification benefits: Bitcoin historically has a low correlation to traditional asset classes, like stocks and bonds, offering potential diversification benefits.
What are Bitcoin’s biggest risks?
- Volatility: Since Bitcoin is a relatively new asset, its price can be highly volatile over short periods.
- Market Risk: Like gold, Bitcoin's value is influenced by supply and demand dynamics, investor sentiment, and macroeconomic factors.
How much should I allocate to Bitcoin?
- Individual goals: Every investor has unique and diverse goals. Your risk appetite and investment time horizon will determine where Bitcoin fits in your portfolio.
- Enhancing portfolios: Bitcoin can enhance risk-return profiles. As this chart shows, a small allocation to Bitcoin has significantly enhanced the cumulative return of a traditional 60% equity and 40% bond mix while only minimally impacting overall volatility.
What are the advantages of a Bitcoin exchange traded fund?
- Cost: Customers on exchanges pay around 2% for transactions. All costs by exchange traded funds are including in publicly available fees.
- Custody: Bitcoin held on exchanges are not actually held by the individual so there’s significant counterparty risk. Exchange traded funds use segregated qualified custody to alleviate this risk.
- Portfolio Monitoring and Regulation: As adoption expands, Bitcoin exchange traded funds fit into traditional portfolio monitoring with trims/adds as part of total portfolio analysis and rebalancing. Plus, the exchange traded fund structure presents standard investment oversight from regulatory and financial parties.
Have Unanswered Questions? Ask Us!
We hope this introduction provided you with a better understanding of Bitcoin. For those looking to integrate Bitcoin into their portfolios, please reach out to your VanEck representative. If you have more questions or need further insights, feel free to submit a question.
Have more questions? Find answers by visiting our Bitcoin and Digital Assets Education Center.
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IMPORTANT DISCLOSURES
Definitions
Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries.
Risk Considerations
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Investments in digital assets and Web3 companies are highly speculative and involve a high degree of risk. These risks include, but are not limited to: the technology is new and many of its uses may be untested; intense competition; slow adoption rates and the potential for product obsolescence; volatility and limited liquidity, including but not limited to, inability to liquidate a position; loss or destruction of key(s) to access accounts or the blockchain; reliance on digital wallets; reliance on unregulated markets and exchanges; reliance on the internet; cybersecurity risks; and the lack of regulation and the potential for new laws and regulation that may be difficult to predict. Moreover, the extent to which Web3 companies or digital assets utilize blockchain technology may vary, and it is possible that even widespread adoption of blockchain technology may not result in a material increase in the value of such companies or digital assets.
Digital asset prices are highly volatile, and the value of digital assets, and Web3 companies, can rise or fall dramatically and quickly. If their value goes down, there’s no guarantee that it will rise again. As a result, there is a significant risk of loss of your entire principal investment.
Digital assets are not generally backed or supported by any government or central bank and are not covered by FDIC or SIPC insurance. Accounts at digital asset custodians and exchanges are not protected by SPIC and are not FDIC insured. Furthermore, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing.
Digital assets include, but are not limited to, cryptocurrencies, tokens, NFTs, assets stored or created using blockchain technology, and other Web3 products.
Web3 companies include but are not limited to, companies that involve the development, innovation, and/or utilization of blockchain, digital assets, or crypto technologies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© Van Eck Associates Corporation.
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IMPORTANT DISCLOSURES
Definitions
Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries.
Risk Considerations
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Investments in digital assets and Web3 companies are highly speculative and involve a high degree of risk. These risks include, but are not limited to: the technology is new and many of its uses may be untested; intense competition; slow adoption rates and the potential for product obsolescence; volatility and limited liquidity, including but not limited to, inability to liquidate a position; loss or destruction of key(s) to access accounts or the blockchain; reliance on digital wallets; reliance on unregulated markets and exchanges; reliance on the internet; cybersecurity risks; and the lack of regulation and the potential for new laws and regulation that may be difficult to predict. Moreover, the extent to which Web3 companies or digital assets utilize blockchain technology may vary, and it is possible that even widespread adoption of blockchain technology may not result in a material increase in the value of such companies or digital assets.
Digital asset prices are highly volatile, and the value of digital assets, and Web3 companies, can rise or fall dramatically and quickly. If their value goes down, there’s no guarantee that it will rise again. As a result, there is a significant risk of loss of your entire principal investment.
Digital assets are not generally backed or supported by any government or central bank and are not covered by FDIC or SIPC insurance. Accounts at digital asset custodians and exchanges are not protected by SPIC and are not FDIC insured. Furthermore, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing.
Digital assets include, but are not limited to, cryptocurrencies, tokens, NFTs, assets stored or created using blockchain technology, and other Web3 products.
Web3 companies include but are not limited to, companies that involve the development, innovation, and/or utilization of blockchain, digital assets, or crypto technologies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© Van Eck Associates Corporation.