Late last year, Bitcoin (CRYPTO: BTC) completed its most significant upgrade in years, Taproot. This update aims to improve privacy and efficiency within the network, and crucially, it also allows smart contracts on the blockchain.
These are big changes for Bitcoin, and they could potentially make it a more powerful investment.
While the crypto market as a whole has taken a beating over the last couple of months, that could make right now a smart buying opportunity. The price of Bitcoin is down more than 42% from its all-time high in November, its lowest price in months.
If you've been on the fence about Bitcoin, now is an affordable time to buy. But is it a smart investment, especially after its Taproot upgrade? Here's what you need to know.
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How will Taproot change Bitcoin?
At its core, Taproot makes the transaction verification process more efficient and improves privacy. When a transaction is verified on Bitcoin's network, it involves validating a digital signature against a public key. With Taproot, signatures can be batched and verified together rather than verified individually.
In simpler terms, transactions can be processed faster with Taproot. Also, when signatures are batched together, it's more difficult to distinguish each individual signature within the transaction -- creating more privacy for users.
The most critical component of the Taproot upgrade, however, is its ability to host smart contracts on the network. A smart contract is a self-executing agreement built on a blockchain, and it allows two individuals to create a secure transaction without a third party like a lawyer.
Smart contracts have plenty of potential in the real world. They make it possible to borrow or lend money securely without a legal contract, for example, and they could potentially revolutionize the banking and finance industries.
Is Bitcoin a smart investment?
Although Taproot does strengthen Bitcoin, it's important to consider how much of an advantage the cryptocurrency will have over its competitors.
When it comes to smart contracts, for instance, Ethereum (CRYPTO: ETH) is by far the biggest player in the space. There are other cryptos such as Cardano (CRYPTO: ADA) and Solana (CRYPTO: SOL) that also have smart contract capability, so Bitcoin has its work cut out for it to be competitive in this area.
This isn't to say that Bitcoin isn't a smart investment right now, but it's wise to have realistic expectations. Even with Taproot, Bitcoin probably won't be able to compete with Ethereum when it comes to smart contracts. But the upgrade could help it hold on to its title as the most popular cryptocurrency.
In addition, despite Taproot's increased efficiency, Bitcoin still consumes a substantial amount of energy. Its proof-of-work (PoW) mining protocol is incredibly energy-intensive, a factor that critics believe will make it more challenging for Bitcoin to scale.
Should you invest now?
If you're considering investing in Bitcoin, now could be a good time to buy when its price is significantly lower. However, be sure you know what you're getting into before you buy.
Like all cryptocurrencies, Bitcoin is still speculative at this point. It's impossible to predict how it will perform over years or decades, and that uncertainty brings a higher level of risk. Bitcoin can also be incredibly volatile, as the last couple of months have proven. Before you buy, make sure you're comfortable with this level of risk and volatility.
Taproot has made Bitcoin a more versatile and efficient investment, and it could also help it keep up with its younger competitors. While Bitcoin isn't perfect, it's still the most popular cryptocurrency. If you're willing to take on more risk for the potential to earn substantial gains, Bitcoin may be the right investment for you.
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Katie Brockman owns Bitcoin and Ethereum. The Motley Fool owns and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
