Hydrocarbon conversion to advanced carbon nanomaterials with concurrent hydrogen production holds promise for clean energy technologies. This has been largely enabled by the floating catalyst chemical vapor deposition (FCCVD) growth of carbon nanotubes (CNTs), where commonly catalytic iron nanoparticles are formed from ferrocene decomposition. However, the catalyst formation mechanism and the effect of the chemical environment, especially hydrogen, remain elusive. Here, by employing atomistic simulations, we demonstrate how (i) hydrogen accelerates the ferrocene decomposition and (ii) prevents catalyst encapsulation. A subsequent catalytic dehydrogenation of methane on a liquid Fe nanoparticle showed that carbon dimers tend to be the dominant on-surface species. Such atomistic insights help us better understand the catalyst formation and CNT nucleation in the early stages of the FCCVD growth process and optimize it for potential scaleup.