Not only is Bitcoin the largest cryptocurrency of the more than 19000 currently available in the market, but it is also the most famous cryptocurrency. It is difficult to miss Bitcoin for financial media, enthusiastically narrating every new record high and dramatic drop.
Although such extreme swings in price might seem attractive and exciting, they are not suited to anyone who does not want to get directly involved in the crypto sphere or does not want to invest in something that can lose up to 80% of its value in just a few minutes. But, as you may have already guessed, the concept is quite complex – let’s try to unravel the secret of Bitcoins then.
What is Bitcoin?
Bitcoin is an electronic form of money that works on the principle of a virtual currency that can be used to buy products and services through digital means without another party’s use. The original author, Satoshi Nakamoto, introduced Bitcoin as an ‘‘electronic cash’’ system that utilizes ‘‘cryptographic” algorithms to eliminate the need for third parties such as bankers.
The transparency of Bitcoin, or the fact that each transaction that occurs is recorded within the public ledger attached to that currency, ensures that Bitcoin transactions are safe. Bitcoins are not anchored to any specific country or government; the only backing one can find is people’s faith.
From 2009 to June 8, 2024, the Bitcoin value was remarkably pushed from under $150 per coin to nearly $30,200. This is due to the fixed number of Bitcoins at 21 million, and many big investors adopt the cryptocurrency as it is a digital form of investment that can act against market risks and inflation.
Why was Bitcoin invented?
Satoshi Nakamoto created Bitcoin to address growing frustrations with the traditional banking system. People were fed up with the lack of privacy, expensive transaction fees, and how governments and banks could manipulate currency supply, causing inflation and financial instability.
The 2007-2008 financial crisis served as a wake-up call, exposing the risks of centralized financial systems and creating the idea of Bitcoin. Nakamoto’s concerns with the traditional financial system were blocked by Bitcoin’s core principles: decentralization, transparency, security, and a fixed supply limit to avoid inflation.
By addressing the double-spending issue in online currency, Nakamoto made it possible to move from relying on institutions to trusting in cryptography and the network’s collective verification process.
How does Bitcoin work?
In simple terms, a blockchain is the digital documentation of Bitcoin, which consists of an unalterable record of every transaction that has occurred. Unlike many other financial technologies, this one works like a chain of interconnected cubes that store practically all the important information: date, time, value, performers, and more.
Unlike centralized systems where data is restricted and controlled, the blockchain network is fully transparent and visible to the public eye, and hence, the recorded transactions can be observed. Buchi Okoro, the CEO and co-founder of Quidax, an African cryptocurrency exchange, described it as “like a Google Doc where everyone has access to type; no one owns it, yet whatever everyone does on the application, your copy also changes.”
That is why Bitcoin’s system is so secure—it is a decentralized system with no single way anyone can break the chain. Most miners must sign off before a Bitcoin transaction block can be cemented into the blockchain. Further, the codes that identify users’ wallets and transactions should also have the correct encryption pattern; therefore, it might be hard to emulate fake entries.
In the words of Stacey Harris, a consultant for Pelicoin, offers a network of cryptocurrency ATMs, “The blockchain system is accessible to any who wants to view it, and once a block is included in the chain, the data it contains cannot be changed, thus acting as a virtual public ledger of Bitcoin transactions.” This high level of transparency and the statistical probabilities involved in the codes of the blocks greatly minimize the possibility of fraud.
Bitcoin basics: Wallets, mining & blockchain
Each coin reflects Bitcoin’s current value, but you don’t need to buy a whole one; you can own fractions of a Bitcoin instead. The smallest unit of Bitcoin is called a Satoshi, named after its mysterious developer. One Satoshi equals one hundred millionth of a Bitcoin. This makes it easy and common for people to own small portions.
- Blockchain: Bitcoin organizes transactions into “blocks” and links them continuously. This system assures that every Bitcoin user has a clear and consistent view of ownership and transaction history.
- Private and public keys: A Bitcoin wallet holds two essential keys: public and private keys. These keys work together, allowing the wallet owner to start and sign transactions safely.
- Bitcoin mining: Bitcoin transactions are verified by users through mining. This system ensures that every new transaction aligns with past ones. It prevents issues like spending Bitcoin you don’t own or reusing the same Bitcoin you’ve already spent.
How does Bitcoin minning work?
Bitcoin’s network is all about mining, where participants work to solve computation problems and get rewarded. This arduous process is necessary for checking the efficacy and including more financial transactions in the distributed electronic register.
To enhance an overall system performance miners are rewarded a particular number of new Bitcoins according to the code of Bitcoin inside the mining of new blocks. At present, this popular reward type constitutes 6%. This equals approximately 25 BTC and could amount to nearly $190,000. The founder and the head office of the African cryptocurrency Qudax – Buchi Okoro – also said, “Such is the process of generating new coins, and new transactions are added to the blockchain.”
Whereas such mining was relatively simple for the everyday user in the past, the procedures and methods have become complicated as time passes. The system effectively has to make puzzle-solving harder, and it has to do this in a way that can only be made affordable using ever more powerful computing resources and loads of cheap electricity.
Flori Marquez, the co-founder of BlockFi, who helps crypto investors manage their wealth, elaborates with a parallel saying, “For instance, back in 2009, after getting a stamp, you are rewarded with much more Bitcoin than you receive today. As there are more transactions, you are paid lesser amount of Bitcoin per stamp.” This trend of diminution in recompense for miners is supposed to go
This reveals that the current Bitcoin mining mechanism is challenging, and reward rates are gradually declining. Furthermore, these issues portray the decentralized digital currency ecosystem as a dynamic process improving through technology and market forces.
How to use Bitcoin
In the United States, most people have only one perspective on Bitcoin: the digital currency is an investment and an opportunity to invest in things different from gold and other hard assets. However, some middlemen and merchants also accept Bitcoin as their mode of payment.
Microsoft Corporation, Paypal, and Whole Foods are examples of those investing in Bitcoins. Although these big players have adopted Bitcoin, it is still relevant to say that its adoption is still scarce and to find someone willing to celebrate Bitcoin, and you might have to spend some time searching local shops and sites.
Sure, some providers allow customers to link their debit cards to their cryptocurrency wallets to be closer to regular payment systems. Another function enables users to make transactions similar to using credit cards, with the online service provider converting Bitcoins to fiat currency immediately.
A group of nations exists, primarily those with relatively unsteady national currencies; individuals involved use Bitcoin and other cryptocurrencies instead of their government-sanctioned values. Among other things, the fact that Bitcoin does not require a central authority to stand behind it or confirm the existence of the value has made it an appealing choice for people living in troubled economic territories such as Venezuela, Argentina, or Zimbabwe.
However, before engaging in a discussion, it is important to note that, like any other currency, Bitcoin is subject to certain taxes when used to buy goods and services in the United States.
How to buy Bitcoin
For those desirous of owning Bitcoin, there are ways to do so, including using the Bitcoin exchange. These are marketplaces where people can purchase, trade, and safeguard digital commodities like Bitcoin. Buying Bitcoin is not much different from opening an account with a stock brokerage firm; individuals must provide identification and funds to fund the account via bank account details or debit card.
As mentioned earlier, some leading exchanges supporting cryptocurrency trading include Coinbase, Kraken, and Gemini. Bitcoin can also be bought via major online brokerage platforms such as Robinhood.
Whether one acquires their Bitcoin at an ATM or a different location, it is crucial to have a storage place; this is a Bitcoin wallet. These wallets can also be defined as ‘hot’ wallets, which means those connected to the internet or cloud, and ‘cold’ wallets, which are kept offline or on physical devices. The hot wallets are Exodus, Electrum, and Mycelium, while the common cold wallets are Trezor and Ledger.
However, before proceeding to the guide on buying bitcoins, it will be relevant to make some important notes on the process: Even though Bitcoin is considered to possess a high value, several exchanges provide an opportunity to buy Bitcoin in fractions.
Commission fees should also be a consideration, which, despite being low fractions of the overall price of a security, can accumulatively be high, especially when trading in small lots. Last but not least, deposits/withdrawals in Bitcoins are not real-time as in the case of conventional equity, where the deal is struck in seconds; this is because the Bitcoin network involves miners to authenticate the trades, which may take 10-20 minutes for the transaction to show up in the buyer’s account.
How to invest in Bitcoin
When it comes to Bitcoin, investors can approach digital currency as any other investment, the difference being that Bitcoin can be bought and held with the expectation of appreciation in value. This strategy has gained sympathy recently, especially with the introduction of new retirement accounts such as Bitcoin IRAs.
There are several noteworthy opinions regarding the best investment approach. Some people invest in Bitcoin to make significant gains in the long run, practising the basics of buy-and-hold. Some want to hold them long-term, while others prefer frequent buying and selling based on price movements. Indeed, the fall in the price of BTC has been evident, with the price dropping as low as $5,165 and going as high as $28,990 in just a year to 2020.
In the opinion of one analyst, “The fact of the matter is that it [Bitcoin] is an asset that is going to be appreciating at a relatively fast pace shortly.” The notion explains the low sell-off rates amongst people who have invested in this digital currency: “The majority of people who own this type of currency are those who intend to keep it for a long time.”
This means that for every person who wants to invest in diversifying their Bitcoin exposure, there is more available to them than holding the actual asset. Bitcoin is available to consumers in the form of the Grayscale Bitcoin Trust (GBTC), a mutual fund for Bitcoin; however, they require a minimum investment of $50 000, and as such, they are inaccessible to many American clients. In Canada, the area’s accessibility is increasing, as the Purpose Bitcoin ETF (BTCC) and the Evolve Bitcoin ETF (EBIT) were introduced.
US investors could otherwise invest in blockchain-based exchange-traded funds (ETFs) to invest in the cryptocurrency market. Nevertheless, these crypto-based funds could offset some risks and have less risk than traditional investments. However, they would still be significantly riskier and more expensive than index funds that consistently generate steady returns. Those investors who aim to increase their funds steadily might consider the last option more appropriate.
Should you buy Bitcoin?
Of course, there is cautious optimism about investing in cryptocurrencies, especially among financial specialists. Even though they acknowledge the benefit of digital assets to their clients, they rarely propose them despite their willingness to uphold their client’s interests in them if the clients do not propose them themselves.
According to one CFP in New York City, our biggest issue is if their client wants to invest in crypto and picks an investment that doesn’t perform, they are financially ruined. They can’t send their kids to college because they invested in something that wasn’t worth it.
Due to the high-risk nature of trading cryptocurrency, some planners recommend that their clients invest in it in the same way they recommend that they invest in any other share through a stockbroker. Still, they consider it an “alternative” investment in this case. Dallas CFP says: “Some call it a Vegas account. It should indeed not be what we rely on to achieve long-term goals. It should not cross a certain percentage of the portfolio.”
Currently, investors are advised to avoid investing big money in one company. Advisors compare Bitcoins to particular weaknesses of stocks. Such experts often recommend allocating no more than 1-10% of your investments in Bitcoin if the client has a particular interest in this investment. One should never invest a significant amount of money even in one stock,” says the CFP based in Dallas.
Hot or cold wallet: What’s best for Bitcoin?
If you decide to buy Bitcoin, you’ll need a place to keep it safe. You can store your Bitcoin in one of two digital wallets:
- Hot wallet: You can usually store your cryptocurrency in exchanges where you buy it. Alternatively, some providers offer independent online storage options, which you can access through a web browser, desktop, or smartphone app.
- Cold wallet: It’s a small, portable device, similar to a thumb drive, that lets you securely store and carry your Bitcoins with encryption.
A hot wallet is connected to the internet, while a cold wallet isn’t. However, you’ll need a hot wallet to transfer Bitcoin into a cold wallet for offline storage.
Your call: Is Bitcoin worth investing in?
Investing in cryptocurrency comes with its risks due to its price volatility. A general guideline is assigning a small portion of your overall investment portfolio to higher-risk assets like Bitcoin or individual stocks. Deciding if Bitcoin is a good investment depends on your situation. Here are some pros and cons to consider.
Bitcoin pros
- Cost-efficient transactions and fast speeds: Once you own it, you can send payments anytime and from anywhere, saving time and money on each transfer.
- Privacy: Transactions don’t include personal details like names or credit card numbers. Although it’s possible to link a wallet to a person, these transactions are generally more private than credit card transactions.
- Decentralisation: After the financial crisis and the Great Recession, many investors became interested in an alternative, decentralized currency, something that operates independently of traditional banks, government control, and other third parties.
- Growth potential: Some investors who buy and hold Bitcoin believe that it will gain more trust and wider acceptance as the currency matures, driving its value higher.
Bitcoin cons
- Price volatility: Bitcoin’s value has risen over the years, but how much buyers have profited depends greatly on when they decide to invest.
- Hacking concerns: While supporters argue that the blockchain technology behind Bitcoin is more secure than traditional electronic money transfers, there have still been several notable hacks.
- Not protected by SIPC: The Securities Investor Protection Corporation (SIPC) provides insurance for investors, covering up to $500,000 if a brokerage goes under or if funds are stolen. However, this protection doesn’t extend to cryptocurrency investments.
