What Is Bitcoin? A Beginner's Guide To The World's Most Popular Type Of Cryptocurrency, And Tips For Investing In BTC
The topic of Bitcoin has sparked popularity among conversations throughout the last few months. Particularly, the end of 2020 has depicted a roller coaster for Bitcoin when its price started to surge towards new records.
Preceding an excessive downfall a couple of months prior, the 300% price growth in 2020 has initiated a new conversation on cryptocurrencies, placing Bitcoin on the forefront for what’s to come in the future of trading exchanges.
As it's gaining much attention from investors, this momentum opens great opportunities to gain some in-depth acumen on the basics of Bitcoin, such as how it began, where it is now, and where it’s potentially headed. Much of Bitcoin’s history is simple to understand and great for newcomers in the crypto world and aspirants alike looking to familiarize themselves with the exciting world of crypto trading.
What Is Bitcoin?
Bitcoin is a form of blockchain invented in 2008, an automated form of monetary value that authenticates cryptographic transactions. Cryptography basically means encoding and decoding information and also providing the basis for blockchain functions.
- Blockchain: Bitcoin’s function lies behind an open-source technology called blockchain that develops a decentralized public ledger. Transactions act as “blocks” which attach to the technology and forms “chains.” Chains create permanent records and do not modify.
- Private and public keys: In order to authorize transactions and provide proof of payments, public and private keys are issued to and used by owners through their bitcoin wallet (which are discussed further down).
Bitcoin was one of the initial examples of modern-day cryptocurrencies and is often used as a primary illustration when describing blockchain. Now often abbreviated with its ticker emblem, BTC, Bitcoin can be used to make various online purchases but has gained popularity behind the notion of getting rich through trading the cryptocurrency.
Blockchain records transactions made by cryptocurrencies such as Bitcoin, where it acts as an archive where changes are unable to be made after the transaction has been completed. Solidification of transactions happens through a mechanism known as proof-of-work where miners or experts in computer hardware are able to mathematically predict the cryptographic key for the next bitcoin block in the blockchain, as described by Jimmy Song, educator and bitcoin pundit.
- Miners: Individuals with expertise in computer hardware of P2P platforms that verify transactions through high-speed computers and are often compensated in Bitcoin.
One of the best things about Bitcoin and one of the reasons for its rise in popularity is due to its lack of need for a central government or monetary authority such as a bank in terms of regulatory involvement.
Simon Peters, a market analyst at eToro, describes Bitcoin as an ability to transfer funds freely without the restrictions of a central authority or middleman due to its “open source and decentralized technology.” This allows for no external impact from regulatory institutions that often control fiscal and monetary policies such as banks or governments and grants free movement of funds between parties.
Where Did Bitcoin All Start?
The unique ability for this decentralized form of online cash to diminish the need for central authorities and common middlemen is primarily what kindled the start of Bitcoin. Users were allowed to send and receive information through software-driven technology without any external influence. Initially brought upon in 2008 in a whitepaper following the ideas of Satoshi Nakamoto. The whitepaper, now on bitcoin.org, would constitute the foundation for bitcoin.
It is still unaware if it was one person or a group of individuals that had created the initial technology, dominantly overcoming the double-spending problem risen from many other attempts to create digital money. The solution that Nakamoto came up with for double-spending was the implementation of a time-stamped, immutable transaction ledger, leading us to the blockchain.
Blockchain thus renders each Bitcoin traceable and exclusive and with the blockchain being publicly visible to users, it’s easy to track down any individual Bitcoin and hardly attainable to adjust any part of the ledger.
Since bitcoins aren’t issued or supported by any government bodies or banks, there is a promise of lower transaction fees than online traditional payment methods. This has attracted investors over its short and rising timespan, and many trust that it can change the way we use and perceive money in the future. The benefits of blockchain technology and Bitcoin may hold the potential to change the role of financial institutions and corporate activities for good.
In January 2009 the first Bitcoin block was mined as well as the first version of the Bitcoin software on The Cryptography Mailing List. Going forward after the first block was mined, initial transactions were used for trial purposes. For instance, two pizzas were purchased by developer Laszlo Hanyecz with 10,000 Bitcoins in 2010 before being regularly used for more formal objectives on an international stage.
Following the same period, the first Bitcoin exchange event launched in March 2010. Ever since, the currency has been known for its constant highs and lows in price changes over the years, characterized by its abrupt fluctuations. Nonetheless, since its launch, Bitcoin has boasted positive growth on its long term time scale, keeping eyes locked on what may happen in the future.
Bitcoin reached its all-time high of $41,946, on January 8, 2021. Source: Coinmarketcap
Have You Considered Investing in BTC?
Sceptics On Bitcoin
Many people question Bitcoin’s lack of stability. Speculations and disbelief regarding Bitcoin’s legitimacy existed ever since day one that the cryptocurrency launched. Bitcoin’s structure, its blockchain, is supposedly protected from any infiltration but unfortunately, the currency on its own, is not.
Through investigations that took place in the year 2019, it was revealed that Mt. Gox exchange was heavily manipulating the cryptocurrency marketplace. Mt.Gox was one of the most sizeable, if not the largest, marketplace to exchange cryptocurrency until hackers infiltrated their defences, which led to the loss of 744.408 bitcoins.
However, the reputation of Bitcoin has changed positively, since in 2020, many financial institutions have invested and are continuing to invest in Bitcoin, which has actually increased its price.
Read More: Bitcoin Price Analysis for 2021
Why Invest In Bitcoin?
Although many seem sceptic about placing their bets on Bitcoin, there are, without a doubt many pros when it comes to decision-making. Although it has a short and ongoing timespan since its first launch, it has generated increasingly large returns. Advocates place emphasis on Bitcoin as a new alternative to storing money, and if it grows with more financial institutions being involved, it can grow dramatically in the long run.
Aside from this, the cryptocurrency has been praised for its low transaction costs, opting for a cheaper alternative to international fund transfers, particularly focusing on business activities, without any third-party interference. It may also provide assistance to investors looking to diversify their portfolios as an uncorrelated asset.
“You hear about Bitcoin being the ‘future of money’, and naturally you want to look at the history of money and how we’re gotten to the state that we are in…The more you look at the history of money, and how we’ve gone from the exchange of bars to gold coins, to dollars backed by gold, to what we have now, Bitcoin is the natural transition to the ‘new money.’” — Simon Peters, market analyst at eToro.
How To Invest In Bitcoin?
There are many cryptocurrency exchanges that are now regulated and monitored in line with legal precedents. Some of the most common ones in the U.S. are Coinbase, Kraken, Gemini, Coinmama, among others. There are also a variety of investment platforms and brokerages like eToro, that allow the exchange of cryptocurrencies or the following financial apps; PayPal, Robinhood, and Cash App. These financial applications have sought to be more popular for those looking to focus on investing in Bitcoin.
It’s suggested that Bitcoin wallets are worthy of keeping for those planning on significant volumes of the cryptocurrency. These hardware wallets are simply lightweight, offline computers that manage Bitcoin assets. As for any investment, don’t go overboard with the amount you choose to invest.
Cryptocurrencies have maintained a volatile reputation, and therefore it’s important to assess the risk of the amount you choose to invest, before doing so. With that said, it’s a good idea to consider long-term thought when investing. Bitcoin’s long-term performance over a decade has overshadowed its short-term performance due to its volatility. Watching the stock market and making predictions on future growth opportunities might give you some signs that prices are headed in a good direction; therefore, keep an eye out.
Tips And Strategies Before Investing In Bitcoin:
1. The use of a bitcoin wallet
Bitcoin wallets are essentially miniature hardware wallets, where people store their cryptocurrency. It’s a good solution for those who plan to hold large sums and are looking for a secure option to their assets. Your hardware wallet will have private keys to which only you will have access to and thus ensuring the safekeeping of your investments. They are essentially small, offline computers that allow you to manage your Bitcoin. Many well-known wallet manufacturers include Ledger, KeepKey, CoolWallet, and Trezor, among others.
2. Invest smart
This goes for any investment. However, it’s always healthy to keep in mind, particularly when looking to invest in Bitcoin, that you shouldn’t invest more than what you can afford to lose. Bitcoin has been known for its reputation to fluctuate here and there and without a sign, prices can drop within hours. With that said, there are chances your assets will drop in value over short periods, and therefore, don’t invest any funds you might eventually need for emergency cases.
3. Plan ahead
By mentioning its volatility above and its fluctuations, Bitcoin investments are worth looking into on a long-term basis. Despite its short term tendency to fluctuate in prices, Bitcoin’s performance over the past decade has shown overall positive growth rates. So with that said, unless you’re someone who is looking into day trading, thinking long-term is another risk-averse option for investing into the cryptocurrency.
4. Keep on eye out on the stock market
It’s important when looking to invest in any type of stock, to keep a close eye on the stock market. One of the crucial aspects of investing in any asset form is being able to make predictions on its future performance or outcomes. Bitcoin has presented similar correlation patterns to S&P 500 in 2020, seeing as driven investors were looking toward more risky investments with the current economic climate. It is certain signs such as this that will help factor in toward your overall decision in placing your bets on Bitcoin.
5. Take into consideration tax liabilities
In the United States, bitcoin, among other cryptocurrencies, is taxable. If you plan to resell your Bitcoin for profit, or if you simply plan to spend it at a value that was higher than first bought at (in other words, the currency has appreciated), then you will be liable for capital gains tax. It’s important to keep record of all your transactions to avoid any legal issues further down the road.
There are high hopes for the cryptocurrency widening its adoption globally. Seeing as business intelligence company MicroStrategy recently captured Bitcoin at one of its highest market values and set it to be its primary reserve asset, there’s no doubt on the growth potential for it in the near future. Positive notions have come about from other corporate giants such as PayPal on the potential of Bitcoin, with its recent investment into the cryptocurrency after developing their own trading operation.
It’s unlikely that Bitcoin will be replacing the Euro anytime soon. However, there’s no doubt that the digital future we’re headed towards won’t be keeping an eye on it.
There are low chances that Bitcoin will turn into an entirely adequate currency such as the U.S. Dollar or Euro in the near future, but this doesn’t mean that it’s not headed in the right direction.
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eToro – Best Broker to Buy Bitcoin
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Virtual currencies are highly volatile. Your capital is at risk
- Bitcoin is a new, digital form of money that is traded online through open-source and decentralized technology.
- Transactions are recorded on a blockchain and are publicly available to trace down to every single Bitcoin as a permanent ledger.
- Large corporations such as MicroStrategy are investing vast sums of money in Bitcoin.
- Bitcoin has produced increasingly large returns since its first launch in 2009.
- Low transaction costs without third-party influence make it ideal for cross-border trading and multinational businesses.
- Bitcoin wallet ensures safekeeping of Bitcoin with small hardware computer.
- There are optimistic future predictions seeing Bitcoin hit its all-time high in market value in January 2021.
- Bitcoin is taxable, so one must be aware of tax consequences when investing in Bitcoin.