What is Bitcoin?
Bitcoin is the world’s first-ever cryptocurrency that was launched in 2009. Cryptocurrencies are basically a digital form of money that exists purely as computer code, with no physical alternatives. The prefix ‘crypto’ comes from the word ‘cryptography’ and refers to an encryption technique designed to secure transactions. In Bitcoin’s case, the underlying technology is blockchain, which is essentially a public distributable ledger where transactions are stored. All transactions performed by Bitcoin are stored securely and transparently on the public blockchain. When Bitcoin was first launched, it was dubbed as the future of money. It has since grown to be the most important cryptocurrency and has led to the emergence of numerous other crypto coins and tokens. Bitcoin is now accepted as a medium of exchange in many places, but it can be said that it is still not yet mainstream. However, its value has grown immensely since 2009 when it was worth just a few cents to the dollar to a high of over $65,000 in 2021. While it is debatable that Bitcoin will eventually be the future of money, there is no doubt that it has become an excellent digital store of value.
How Does Bitcoin Work?
To understand how Bitcoin works, it is important to understand the concept of blockchain and mining. Blockchain is literally a ‘chain of digital blocks’. Every ‘block’ contains information about each and every Bitcoin transaction that is performed. Based on this, blockchain is a public ledger that contains entries of every transaction performed. Anyone can view entries entered on the public ledger. Transactions are added to the blockchain through a process known as mining.
What is Bitcoin Mining?
When you perform a Bitcoin transaction, it will be added to the blockchain after it is confirmed. The process of confirming Bitcoin transactions is what is referred to as mining. Mining is especially important in Bitcoin because after a transaction has been recorded on the blockchain, it can never be altered again. The process of mining involves solving mathematical puzzles and this can be done by anyone. There are, however, enhanced computers designed to mine Bitcoin more efficiently. After mining, the miner adds a block of the transaction to the blockchain, and the transaction is then final and permanent. Miners are incentivized to mine by being given new coins. This means that it is by mining that new Bitcoins are generated. However, there will only ever be 21 million Bitcoins, with the last coin set to be mined by 2140. Each Bitcoin is divisible to 8 decimal places, with the smallest unit referred to as a ‘Satoshi’- the term refers to the mysterious founder of the cryptocurrency who goes by the name Satoshi Nakamoto.
How is Bitcoin Stored?
As a digital asset, Bitcoin is stored in digital wallets. Cryptocurrency wallets can either be online or offline, hardware or software. Every crypto wallet has public keys and private keys. Your public keys can be seen by anyone, and they are essentially how you are identified on the blockchain. You will, however, need your private keys to access or perform any transaction with your coins. To understand the concept of public and private keys, consider Bitcoins as an email service. Your email address is your public key, or how you are identified on the email platform, and anyone can see or have it. Your private key is then your password that you will need to access, read or send an email, and only you should have access to this password. If you lose your private keys, you have essentially lost your Bitcoins. Bitcoins can also be lost due to hacking or by physically losing the hardware that holds your coins.
Online wallets are probably the most common way people store their Bitcoins. There are different types of online wallets (also known as hot wallets) and they run on computers or mobile devices, either as software or web-based wallets. There are also exchange wallets, where crypto exchanges provide custodial accounts that hold your coins. Hot wallets are considered less secure than cold wallets. This is because they run on the Internet and they may be vulnerable to hacking. They are, however, considered a faster way to access and transact using Bitcoin.
On the other hand, cold wallets are offline and hardware based. They are typically USB drive devices and are considered the safest way to store Bitcoins. This is because they are not connected to the Internet and therefore, they are not vulnerable to hack attacks.
How to Buy Bitcoin?
When Bitcoin started, the only way to buy the coins was through cryptocurrency exchanges. In most exchanges, Bitcoin can be bought using popular payment methods such as debit/credit cards, bank transfers, and even popular eWallets such as PayPal. On the exchanges, all Bitcoin buyers will be required to open and secure their crypto wallets.
Another popular way to buy Bitcoin is using peer-to-peer Bitcoin trading sites. At these sites, traders are allowed to buy and sell Bitcoin among each other. These sites have grown in popularity because local traders can easily contact each other and exchange Bitcoin using convenient local payment methods.
Bitcoin can also be bought via Bitcoin ATMs. Bitcoin ATMs look like traditional ATMs, but they are not linked to any bank. They are typically connected to crypto wallets or crypto exchanges. At most Bitcoin ATMs, Bitcoin can be bought using cash or debit/credit cards.
How to Trade and Invest in Bitcoin?
There are various ways to be exposed to the lucrative returns of Bitcoin. The methods discussed above allow investors to own coins and hold them for the long run with the hope that the cryptocurrency will continue to rise in value. This is, however, not the only way to be exposed to Bitcoin.
Bitcoin has now become a mainstream financial asset class and there are various derivatives designed to capture the returns of the cryptocurrency. Investors who believe that owning coins is inherently risky can buy stocks of companies that are investing in that space. Stocks that can be bought, for example, are of companies that mine Bitcoin, transact in Bitcoin, or even crypto exchanges.
There are also Bitcoin CFDs which give investors a great way to trade the coin. A CFD (contract for difference) is a financial derivative product that pays the difference between open and closing prices of assets. It allows an investor to speculate on price changes of an underlying asset without owning it. So essentially, if you make a correct price prediction, the CFD broker pays you in the form of profits; but if you make a wrong price prediction, you pay the CFD broker in the form of losses. CFD brokers have been around for a while and they operate in a heavily regulated space. It is important to note that with CFDs, you can earn money whether the price of Bitcoin goes up or goes down – it all depends on the prediction that you made.
What is the Difference between Investing and Trading Bitcoin?
When you invest in Bitcoin, you essentially believe that the cryptocurrency has positive fundamentals, and it will continue to grow in value. A Bitcoin investor is generally in for the long haul and will typically view price dips as opportunities to buy more coins. A Bitcoin trader though speculates on the ever-changing prices of the cryptocurrency. Bitcoin is a very volatile asset, with prices capable of swinging heavily in both directions. A trader seeks to capture profits from both up and down price swings.
Bitcoin supply is capped. This means that there is a high ceiling on its price over time.
Bitcoin is anonymous. While the public addresses are public and visible, the owners of the addresses are anonymous.
Bitcoin is decentralized. It is not controlled by any government or bank or any other third party.
It is very accessible and highly liquid. Crypto exchanges have made it easy to buy and sell Bitcoin.
Bitcoin can deliver high potential returns. The price of Bitcoin has climbed from below $1 in 2009 to over $60,000 in 2021.
There is no threat of inflation with Bitcoin. Unlike traditional money which can literally be printed by central banks and devalued, there will only ever be a fixed number of Bitcoins.
Growing demand. Bitcoin is continually enjoying massive adoption and acceptance, both by governments and the public.
Bitcoin is highly volatile. The cryptocurrency has wild price swings that limit its ability to be used as a reliable means of exchange.
Transactions are permanent and final. There is no recourse if you send coins to the wrong address.
Regulatory Challenges. Although adoption is growing, there is always the threat of negative regulation impacting the price of Bitcoin.
Illicit Use. Due to the anonymity and ability to move money across the globe, Bitcoin is easily used to fund various illegal activities.
Future Outlook of Bitcoin
Bitcoin has become a phenomenon no one could have imagined possible when it was launched a little over a decade ago. Its proponents view it as the solution to the inherent limitations that traditional money systems face. Bitcoin is also backed by the revolutionary blockchain technology that continues to be extensively adopted in various sectors. Bitcoin was the first-ever cryptocurrency and the first-ever public blockchain. It has given rise to numerous other cryptocurrencies and has already taken its place as the “digital gold”. It is believed that wherever the cryptocurrency or blockchain goes, extensively will continue to command its high value and respect as the pioneer. Already major companies, such as Tesla and PayPal, have adopted Bitcoin, and if more join up, the cryptocurrency will only climb higher. For many Bitcoin lovers, the cryptocurrency has been a success and it can only get better with more legitimacy coming its way.
But not everyone is optimistic. Critics believe it is useless as both a medium of exchange and a store of digital value because of its price volatility. They view it as another ‘tulipmania’ craze, a bubble that will eventually burst. Skeptics have also questioned the idea that the currency is decentralized. The majority of mining rigs are centralized in China, which essentially gives the Chinese government a lot of control over the future of the cryptocurrency. Criticism of Bitcoin also comes from within. There are concerns that its blockchain is lanky and outdated, and that it is only a matter of time before another altcoin takes its place. There are various promising crypto projects, and it is believed Bitcoin is holding its value due to sentiment rather than fundamentals.
The future of Bitcoin is very much in question. Where some see unlimited potential, others only see unlimited risk. The truth, however, is that the revolutionary blockchain technology will continue to be around – it is its application that will determine the eventual fate of Bitcoin and other cryptocurrencies.