Crypto Guide: What is Bitcoin Currency?
What is bitcoin? Many people who hear of bitcoin for the first time find it hard to comprehend what it actually is and how it functions as a currency. After all, bitcoin, commonly denoted as BTC or XBT, doesn’t function like a traditional fiat currency or investment vehicle at all.
With humble origins dating back to the financial crash of 2008, bitcoin has now gone mainstream. Many people unfamiliar with investing have still heard of bitcoin due to its attention in the media. In 2022, bitcoin is the king of all cryptocurrencies, holding the top spot with a nearly $420 billion market capitalization.
Bitcoin has since spawned thousands of other cryptocurrencies, inspired by the revolutionary blockchain technology that has drawn billions in investment from around the globe.
But why is bitcoin so immensely popular? If you’re looking for a bitcoin guide or a comprehensive bitcoin explanation, this article is exactly what you need.
Bitcoin images like this one are merely symbolic of the real bitcoin currency, which is completely digital and intangible.
What is Bitcoin / Bitcoin Explained
Bitcoin is a digital or virtual currency that is created (mined), stored, traded, and transferred electronically. Bitcoin (BTC or XBT) is not regulated by any central bank or central authority and can easily be transferred between individuals or businesses around the world without any oversight.
The pace at which bitcoin can be mined and also its maximum supply is limited by means of the SHA-256 decreasing supply algorithm. This basically means that it becomes progressively harder and harder to mine bitcoin, known as ‘halving’.
The SHA-256 algorithm also limits the amount of bitcoin that can be mined to 21 million units, with the last bitcoin expected to be mined in the year 2140. This mechanism is good for the price of bitcoin because it limits supply while demand, in theory, increases exponentially.
Bitcoin has become a powerful financial instrument that is traded and speculated on more and more every day.
*Learn how to trade bitcoin here.
Who Invented Bitcoin?
An anonymous mastermind with the pseudonym Satoshi Nakamoto invented a powerful peer-to-peer money transfer system in 2009, based on decentralized blockchain-ledger technology.
A blockchain ledger is a digital, decentralized ledger that is distributed between numerous nodes (computers). The record of a particular transaction cannot be altered without changing the subsequent blocks, which are linked to the block that contains the record of that particular transaction. Because of this, a public, fully digitized, fully validated database of every transaction is formed that is immutable, ie. it cannot be changed after it’s been created.
Nakamoto created a decentralized currency like the world had never seen before, inventing a new way to send currency between friends, relatives, or even unknown entities who can remain anonymous.
The first genesis block was mined in January 2009, and the world has never been the same since.
Why was Bitcoin Invented?
Bitcoin was invented to provide a means of transferring money electronically without being governed by a central authority. The purpose was to enable quick and cheap peer-to-peer money transfers with a reliable decentralized system that effectively prevents double-spending.
Double-spending simply means spending the same bitcoin (or amount of bitcoin) twice. Double-spending can be a problem with digital cash transactions because each portion of digital currency has a digital file that can be duplicated and used to spend the same ‘coin’ more than once if proper precautionary measures are not taken.
With traditional paper money, this is not a problem. For example, a kid who hands out a $10 bill for some sweets at a candy shop can in no way spend the same $10 bill again because after the transaction is confirmed, the bill is no longer in his possession.
Bitcoin uses an effective confirmation mechanism that records every transaction performed on the blockchain, giving it a time-stamp and unique transaction identifier. Every transaction that has ever been done on the bitcoin network is organized chronologically in ‘blocks’, and a log of digital signatures accompanies every bitcoin transaction, tracking the ownership path by which the currency has been transferred.
If someone tries to simultaneously spend the same bitcoin twice, only one transaction will be confirmed, with the other one being rejected. The only way to double-spend is by ‘forking’ bitcoin, which creates an entirely new, essentially worthless cryptocurrency.
Blockchain Technology / Decentralized Blockchain Ledger
The whole bitcoin network is managed by a distributed ledger that uses blockchain technology to keep account of transaction paths and to prevent double-spending.
The ledger is maintained by thousands of nodes or computers that process the transactions on the network and receive a reward (bitcoin and, in some cases, transaction fees) for their processing effort (after the ledger information is organized and placed in new blocks in the blockchain and a valid hash is found). These nodes perform what is commonly known as bitcoin mining.
The bitcoin blockchain ledger made easy:
- A ledger is an account book, register, or log, like an accountant would use.
- The entire bitcoin ledger or registry of transactions is accessed by the different computers (nodes) all around the globe simultaneously.
- The ledger is continuously updated, which means every computer is always ‘looking’ at the most up-to-date version.
- When a transaction is initiated on the bitcoin network, the action is distributed between all the computers on the network.
- The computers that process the transaction verify it with other computers on the bitcoin network to make sure the transaction matches up.
- When the transaction is finally verified, it is packed into a block of data which is made up of several bitcoin transactions.
- The blocks are like the links of a chain. When a block is completed, it is attached in chronological order to the existing blockchain.
- When transactions are confirmed and added to the blockchain, they cannot be reversed. Blocks cannot be removed or replaced. When a block has been added to the blockchain, it is final.
- Mining then begins on the next block, and the process repeats.
Limited Bitcoin Supply
The decreasing-supply algorithm that governs bitcoin mining and other activities places a limit on the pace at which bitcoin can be mined. It also limits the total bitcoin supply to 21 million. It is estimated that the last bitcoin will only be mined in 2140. The limited supply of bitcoin helps to support its price and is exactly the opposite of how the supply of fiat currencies works in many cases.
Bitcoin Market Capitalization and Trading Volume
The bitcoin market cap fluctuates all the time. At one stage in October 2017, it was more than $95,000,000,000, or $95b. It’s since more than tripled to stand at nearly $420,000,000,000, or $420b.
Bitcoin has an impressive daily trading volume of about $35b as of July 2022. Although it’s a big number for a cryptocurrency, it’s very small compared to something like EUR/USD, with a massive daily turnover of more than $1.1t.
Bitcoin, in theory, can be transferred from one bitcoin wallet to another with minimal transaction fees. However, these fees depend on the activity on the network. If there are many transactions, like during a strong bull market, the blocksize increases, with the option to pay higher fees to get transactions through the network quicker.
During quieter times, fees are generally around a few dollars. As you can see in the chart above, at its peak in mid-2021, fees were an extortionate $62.
This fee depends on how much is being sent, but this has less of an impact than you’d think. It all depends on the size of the transaction in bytes and how quickly you want the transaction to move through the network; transactions with higher fees are prioritized.
How do transactions occur?:
- The transaction is validated by every node with a copy of the blockchain, which checks that your wallet has enough bitcoins to complete the transaction.
- After the transaction is validated, it goes into the Memory Pool, a waiting room of sorts where a transaction waits for miners to add it to a block. This is the ‘unconfirmed transaction’ stage.
- Once it’s added to a successfully mined block, the transaction is then confirmed.
How to Bitcoin…
How to Buy Bitcoin with Fiat Currencies (Dollars, Pounds, Euros, etc.)
To pay for something with bitcoin or to send bitcoin to someone, you first need to have some bitcoin. To receive a bitcoin payment/transfer you only need to set up a bitcoin wallet and provide the bitcoin sender with your wallet’s address.
Parties who need to fund their bitcoin wallets can convert fiat currencies to bitcoin in different ways:
1. Cryptocurrency/Bitcoin Exchanges – Open an account with a reliable cryptocurrency exchange, like Binance, Kraken, or Coinbase. After depositing money via your credit card, debit card, or a wire transfer (electronic funds transfer), you can then trade it for bitcoin on the exchange. Once you have bitcoin, you can send it to anyone who provides you with a valid bitcoin address. You can also receive bitcoin payments into the account you have with the cryptocurrency exchange with your unique wallet address. Some cryptocurrency exchanges offer the option of converting bitcoin and certain fiat currencies to other cryptocurrencies besides bitcoin. Ethereum, the second most popular cryptocurrency, and its BTC pair, ETH/BTC, is a good example of this.
2. Bitcoin Marketplaces – Bitcoin can be acquired with cash, credit cards, wire transfers, etc, by locating individuals in bitcoin marketplaces who want to sell bitcoin. These marketplaces, like LocalBitcoins or Paxful, facilitate direct trade between individuals. More often than not, there will be dedicated sellers on these platforms that you can take your pick from. Sometimes, the transaction can even be conducted in person, if you wish.
Bitcoin can be bought in many different ways with fiat currencies in bitcoin marketplaces, including cash and bank wire transactions.
3. Bitcoin ATMs – Bitcoin ATMs are popping up around the world. To buy bitcoin with cash at a bitcoin ATM requires the following steps:
How Do I Sell Bitcoin With a Bitcoin ATM?
- Select ‘sell’ when prompted by the ATM.
- Choose the amount you want to sell in bitcoin and request to withdraw in cash
- Scan the QR code that is presented to you, either on screen or on a receipt printed out
- Wait for the transaction to become confirmed. This wait can vary, depending on a few factors, like quantity sold. Some machines will send you a text telling you your cash is ready; some require you to come back and scan a QR code on your receipt.
- Redeem and withdraw your cash.
Bitcoin ATMs allow people to buy bitcoin with cash.
About Bitcoin Wallets and Exchanges
One of the main differences between bitcoin wallets and exchanges is that with an exchange, fiat currencies can be converted to bitcoin and the other way around. These exchanges generally offer a selection of other cryptocurrencies to buy and sell too, ranging from a handful to hundreds.
These exchanges will usually give you a unique address that can send and receive BTC, enabling you to use it like a regular bitcoin wallet. However, be wary of keeping funds on exchanges, as hacks do occur, and you might not get your money back.
Types of Bitcoin Wallets
Bitcoin clients function in the same way as the original bitcoin wallet, BitcoinQt, which is now called Bitcoin Core. Bitcoin Core is a ‘full client’ or a full node client that requires strong computing power. It’s the most reliable wallet but is slow and not ideal for the casual user.
When Bitcoin Core is downloaded, the whole blockchain is downloaded to your computer, which can be dozens of gigabytes. Lightweight clients like Electrum are easier to use and can even be operated from a smartphone.
Other Desktop Wallets
Desktop wallets other than Bitcoin Core include Armory, Electrum, Bither, and Wasabi. For a full list, check out bitcoin.org’s directory.
Mobile wallets, like Edge, Mycelium, or Unstoppable, are bitcoin wallets that are installed on your smartphone, and these are often lightweight and agile. A great feature of these wallets is that they allow you to quickly scan QR codes for easy transactions.
Paper wallets are a reliable form of cold storage where bitcoin can be stored safely. Paper wallets basically have the public address of your bitcoin wallet (which you need in order to receive bitcoin transfers) and the private key that can recover your wallet. In order to spend these bitcoins, one must ‘sweep’ the private key into an active wallet, which loses the benefits of cold storage. Still, paper wallets are a very secure way to hold bitcoin.
Online wallets offer perhaps the easiest way to create a wallet, with many giving you an address within minutes. No need to download the blockchain; just log in and start sending and receiving. One of the most popular options is Blockchain.com
With this option, your private keys are stored on the website’s server, which means recovery of your wallet, should you lose access, is easy if you’ve stored the private key yourself. However, you may lose control over your private keys if the online service provider doesn’t take the necessary precautions to secure them.
Hardware wallets like a Ledger or Trezor can facilitate secure bitcoin payments and store private keys electronically, without ever actually exposing them. The main benefit of using a hardware wallet is that secure bitcoin transactions can be done on a computer that might not be secure.
Another advantage is that parties with large amounts of bitcoin can safely store bitcoin and execute bitcoin transactions without having to rely on third-parties for security. Hardware wallets are the best option for anyone seriously considering holding and storing bitcoin
Can Bitcoin be Lost or Stolen?
Yes. There have been many hacks in the crypto world, with Mt. Gox being the most infamous. In the Mt. Gox scandal, 740,000 bitcoins were stolen from the exchange’s customers – 6% of all bitcoin in existence. This was worth $460 million at the time, or $16.2 billion as of July 2022.
There have also been many, many cases of users losing their private keys or the USB where they stored their private keys. These losses have ranged from a couple of hundred dollars to millions.
Generally speaking, as long as you employ strong cybersecurity measures, your bitcoins are at a very low risk of being stolen. Of course, a hardware wallet is always the best way to store your bitcoins if you still want to transact them regularly.
Why is Bitcoin so Popular?
- Cheap and fast transactions – Bitcoin transactions are generally cheap to carry out. To move $1,000,000 worth of bitcoin from South Africa to Hawaii (Hawaii is basically antipodal to South Africa) can be done for less than $10… in less than an hour. Now that’s awesome!
- Anonymity – There are no names attached to wallets. While they can be traced when a wallet is linked to a verified person’s wallet, in theory, one could perform a transaction completely anonymously.
- Low risk of fraud – As mentioned, the only way to fraudulently transact bitcoin is by stealing it. Other than that, double-spending and other fraud is virtually impossible.
- Lack of centralization – No longer are banks needed as an intermediary to transact across the world. There are no taxes or dependence on a larger authority in the bitcoin world.
- Extreme price volatility and price escalation – Large volatility provides an opportunity for excellent speculative and investment growth.
- Growing adoption – as institutions, central banks, and even entire governments adopt bitcoin, the price is likely to grow. This attracts many sold on the prospect of high returns for years to come.
Fast bitcoin transactions have drawn many users to this amazing cryptocurrency.
Could Bitcoin ‘Crash and Burn’?
It’s definitely possible, but due to the overall increasing confidence in bitcoin and its immense popularity, a major crash is not likely to happen very soon. Famous skeptics, like Warren Buffett, predict bitcoin will eventually return to $0; some see the value but feel physical assets like gold will always trump digital assets and are wary of the prospect of long-term growth.
Generally speaking, a catastrophic event would need to play out in the bitcoin world for the price to sink to $0. There are currently 250k bitcoin transactions every day; for bitcoin to fall that far, that number would need to significantly fall.
Is Bitcoin a Safe-Haven Asset?
Many people consider bitcoin to be a great store of value and a hedge against central bank failure. Considering the volatility and relatively thin liquidity of bitcoin (especially when compared to major currency pairs), most financial industry professionals don’t consider it to be a solid safe-haven asset. Gold and the Japanese Yen are examples of widely accepted safe-haven assets.
A major drawback of bitcoin is that it has very little intrinsic value besides being a store of value. This is why some call it digital gold, despite gold having other uses in manufacturing and the like. Perhaps it will become more of a safe-haven in the future, especially if its volatility decreases and its liquidity increases. Or perhaps bitcoin will be history sometime in the future; it’s impossible to know for sure.
One thing that bitcoin bulls point to as a demonstration of bitcoin’s safe-haven status is the recent adoption as an accepted currency in El Salvador and the Central African Republic (CAR). In El Salvador, the government adopted bitcoin as legal tender in June 2021, hoping it would relieve some of their economic woes.
Protests were made by both citizens of El Salvador and the worldwide community, concerned about the overall lack of internet access in the country. Still, the government, led by a young president, pressed on.
Following bitcoin’s peak in November 2021, prices have fallen by 70% as of July 2022, and El Salvador’s bitcoin coffers have fallen in value by around 50%. Not so good when the country has $1b in debts it needs to pay over the next year.
While some praise the government for this experiment, others point to question bitcoin’s capability as a safe-haven asset. Gold has long been used to back part of the Swiss Franc and has never experienced this level of volatility and uncertainty over the long-term value of its reserves.
Bitcoin Investment / Bitcoin Speculation
Bitcoin has been an awesome investment vehicle that has filled many investors’ pockets with handsome gains. The Winklevoss twins, the same who split from Mark Zuckerberg during Facebook’s founding, invested approximately $11m in bitcoin in 2012 and 2013. This made them billionaires, becoming a $6b fortune.
The buy-and-hold strategy, or ‘hodling’ as it’s otherwise affectionately known by the bitcoin community, has been a popular bitcoin strategy that has performed great so far. Obviously, this depends on when you invested, but generally speaking, it’s the best way for investors to get involved with bitcoin.
Bitcoin can be traded on forex trading platforms and bitcoin exchanges for speculative or investment purposes. On cryptocurrency exchanges, bitcoin can typically be bought with fiat currencies or other cryptocurrencies.
When trading bitcoin on forex trading platforms, traders and investors typically engage in contracts for difference (CFDs) trades and don’t ‘physically’ own bitcoin, unlike exchanges. Profits or losses are calculated on the fluctuation of the underlying bitcoin price and credited or debited to the traders’ trading accounts.
Trading bitcoin CFDs with forex brokers may have advantages over trading it on bitcoin exchanges. Some of the advantages include access to deeper liquidity in some instances, security because the bitcoin is not owned (and can therefore not be hacked), proper broker regulation, the ability to short bitcoin, access to stop loss, take profit, and other orders, and advanced charting and trading tools.
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Bitcoin can also be traded on social trading platforms like eToro and ZuluTrade with CFDs. On these platforms, investors can copy the trades of cunning traders directly and automatically into their trading accounts. Follow this link for in-depth information on trading bitcoin and other cryptocurrencies with eToro.
eToro USA LLC does not offer CFDs, only real crypto assets.
Investors and speculators can trade numerous cryptocurrencies besides bitcoin. Some of the most prominent cryptocurrencies include Ethereum, Litecoin, Ripple, Cardano, and Solana. Of course, there are other ways to invest or speculate in the financial markets and traders can easily access foreign exchange, stock, bond, interest rate, commodity, options, and futures markets, online.
*Learn how to trade ether (Ethereum)
Popular Bitcoin Rumours
There are often rumours that bitcoin will either crash or become much more expensive. Bitcoin has made numerous sharp pullbacks throughout the years but has continued to trade higher. Who knows where the price of bitcoin will go in the future? Some say bitcoin will hit $1,000,000 before 2030. Others bargain on $100,000 by 2027. Let’s see what happens…
Bitcoin in Perspective
One thing about bitcoin is certain – it has outperformed all ‘traditional’ investment products since it was invented. However, it should be noted that it might not do the same in the next few decades. Perhaps it will, but how long will money flow into some a virtual currency of which the only intrinsic value is its value as a medium of exchange and store of value.
Experienced investors maintain balanced portfolios. Is all of your money in bitcoin?
When it comes to trading and investing in bitcoin, proper risk management should be exercised at all times. There is potentially a lot of money to be made with bitcoin trading, but traders should exercise prudence when trading it. The price of bitcoin is very volatile, and risk needs to be managed carefully. The following investment rules should be applied when trading or investing in bitcoin, or any cryptocurrency:
- Don’t risk all of your money on bitcoin.
- Only invest or trade with money you can afford to lose.
- Trade with the prevailing trend.
- Don’t use much leverage, if any.
In terms of intrinsic value and other aspects, bitcoin is completely different from traditional assets like fiat currencies, stocks, and commodities. Nevertheless, bitcoin has outperformed all of these asset classes by far and may continue to do so for quite a while. Bitcoin’s extreme volatility and persistent trending behavior make it a grand champion in the trading arena to those who have an appetite for explosive gains.
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