Bitcoin has been a global phenomenon over the past two years. Even though it has existed for over a decade now, it came under the spotlight in 2017 when its price went from just under $1,000 per coin in January to a whopping $20,000 in December.
It was a crazy ride, so to speak, and the hype was surreal. Major news outlets, WSJ, CNBC, and Forbes started dedicated cryptocurrency and Bitcoin news coverage, but it was just too good to continue like that. With the start of 2018, Bitcoin (BTC) prices started to tumble, and while there were short-lived surges, the overall trend was bearish (negative), and Bitcoin ended the year around $3,300.
During all the hype, coverage, money-making and money-losing, few stopped to learn about Bitcoin. If you’re here to know what is Bitcoin and how to invest in it, you’ll get some answers, but only you can decide if you SHOULD invest in it or not.
This is not meant to be a comprehensive guide (the topic is too vast for that) but I will do my best to cover all the basics required to understand Bitcoin, how it works and so on.
What is Bitcoin
While the technical jargon can be overwhelming, we will try to keep it simple. Bitcoin is a cryptocurrency, a unit of data on a database (the Bitcoin blockchain), which can be transferred and exchanged between users.
In order to make these transfers and exchanges fair, reliable and unchangeable, cryptographic principles are used to design a mode of network operation, which relies on a user sending a Bitcoin (or a fraction of it – in Satoshis) to another, and several other users (miners and nodes) validating, processing and recording the transaction into the ledger (database/Bitcoin blockchain).
When a transaction is sufficiently verified by a number of other users (who profit from their contribution), it becomes permanently (in theory) recorded on the blockchain for perpetuity (in theory again).
Who created Bitcoin?
Bitcoin’s creator is unknown and chose to remain anonymous, using the pseudonym Satoshi Nakamoto. Many believe it is not one person but a group, however, over the years, several individuals have claimed to be Satoshi Nakamoto, including the infamous Craig Wright (whose antics you can witness on Twitter).
Can Bitcoin be cloned or copied?
Yes, as a matter of fact, it has been cloned and copied several times, and often with minor changes (as is the case with Litecoin), the resulting coin can offer additional features (like faster transaction settlement or privacy features and so on).
However, the real strength of Bitcoin lies in its network and global support (the number of active nodes, miners and wallets), which cannot be copied or cloned. Hence, just like you can clone an iPhone but not Apple’s brand and distribution etc, you can clone Bitcoin but it cannot replace the original.
Can Bitcoin be hacked or stolen?
Bitcoin itself cannot be hacked (practically), but wallets where Bitcoins are stored, or exchanges which store them can be hacked, and yes your Bitcoins can be stolen if someone has access to your private key (discussed later in this article).
Holding or having Bitcoin is like having cash, if someone gets access to your wallet, they can easily take it all out and you will not be able to retrieve it by reversing the transaction.
How does Bitcoin mining work?
Bitcoin mining is the process of solving complex mathematical problems in order to claim the right to process a block on the Bitcoin blockchain and receive the block reward (which is currently 12.5 Bitcoins). Bitcoin is a cryptocurrency which requires proof of work (PoW), which is why considerable computing power is required to successfully mine a Bitcoin block.
As more and more miners join the network, the competition for each block increases, and hence you need more computing power than the next guy to have a shot at claiming the block reward. This is why Bitcoin mining is now done by pools (combined computing power) and large-scale mining companies.
What is Proof of Work and Proof of Stake?
Proof of Work and Proof of Stake are two of the most common consensus protocols used by cryptocurrencies (there are more consensus protocols like delegated proof of stake and so on). A consensus protocol is a set of rules designed to ensure uniformity and agreement between all the nodes and devices in the network.
The rules for consensus are set before a cryptocurrency is created, and these work as a self-auditing system to ensure that the data stored on a blockchain is the agreed upon version by the majority of the network participants.
A very good guide on Consensus Protocols is available on Lisk Academy and you can read it here.
How is Bitcoin price determined in US dollars
Bitcoin is not intrinsically priced in US dollars. It is just a medium of exchange, a token, which only has value because of the market forces of supply and demand. When Bitcoin was originally created by the anonymous Satoshi Nakamoto (a pseudonym), it was designed to have a limited supply of 21 million coins.
New Bitcoins are only created when miners (users we mentioned above as the ones who verify and process transactions) are rewarded for their work. The Bitcoin blockchain is updated every 10 minutes when new blocks (sets of transactions) are processed by miners. Each block processed by a miner gives out a reward of 12.5 Bitcoins currently, and these are added to the circulation (as newly created Bitcoins).
Miners then spend Bitcoins or sell them to recover costs and profit from their work, and this spurs on the Bitcoin economy. Whether Bitcoin price is at $20,000 or $1,000 is mostly dependent on market sentiment and hype. Bitcoin price is essentially speculation driven and goes up as people start losing trust in traditional currencies.
The chart below shows the real-time Bitcoin price in US dollars.
What is so good about Bitcoins?
You’re probably wondering what is so good about Bitcoins? After all, it just seems like internet play money. Well, it kind of is. Except that its design makes it more than just play money. Unlike virtual currencies in video games, Bitcoin cannot be created or changed arbitrarily. Even fiat currencies (USD, EUR, GBP) are created, mostly arbitrarily, by central banks.
However, Bitcoin is managed by code, and the code is the law for blockchain based cryptocurrencies. The beauty of Bitcoin and other, large-scale cryptocurrencies, like Ethereum, Litecoin (and not XRP), is that they are created according to set rules, cannot be forged or manipulated. You do not need a government’s approval or bank account to own, hold or transfer Bitcoins (and other cryptocurrencies). It is truly a currency (not necessarily of value), that you control completely, and fully.
Investing into Bitcoins
Before you ask how to invest in Bitcoins, ask should you be investing into Bitcoins? The reason why most people buy Bitcoins is that they think it will make them rich. After all, those who bought Bitcoins back in 2011 or 2013 became millionaires in 2017 when its price crossed $1,000, let alone $20,000. However, that is not a guarantee, as with most things in life (and financial markets), what goes up can come down and markets are unpredictable.
Crypto markets and Bitcoin is even more unpredictable and volatile than other financial instruments. These are markets which run 24/7, across the world, and are largely unregulated and unchecked. This means there is a lot of fake trading activity and large-scale market manipulation, where whales (people who hold millions in Bitcoin) can easily move the price up or down to profit from long and short orders.
This shouldn’t discourage you completely though. The point here is that you should understand the risks completely before you invest into Bitcoins. At the end of the day, if you feel digital currencies are the way to go (as the global economy worsens and fiat currencies weaken), you can invest in Bitcoin, just like you may invest in gold, but with Bitcoin, the risk and reward, both are very high.
How to invest in Bitcoins
If you’ve made the decision to invest in Bitcoins, the next steps are rather simple. You will need to first get a Bitcoin wallet. Starting a wallet is simple, but the critical step is securing the private key.
Setting up a Bitcoin wallet
There are several reputable Bitcoin wallet services, and I would recommend the Blockchain.com Bitcoin wallet (always check the site address to make sure you’re not redirected to a fake site).
Setting up your wallet is easy, and you can even download an Android or iOS version of the wallet app on your phone.
When you are setting up your Bitcoin wallet, there will be a step where the service asks you to securely record and save your private key and mnemonic seed phrase. The seed phrase is a set of words (for easy entry and recording) that correspond with your wallet and allow you to recover or restore a wallet in case you forget your password or lose your phone/delete your app.
Needless to say, the seed phrase should not be saved on your computer (in case you get hacked) and is typically recorded on a paper which is then kept away safely. It is always a good idea to test your seed phrase after recording it to make sure you didn’t make any mistake in noting it down.
Once your wallet is set, you will receive a wallet address, which is your public key – meaning the key you send to others when you want to receive Bitcoins.
Signing up with an exchange
Next, you need to sign up with an exchange which sells Bitcoin for USD. The easiest for American and some European users is Coinbase, which allows you to purchase Bitcoins via USD transfers. LocalBitcoins is also a good option if you don’t have access to Coinbase.
Signing up with these platforms is simple and you will need to provide some identity verification in order to be able to buy Bitcoins with wire transfers and credit cards.
It is important to realize that you don’t have to buy a full Bitcoin at any time. You can easily buy any fraction of it, such as 0.1 BTC and so on. Exchanges like Coinbase also have other options, like Litecoin, Ether, XRP and more.
Withdrawing to your wallet
Once you’ve successfully purchased a Bitcoin (or a fraction of it) from an exchange, you just have to withdraw it to your wallet (which you created earlier). This is where you use your public key (not private key) to withdraw Bitcoins to, and they should appear in your wallet shortly afterward (usually in 10 – 20 minutes).
You can track the progress of any transaction in or out from your wallet by using a Bitcoin blockchain explorer like this one. Just type in your wallet address in the search bar and you will be able to see any incoming or outgoing transactions and the number of verifications next to it.
Selling Bitcoins for USD
In order to profit from your Bitcoin investment, you need to sell them at some point, for a price higher than what you bought them for. This is also done via an exchange, like Coinbase, and for this, you need to follow the steps above in opposite – meaning you need to transfer your Bitcoins from your wallet to your exchange account (your exchange account also gives you a wallet address to receive Bitcoins) and then sell them at the market price to receive and withdraw USD to your bank (you need to link your bank account to the exchange).
How does Bitcoin trading work?
Bitcoin trading is simply the act of buying and selling Bitcoin on a reputable exchange in order to profit from the price volatility. Most full-time traders make good profits from crypto and Bitcoin trading, but is, once again, a high-risk activity and requires prudent risk management and experience.
In summary, traders typically use two types of analysis – Technical Analysis and Fundamental Analysis, when trading Bitcoin. Technical analysis makes use of indicators, such as the MACD, RSI and trend/resistance lines to make informed deductions regarding a coin’s price movement.
Whereas fundamental analysis leans on the news, reports, and developments around the industry as a whole to assess whether the price will go up in response to a bullish (positive) news or go down as a result of a bearish (negative) development.
Is Bitcoin legal or illegal?
Bitcoin’s legality also comes under question often, and the truth is that Bitcoin, in itself, is not illegal, but unfortunately, given how it can be used without any centralized authority’s approval, it is often used for illegal activities like money laundering and buying and selling unlawful goods and items.
This lack of government oversight has resulted in several countries banning Bitcoin entirely, including China, Russia, Pakistan, and India.
What can you buy with Bitcoins?
Unfortunately, not much. While some dealers sell cars for Bitcoins and you have services like Namecheap (domain and hosting), Expedia (travel) and Microsoft (apps) accepting Bitcoin, it is not as widespread as one would like. However, this is changing, and it is expected that in the next 5 – 10 years, most online retailers will accept digital currencies.
Meanwhile, you can learn more about available Bitcoin offers on SpendBitcoins.
How to keep track of your Bitcoin and crypto portfolios?
Once you become a seasoned trader or ‘hodler’ (the crypto verse’s term for loyal holders who hang on to their cryptocurrencies despite price crashes) you might want to download a crypto portfolio app like Delta to record your trades and keep a track of your profits and losses.
How to stay on top of Bitcoin price and news?
The crypto market is very fast and ever-changing. While there are currently several developments in discussion, such as the likelihood of a Facebook Coin, the start of U.S. SEC regulated Bitcoin ETFs, the launch of Bitcoin custody solutions by large-scale financial institutions like Fidelity and the start of physically settled Bitcoin futures by Bakkt – the industry is in its nascent stage and you will see a lot of positive and negative news coverage. However, there are several reputable publications such as Cryptovest and CoinTelegraph which cover crypto and Bitcoin news on a daily basis.
Alternatively, you can also turn to Twitter (whose CEO is an ardent supporter of Bitcoin) and get the latest news, developments, and opinions on Bitcoin directly from industry stakeholders and analysts.
That’s all for now folks. Hopefully, by now you have a much better understanding of what Bitcoin is and how it works. Nothing in this article should be construed as investment advice and you should be prudent and careful when investing in any cryptocurrency (especially other than Bitcoin). That being said, 2019 is poised to be a great year for crypto and it is definitely a space worth watching.
If you have any questions about Bitcoin, cryptocurrencies and blockchain technology, feel free to leave a comment below or contact me directly.