Bitcoin A beginner’s guide to the world Scarcely a news cycle goes by without some mention of bitcoin. As the first and most widely traded cryptocurrency, bitcoin is often seen as a representation of the larger cryptocurrency ecosystem, for better or worse. Throughout its life since being created in 2009, its critics have been decrying its failure while advocates have been making wild projections, former Goldman Sachs hedge-fund chief Raoul Paul going as high as $1 million by 2025.
But while it has certainly attracted plenty of attention, bitcoin remains a mystery to casual and experienced investors alike. This shouldn’t be the case, since the basics of bitcoin and how it works are relatively easy to understand.
Bitcoin A beginner’s guide to the world Here’s a brief bitcoin biography: An overview of its origins, operations — and how to invest in it.
What is bitcoin?
Bitcoin is a cryptocurrency, an electronic version of money that verifies transactions using cryptography (the science of encoding and decoding information).
- It’s decentralized because this code is run by thousands of computers (i.e., ‘nodes’) spread across the globe.
- It’s digital because it exists as a set of code that determines how it operates.
- It’s scarce because its code caps its overall volume to 21 million bitcoins.
When you use bitcoin to buy something, it records the transaction on a blockchain, which is essentially a ledger or database whose entries can’t be modified or erased.
What is bitcoin mining, Bitcoin A beginner’s guide to the world?
New bitcoin is created approximately every 10 minutes through a process known as mining.
“It’s called mining because it’s like looking for gold,” Song says. “Anyone with a shovel can dig and look for gold, just as anyone with a computer can look for
proof-of-work
New Block of Information, Bitcoin A beginner’s guide to the world.
Bitcoin A beginner’s guide to the world Containing recent transactions need to be updated on bitcoin’s blockchain. The validity of these blocks is verified through a process known as proof-of-work, in which “miners” (i.e., people with computing hardware) race to calculate a cryptographic key — basically a very complicated math problem. The first miner to solve the key updates the information on the blockchain and gets a set amount of bitcoin in return. These puzzles vary in difficulty to make sure that it gets solved in roughly 10 minutes.
Currently, each validated block rewards a successful miner with 6.25 bitcoin, though this amount is halved every four years. The last time bitcoin was halved was in May of 2020. All 21 million bitcoin will be mined by the year 2140.
In the early days of bitcoin (the late 2000s, early 2010s), anyone with a computer could mine bitcoin with some level of success. However, as bitcoin and bitcoin mining became more popular, the competition got steeper.
The miner with the most computing power, known as a hash rate, has the greatest chance of solving the puzzle and reaping the rewards. Computers got more powerful and more energy-consuming. They also got more specialized; a new type of computer known as an application-specific integrated circuit (ASIC) miner was developed specifically to solve proof-of-work puzzles.
Part of bitcoin’s value is derived from this mining process — the energy, time, and cost of operating these mining rigs. Another major component of bitcoin’s price is its market sentiment, which commonly boils down to “hype.” This can backfire if something happens to undermine trust.
A brief history of Bitcoin, Bitcoin A beginner’s guide to the world.
Working with various members of a cryptography mailing list, the pseudonymous Nakamoto launched Bitcoin on January 3, 2009.
Other individuals had attempted to develop forms of electronic money before (e.g., e-Cash, DigiCash, and Hashcash), but most had failed to solve the ‘double-spend’ problem, in which bad actors can spend the same digital currency twice. Nakamoto’s main solution to this problem was to introduce a timestamped, permanent transactions ledger: the blockchain.
This effectively makes every bitcoin traceable and unique, insofar as the transaction history of each bitcoin is publicly visible on the bitcoin blockchain. “Any attempted alteration of the ledger would be rejected by other participants,” Peters says.
The blockchain technology behind the bitcoin network is what excites most people about this digital currency.
Early uses of bitcoins, Bitcoin A beginner’s guide to the world.
It then became more commonly used in online marketplaces and for international contracts and import/export operations.
It was also around this time that traders first began speculating with the currency, with the now-defunct BitcoinMarket.com launching as the world’s first bitcoin exchange in March 2010.
Having been worth precisely $0 when it debuted in 2009, bitcoin has experienced more than its fair share of pricing ups and downs, with its worth rising or plummeting by hundreds of dollars in a matter of hours.
In the news: In early May of 2022, bitcoin, along with the entire cryptocurrency world, experienced a major crash as two major stablecoins started wavering, one of them crashing completely. The crash of these supposedly stable cryptocurrencies undermined investor confidence in cryptocurrency as a whole.
Bitcoin’s legitimacy.
Bitcoin A beginner’s guide to the world.
One reason for bitcoin’s volatility is the Considerable suspicion and skepticism that have dogged the cryptocurrency throughout its history. Bitcoin’s blockchain may be immune to interference, but bitcoin itself is not, skeptics have said.
Research published in 2019 concluded that “there was serious market manipulation in Mt. Gox exchange,” which was the largest cryptocurrency marketplace until hacking forced its 2014 shutdown, incurring the loss of some 744,408 bitcoins.
Should I invest in bitcoin?
Bitcoin is in a weird place right now. It is still the most widely traded cryptocurrency on the market, and that doesn’t show signs of stopping; over half of current bitcoin investors entered the market last year. Ultimately, whether you should bitcoin depends on whether you think this particular cryptocurrency may still be valuable and sustainable as an asset in the long run.
Despite its poor performance in 2022, bitcoin advocates believe that its fixed supply makes it the perfect way to store wealth and that it should appreciate significantly over the long term as more institutional investors — investment banks, mutual funds, pension plans — pile into it.
“We have already seen increased interest from institutional investors and corporations” in 2020, says Peters. “This is in part to the increasing view that bitcoin can act as a strong hedge against inflation in portfolios, as well as potentially growing in price and consumer adoption substantially in the future.”
How to invest in bitcoin.
There are two main ways to invest in bitcoin. Either you set up an account with one of the many dedicated cryptocurrency exchanges now in existence, or you buy it through an investment platform that includes the option to buy cryptocurrencies.
While cryptocurrency exchanges were once shady, unregulated operations, the major exchanges now operating are all regulated and in compliance with applicable laws. In the United States, some of the most popular are:
- Coinbase
- Kraken
- Gemini
- Binance.US
- bitFlyer
- Coinmama
Alternatively, you can buy bitcoin through several financial apps and platforms, including Robinhood, Cash App, and PayPal.
If you do decide to invest in bitcoin, here are five pointers worth keeping in mind to reduce your risk exposure:
1. Consider buying a bitcoin wallet.
If you’re buying bitcoin through an exchange. And if you’re planning on holding large sums of the cryptocurrency, it may be a good idea to transfer them to your hardware wallet. Hardware wallets are small. Offline computers that store the private keys controlling your bitcoin funds.
Important: Coinbase has recently admitted that the company does not offer bankruptcy protection.
2. Invest only what you can afford to lose.
This sage advice applies to any investment, but especially here. Bitcoin has fluctuated wildly since its inception, spiking well above $65,000 in November of 2021. Later losing over half its value by May of 2022 as. A result of a wider cryptocurrency crash, at one point dipping to $26,000. However, a similar swing occurred in April of 2021. When bitcoin rose to nearly $60,000 before dropping to $31,000 in May.
The moral is: Your holdings may decline significantly in the short term. So don’t invest any funds that you might need to call on for an emergency. Lest you are forced to sell during one of these downswings.
3. Think long-term.
Given its
volatility
, it usually pays to have more of a long-term perspective when investing in bitcoin. If you believe that bitcoin will gain value in the distant future. Perhaps it will gain additional use cases other than a means of carrying out transactions — then it might be worth investing in.
4. Watch the stock market.
Bitcoin’s price is not held in a vacuum. Cryptocurrency investors are subject to the same interest rate increases — which negatively impact the stock market — that affect other investors.
Additionally, research has shown a positive correlation between bitcoin’s price and the S&P 500. As such, it may be worthwhile watching stocks for telltale signs of an impending movement in the bitcoin market.
5. Remember tax liabilities.
In the US, bitcoin is subject to the same tax rules as other assets. You are liable for capital gains taxes when selling the currency at a profit. Or even just spending it (if the price has appreciated since you bought it). So be sure to keep records of all your transactions.
The bottom line.
It’s hard to say where Bitcoin will be in the next five or 10 years.
Its ability to operate at scale — meaning its ability to handle a growing number of transactions — has been seriously questioned. Without that capacity, it’s unlikely that bitcoin will become a fully-fledged currency, replacing traditional dollars or euros, anytime soon. But some advocates still believe the cryptocurrency will bounce back.
“In my view, whilst adoption will continue to increase at a steady rate. The largest role I see bitcoin having is its increased use as an asset in investment portfolios,” says Peters. Given that bitcoin has no real fundamentals besides a limited supply and a growing network of developers. Users, and holders — and it’s difficult to fully subscribe to such optimistic forecasts.
