Bitcoin is not only the first cryptocurrency, but the most famous of the more than 5,000 cryptocurrencies in existence today. Financial media are willing to deal with new dramatic highs and dizzying declines, making Bitcoin an integral part of the landscape.
Sudden volatility can make headlines, but few make Bitcoin the best choice for novice investors or those looking for a stable store of value. Understanding everything can be tricky. Let’s take a closer look at how Bitcoin works.
What Is Bitcoin?
Bitcoin is a decentralized digital currency that can be bought, sold and exchanged directly without intermediaries such as banks. Bitcoin creator Satoshi Nakamoto originally described the need for an “electronic payment system based on cryptographic proofs, not trust.”
All Bitcoin transactions made so far are on a public ledger accessible to everyone, making it difficult to reverse and counterfeit transactions. This is by design. Due to its decentralized nature, Bitcoin is not backed by governments or issuers and has no guarantee of value other than proof burned at the heart of the system.
Anton Mozgovoy, co-founder and CEO of Holyheld, which provides digital financial services, says, "They are money because we humans have decided that we are worth gold."
Since its public launch in 2009, the value of Bitcoin has skyrocketed. Although it once sold for under $150 per coin, as of October 26, 2021, one Bitcoin now sells for more than $62,000. Because its supply is limited to 21 million coins, many expect its price to only keep rising as time goes on, especially as more large, institutional investors begin treating it as a sort of digital gold to hedge against market volatility and inflation.
How Does Bitcoin Work?
Bitcoin is built on a distributed digital record called a blockchain. As the name implies, blockchain is a linked body of data, made up of units called blocks that contain information about each and every transaction, including date and time, total value, buyer and seller, and a unique identifying code for each exchange. Entries are strung together in chronological order, creating a digital chain of blocks.
“Once a block is added to the blockchain, it becomes accessible to anyone who wishes to view it, acting as a public ledger of cryptocurrency transactions,” says Stacey Harris, consultant for Pelicoin, a network of cryptocurrency ATMs.
Blockchain is decentralized, which means it’s not controlled by any one organization. “It’s like a Google Doc that anyone can work on,” says Buchi Okoro, CEO and cofounder of African cryptocurrency exchange Quidax. “Nobody owns it, but anyone who has a link can contribute to it. And as different people update it, your copy also gets updated.”
While the idea that anyone can edit the blockchain might sound risky, it’s actually what makes Bitcoin trustworthy and secure. In order for a transaction block to be added to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must conform to the right encryption pattern.
These codes are long, random numbers, making them incredibly difficult to fraudulently produce. In fact, a fraudster guessing the key code to your Bitcoin wallet has roughly the same odds as someone winning a Powerball lottery nine times in a row, according to Bryan Lotti of Crypto Aquarium. This level of statistical randomness blockchain verification codes, which are needed for every transaction, greatly reduces the risk anyone can make fraudulent Bitcoin transactions.
“Once a block is added to the blockchain, it becomes accessible to anyone who wishes to view it, acting as a public ledger of cryptocurrency transactions,” says Stacey Harris, consultant for Pelicoin, a network of cryptocurrency ATMs.
Blockchain is decentralized, which means it’s not controlled by any one organization. “It’s like a Google Doc that anyone can work on,” says Buchi Okoro, CEO and cofounder of African cryptocurrency exchange Quidax. “Nobody owns it, but anyone who has a link can contribute to it. And as different people update it, your copy also gets updated.”
While the idea that anyone can edit the blockchain might sound risky, it’s actually what makes Bitcoin trustworthy and secure. In order for a transaction block to be added to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must conform to the right encryption pattern.
These codes are long, random numbers, making them incredibly difficult to fraudulently produce. In fact, a fraudster guessing the key code to your Bitcoin wallet has roughly the same odds as someone winning a Powerball lottery nine times in a row, according to Bryan Lotti of Crypto Aquarium. This level of statistical randomness blockchain verification codes, which are needed for every transaction, greatly reduces the risk anyone can make fraudulent Bitcoin transactions.
How to Use Bitcoin
In the US, people typically use Bitcoin as an alternative investment that helps them diversify their portfolio beyond stocks and bonds. You can also make purchases using Bitcoin, but the number of sellers that accept cryptocurrency is still limited. The major companies that accept
Bitcoin are Microsoft, PayPal, and Whole Foods. You may also find that some small local retailers or certain websites accept Bitcoin, but it takes a bit of digging. You can also use a service that allows you to link your
debit card to your cryptocurrency account. In other words, you can use Bitcoin like a credit card. It also usually involves a financial provider converting bitcoins into dollars instantly. “Crypto.com and CoinZoom are two regulated services in the United States,” Montgomery said.
In other countries, especially in countries where currencies are less stable, people sometimes use cryptocurrencies instead of their own currency.
“Bitcoin gives people the ability to store value without relying on government-backed currencies,” says Montgomery. “It gives people a chance to prepare for the worst-case scenario. You can already see people in countries like Venezuela, Argentina and Zimbabwe. In countries with high debt, Bitcoin is gaining momentum."
However, if you are using Bitcoin as a currency other than an investment in the United States, you should be aware of the specific tax implications.
How to Buy Bitcoin
Most people buy Bitcoin via cryptocurrency exchanges. Exchanges allow you to buy, sell and hold cryptocurrency, and setting up an account is similar to opening a brokerage account—you’ll need to verify your identity and provide some kind of funding source, such as a bank account or debit card.
Major exchanges include Coinbase, Kraken, and Gemini. You can also buy Bitcoin at an online broker like Robinhood.
Regardless of where you buy your Bitcoin, you’ll need a Bitcoin wallet in which to store it. This could be something called a hot wallet or a cold wallet. Hot wallets (also called online wallets) are stored in the cloud by exchanges or providers. Online wallet providers include Exodus, Electrum, and Mycelium. A cold wallet (or mobile wallet) is a standalone device used to store bitcoins and is not connected to the internet. Some mobile wallet options include Trezor and Ledger.
Some Important Notes About Buying Bitcoin: Bitcoin is expensive, but you can buy partial Bitcoin from some vendors. You should also keep an eye on fees that, although typically a small percentage of cryptocurrency transactions, can actually add up to small purchases. Finally, keep in mind that buying Bitcoin is not instantaneous like many other stock purchases. Bitcoin transactions must be verified by miners, so it may take at least 1020 minutes to confirm your Bitcoin purchase on your account.
How to Invest in Bitcoin
Like a stock, you can buy and hold Bitcoin as an investment. You can even now do so in special retirement accounts called Bitcoin IRAs.
No matter where you choose to hold your Bitcoin, people’s philosophies on how to invest it vary: Some buy and hold long term, some buy and aim to sell after a price rally, and others bet on its price decreasing. Bitcoin’s price over time has experienced big price swings, going as low as $5,165 and as high as $28,990 in 2020 alone.
“I think in some places, people might be using Bitcoin to pay for things, but the truth is that it’s an asset that looks like it’s going to be increasing in value relatively quickly for some time,” Marquez says. “So why would you sell something that’s going to be worth so much more next year than it is today? The majority of people that hold it are longterm investors.”
Consumers can also invest in a Bitcoin mutual fund by buying shares of the Grayscale Bitcoin Trust (GBTC), though it’s currently only open to accredited investors who make at least $200,000 or have net worths of at least $1 million. This means the majority of Americans aren’t able to buy into it. In Canada, however, diversified Bitcoin investing is becoming more accessible. In February 2021, Purpose Bitcoin ETF (BTCC) started trading as the world’s first Bitcoin ETF, and the Evolve Bitcoin ETF (EBIT) has also been approved by the Ontario Securities Commission. American investors looking for Bitcoin or Bitcoinlike exposure may consider blockchain ETFs that invest in the technology underlying cryptocurrencies.
IMPORTANT NOTE: Although crypto funds can diversify crypto assets and reduce risk slightly, they still carry significantly more risk and charge significantly higher fees than broad index funds with a history of stable returns. Investors looking for a steady increase in wealth can opt for index mutual and exchange-traded funds (ETFs).
Should You Buy Bitcoin?
In general, many financial experts support the desire of customers to buy cryptocurrencies, but if the customer is not interested, it is not recommended to do so. “The biggest concern for us is when someone wants to invest in cryptocurrency, but the investment doesn't work, and suddenly we can't send our kids to college,” says Certified Financial Planner Ian Harvey. (CFP) New York. “Then it wasn't worth the risk.
Due to the speculative nature of
cryptocurrencies, some planners recommend cryptocurrencies for their clients' "side" investments. Dallas CFP Scott Hammel said, "Some people call it the Vegas score. "Let's make sure it doesn't become too many portfolios to exclude from our real long-term."
In the most direct sense, Bitcoin is like a single stock and advises does not recommend investing a significant portion of your portfolio in one company. At best, planners suggest investing no more than 1-10% if you are passionate about Bitcoin. “If it were a single stock, you wouldn't have allocated a significant portion of your portfolio to that stock,” Hummel says.
Comments
Post a Comment