Whether you’re interested in cryptocurrency or not, you’ve probably heard of bitcoin. But exactly how does bitcoin work, and how can you take advantage of this popular cryptocurrency?
What is Bitcoin?
- Bitcoin is a cryptocurrency (digital money), but it is not a legal tender or a physical form of money.
- Cryptocurrencies like bitcoin are a form of digital or virtual currency that’s completely electronic.
- It’s unclear who invented Bitcoin. Although the concept does follow guidelines published in a whitepaper by Satoshi Nakamoto, a pseudonym for a mystery person or group of people. No one knows the person’s real identity.
- Bitcoin stands out among other cryptocurrencies by having proven security using blockchain processing, which reduces the chances of hacking.
- Bitcoin.org is the original bitcoin site. However, there are hundreds of places where you can buy, sell, trade, or store bitcoins, including exchanges, brokers, and wallets.
Bitcoin Cryptocurrency – Key Features & Terminology
Bitcoin is becoming more popular, so there are guides like this to explain all the different aspects. When researching bitcoins, you may come across unfamiliar terminology. In the following sections, we include some of these terms and their definitions.
Bitcoin Key Features
Bitcoins are an electronic form of currency that has values that fluctuate rather than remaining constant. One bitcoin does not necessarily mean $1. It could mean a few cents or several dollars, depending on the market.
One of the most significant benefits of Bitcoin is that it’s decentralized. Therefore, it’s not under the control of anyone other than other peers. This setup means that your currency stays safe from hacking, system failures, and seizure by governing bodies.
Another feature of using Bitcoin currency is that it’s completely anonymous. Your bitcoins store in an electronic wallet that does not contain any identifying information. Many people invest in bitcoin to have an untraceable source of currency.
Bitcoin transfers are also fast, as in near-instantaneous. It usually takes less than five minutes for a bitcoin transfer to go through, even if the transactions occur from opposite sides of the world.
And finally, another useful feature is the growing availability of businesses and products that are now accepting bitcoin currency. You can shop without leaving a trace when paying with bitcoins, meaning complete anonymity.
Bitcoin operates as a form of cryptocurrency – digital currency. You can exchange bitcoins for some services and goods. In other words, bitcoins (BTC) are a type of electronic money.
Bitcoin operates using a mathematical algorithm that manages transactions and organizes them into blocks of data that form a blockchain. This process happens through cryptography, which provides a secure system with accurate transactions for public viewing.
These blockchains mean that no one can perform a fraudulent activity without being caught. Anyone can view transitions as they occur.
The fantastic thing about Bitcoin is that it’s decentralized, which means it is not under the control of any government, institution, or person. For users, this means is there aren’t the usual restrictions and rules that go along with legal tender.
Benefits of a decentralized system include lower transaction costs and not having to deal with costly conversion rates.
However, since no laws regulate a bitcoin’s value, it can fluctuate in value with time. And bitcoins are strictly electronic and not a form of currency that you can spend like legal tender money.
Bitcoin is a peer-to-peer system run by nodes – a collection of computers – that handle all Bitcoin code and store blockchains. There are over 47,000 nodes that manage the Bitcoin system, making hacking and fraud nearly impossible.
To hack the bitcoin system, a person must control 51% of the computer system. These fraudulent changes are visible in the blockchain, and then the people who operate the nodes will notice the deception and correct it.
As of January 2021, Bitcoin market capitalization values at $600 billion. That’s an all-time high since Bitcoin began in 2009. And a drastic increase from the 2020 third quarter, when the market capitalization was just $200 billion.
The value of a bitcoin varies with the market. Current values as of January 2021 have one bitcoin being the equivalent of $40,000. However, there are only a limited number of bitcoins worldwide, with around 18 million in circulation.
How it Works – Role Of Blockchain Technology.
All of Bitcoin’s data goes into blockchains, a type of database that stores data into blocks that combine into chains. This format keeps data together chronologically.
Once data enters these blockchains, they are permanent and viewable to anyone. This method creates a peer-to-peer network where no one person or group has control.
To start with Bitcoins, you first need to get a Bitcoin wallet. Your wallet holds your transactions and records of how many bitcoins you have in your balance.
Your wallet also holds your private key or seed. This key acts as a virtual signature that identifies the owner and provides mathematical proof of the transaction. This signature also means changes can’t occur on the transactions.
Transactions receive confirmation in the network, usually within the first twenty to thirty minutes, which adds them to the blockchain. This process is known as mining.
When a group of transitions fills up a block, miners can solve a cryptographic challenge, closing the box and starting a new one. In exchange for completing blocks, users receive bitcoins. Mining also creates new bitcoins.
How and Where to buy Bitcoin?
There are multiple ways to get bitcoins. If mining sounds like too much work, you can go the easy route and buy bitcoins from exchanges, wallets, trading sites, and other platforms.
Before you can start accruing bitcoins, you need a digital wallet. There are plenty to choose from, so do your homework to pick one that has terms that work for you.
To add bitcoins to your wallet, you need to use a bitcoin exchange. Exchanges allow you to purchase bitcoins using multiple currencies, including bank transfers or debit cards.
Coinbase, eToro, and Coinmama are three of the top exchanges to purchase bitcoins using multiple currencies. Exchanges and brokers are the best ways to buy large sums. Two of the best brokers to use are Robinhood and Charles Schwab.
Many exchanges charge fees for their services, so review each company’s policies about their trading and withdrawal fees and their deposit requirements.
Where to Store Bitcoins?
Bitcoins are a type of digital currency and have no physical form. You cannot print these off or pay with them in hand to hand exchange.
To receive or spend bitcoins, you have to use a digital device that stores your digital wallet. Are you picking up on the recurring theme here?
Your digital wallet is a ledger, or record, of your transactions, including the sum of your assets. Balances are managed using private and public keys – numbers and letters linked together through a mathematical encryption algorithm.
The public key consists of your transactions and shows up as your digital signature in the blockchain. Your private key should stay a secret, as it controls your buying, trading, and spending abilities. Think of it as your ATM pin code.
Once you’ve completed your wallet setup, you receive a Bitcoin address, which you provide to people. Addresses are only useful for one transaction. You should generate a new address for each trade you make.
How to Make Money off it? Trade or Invest?
If you’re okay with something taking a while to become valuable enough to sell, you may prefer to invest in Bitcoins or HODLing (Hold On for Dear Life) – buying and holding.
With this method, you buy bitcoins, store them in your wallet and wait until the market’s ready to sell. However, holding them could mean the bottom drops out, and you lose everything.
Trading Bitcoins is similar to trading stocks. It requires knowing how to read the market to get the best values. You can do Bitcoin day trading, which is when you make short, quick trades.
Swing trading lets you buy low then sell high. You may hold your investment for a few hours, days, or months. The goal is to sell for more than what you paid.
Pros and Cons of buying Bitcoin Coin – Risk or Reward?
Many people wonder if buying Bitcoin coins is a risk or a reward. Look at Bitcoins as an investment. It could go either way, depending on various factors. Here are some advantages and disadvantages of Bitcoins.
One of the most significant selling features of the Bitcoin world is that it’s decentralized, which means no one owns or regulates it. You won’t face high conversion rates and fees like with financial institutions, which often penalize you for how you spend your money.
Multiple factors play a part in the liquidity of bitcoins. Increases in exchanges help increase liquidity, as do more businesses starting to recognize Bitcoin as a currency form. Liquidity refers to how easy it is to convert Bitcoin into legal tender or vice versa.
While decentralization has its advantages, there are a few downsides. Not being regulated by a governing authority does make it risky to engage in trading bitcoins.
If something goes wrong, there’s no one you can address for complaints or resolutions. Not surprisingly, there are a large number of fraud cases dealing with cryptocurrency.
And since bitcoin doesn’t fall under any government’s rule, the value can fluctuate wildly, with no one to control it but the market. This volatile tendency means you can easily suffer catastrophic investment losses if the market capitalization drops.
- No regulation
- Still working out the kinks
Bottom Line – Should You Buy Bitcoin?
Bitcoin is a pioneer of cryptocurrency and is one of the most popular digital currencies used. But its future is still uncertain. Some countries are attempting to regulate this unregulated market.
But since many people use Bitcoin as an anonymous investment, this interference might come at a cost. Given the volatility of the bitcoin market, it can be a risky investment. But if you can get in at the right time, it can net a decent profit.