What is Bitcoin Currency?
What is bitcoin currency? 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. This is pretty normal because bitcoin ( [[BTC]] , XBT) is not a normal fiat currency or investment vehicle at all.
Being the first of many cryptocurrencies, bitcoin has attracted billions of dollars of investment capital from around the world and its revolutionary blockchain technology is changing the processes of modern society in many different ways.
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 invisible.
What is Bitcoin / Bitcoin Explained
Bitcoin is a digital or virtual currency that is created (mined), stored, traded, and transferred electronically. Bitcoin ( [[BTC]] , XBT) is not regulated by any central bank or central authority and can easily be transferred between individuals or businesses around the world.
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. The SHA-256 algorithm also limits the amount of bitcoin that can be mined to 21 million units.
This mechanism is positive for the price of bitcoin because it prevents the market from being flooded by bitcoin which would be negative for its price.
Bitcoin has become a powerful financial instrument that is traded and speculated on more and more every day.
Who Invented Bitcoin?
Some intelligent math 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 which is distributed between numerous nodes (computers) wherein the record of a particular transaction cannot be altered retroactively without changing the subsequent blocks which are linked to the block that contains the record of that particular transaction. Transactions and procedures executed in a blockchain are governed by certain rules and settings that cannot be altered under normal conditions.
In the process, this individual created a decentralized cryptocurrency and a clever payment system that has become much more than just tools to transfer value between friends, family, and other parties. Both bitcoin and the underlying blockchain technology have attracted an incredible amount of interest and investment capital since being invented and implemented by the legendary Satoshi Nakamoto who mined the genesis block of bitcoins in January 2009.
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 a really effective confirmation mechanism that records every transaction done on the blockchain and gives it a time-stamp. In this way, every transaction that has ever been done on the bitcoin network is organized chronologically and a log of digital signatures accompany every ‘unit’ of bitcoin currency, 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. All bitcoin transactions are tracked in a public, decentralized ledger that can be examined by anyone.
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 simplified:
- Remember that a ledger is an account book, register, or log.
- 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 need to verify it against specific conditions and rules stated in the bitcoin protocol.
- 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 a 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.
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.
Bitcoin has an impressive daily trading volume of about $1.95 billion (October 2017). Although it’s a big number for a cryptocurrency, it’s very small compared to the [[EUR/USD]] with its massive daily turnover of more than 1.1 trillion U.S. dollars.
Bitcoin can be transferred from one bitcoin wallet to another with minimal transaction fees if any. Bitcoins can be sent in little portions much smaller than one bitcoin. The minimum transaction amount differs between the different bitcoin wallets and exchanges. With bitcoin wallets, any transaction larger than 0.000055 bitcoin shouldn’t be a problem. Bitcoin exchanges often have higher minimum bitcoin transaction amounts than wallets but relatively small transactions are still possible.
How to Bitcoin…
How to Buy Bitcoin with Fiat Currencies (Dollars, Pounds, Euros, etc.)
To pay for something with bitcoin ( [[BTC]] , XBT) or to send bitcoin to someone, you obviously 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:
- Cryptocurrency/Bitcoin Exchanges – Open an account with a reliable bitcoin or cryptocurrency exchange and deposit money via your credit card, debit card, or a wire transfer (electronic funds transfer). After depositing your dollars, euros, pounds, or other fiat currency, you can exchange 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. Some cryptocurrency exchanges offer the option of converting bitcoin and certain fiat currencies to other cryptocurrencies besides bitcoin.
- Bitcoin Marketplaces – Bitcoin can be acquired with cash, credit cards, wire transfers, etc, by locating individuals in bitcoin marketplaces who want to sell bitcoin. Of course, if bitcoin is bought with cash the buyer needs to locate a seller in his or her proximity. The buyer obviously needs to have a bitcoin wallet ready to receive the bitcoin transfer from the seller after doing the deal.
Bitcoin can be bought in many different ways with fiat currencies in bitcoin marketplaces, including cash and bank wire transactions.
- Bitcoin ATMs – Bitcoin ATMs are popping up around the world. To buy bitcoin with cash at a bitcoin ATM requires the following steps:
- Your mobile number.
- Receive a validation code and enter it.
- Select the bitcoin amount you’d like to purchase.
- Select whether you already have a bitcoin account/wallet or not. If you don’t, the ATM can generate one for you and print out its details.
- Scan the QR code if applicable.
- Insert your cash into the ATM and wait for a confirmation of the transaction. The purchased bitcoin will be sent to your bitcoin wallet and may take up to an hour to reflect.
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 a bitcoin exchange, fiat currencies can be converted to bitcoin and the other way around. Some exchanges also offer bitcoin conversion to other cryptocurrencies and/or conversion between fiat currencies and other cryptocurrencies besides bitcoin. Parties who use bitcoin exchanges are able to send bitcoin to bitcoin wallets or other bitcoin exchanges and can also receive bitcoin payments from bitcoin wallets and exchanges.
On the other hand, a bitcoin wallet is basically used as a storage medium for bitcoin which can also receive and send bitcoin. Bitcoin wallets transact with other bitcoin wallets, bitcoin exchanges, or merchants who accept bitcoin payments.
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 is the most reliable bitcoin client because with it you can independently verify transactions on the bitcoin network. When Bitcoin Core is downloaded, however, the whole blockchain is downloaded to your computer. Lightweight clients like Electrum are easier to use and can even be operated from a smartphone.
Other Desktop Wallets
Desktop wallets other than bitcoin clients include Exodus, mSIGNA, Armory, and many others.
Mobile wallets are bitcoin wallets that are tailored to your smartphone and one of the advantages offered is the QR code capability which enables instant bitcoin payments.
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 needed to transfer bitcoin to another address, printed or written on it. An easy and convenient way to create paper wallets is to use websites like bitaddress.org. It takes a few seconds to create after which your paper wallet can simply be printed out and stored in a safe place.
With this option, your private keys are stored online. This offers the advantage of being able to access them from anywhere at any time. However, you may lose control over your private keys if the online service provider doesn’t take the necessary precautions to secure it.
Hardware wallets like Trezor can facilitate secure bitcoin payments and store private keys electronically. The benefit of using a hardware wallet is that secure bitcoin transactions can be done on a computer that might not be secure. The other 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.
Can Bitcoin be Lost or Stolen?
Yes. Bitcoin owners should take the necessary precautions to secure their bitcoin holdings from hackers, thieves, and from losing private keys or wallets. If handled correctly, however, bitcoin owners shouldn’t have any problems with losing bitcoin.
Why is Bitcoin so Popular?
- Cheap and Fast Transactions – Bitcoin transactions are often free or either really cheap. 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!
- Extreme price volatility and price escalation have provided excellent speculative and investment opportunities.
- Arbitrage opportunities between different bitcoin exchanges and other opportunities related to the bitcoin boom have drawn much capital to this cryptocurrency.]
Fast bitcoin transactions have drawn many users to this amazing cryptocurrency.
Could Bitcoin ‘Crash and Burn’?
It’s definitely possible, but due to the increasing confidence in bitcoin and its immense popularity, a major crash is not likely to happen very soon. At the moment there is a major ‘trend’ of capital flowing into bitcoin which is obstinately supporting its price. It will probably take much energy to stop this trend and to crash the price of bitcoin, although the ‘mighty’ bitcoin has very little intrinsic value and is a good candidate for a big crash.
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.
Another major drawback of bitcoin is that it has very little intrinsic value, as we have already mentioned. 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, who knows?
Bitcoin Investment / Bitcoin Speculation
Bitcoin ( [[BTC]] , XBT) has been an awesome investment vehicle which has filled many investors’ pockets with handsome gains. Buy-and-hold has been a popular bitcoin trading strategy that has performed really great so far. Bitcoin can be traded on forex trading platforms and bitcoin exchanges for speculative or investment purposes. On bitcoin 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. 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, total 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.
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.
eToro also offers an exciting new financial product called CryptoFund which allows investors to invest in a CopyFund made up of different cryptocurrencies including bitcoin. This CryptoFund is managed by professional analysts on the eToro team and rebalanced on a monthly basis if necessary. This is a convenient and clever way to gain exposure to different cryptocurrencies at the same time without having to manage it yourself. The minimum CryptoFund investment is $5000. Follow this link for in-depth information on trading bitcoin and other cryptocurrencies with eToro.
Investors and speculators can trade numerous cryptocurrencies besides bitcoin. Some of the most prominent cryptocurrencies include ether, litecoin, dash, monero, and ripple. 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.
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 odd virtual currency of which the only intrinsic value is its value as a medium of exchange. What else is bitcoin good for?
Experienced investors maintain balanced portfolios. Is all of your money in bitcoin?
Firstly, there are numerous alternatives to bitcoin. For example, ether, litecoin, dash, and ripple, just to mention a few. Perhaps much of the capital currently invested in bitcoin will gradually flow into some of these other cryptocurrencies. Much of the opposition aimed against cryptocurrencies is focussed on bitcoin which could also encourage an increase in the use of alternative cryptocurrencies.
There are potentially many unknown factors that could plague the price of bitcoin in the future. The last thing investors should do is to be too sure of what the bitcoin price will do in the future. After all, a bitcoin is only worth what someone is willing to pay or give in exchange for it. What is driving the price of bitcoin besides investment frenzy and its value as a medium of exchange? Can you eat bitcoin or make anything from it? Or is bitcoin backed by any authority, physical asset, or government? Has anyone ever seen a bitcoin? Surely there is little substance to keep bitcoin from tumbling all the way to the ground.
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 really volatile and needs to be handled carefully. The following investment rules should be applied when trading or investing in bitcoin:
- 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 behaviour make it a grand champion in the trading arena to those who have an appetite for exponential gains.
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