Bitcoin is a global digital currency based on distributed computing instead of gold and banks. At the time of this writing, Bitcoin is the world's largest digital currency by market capitalization (market cap), meaning that its total market value is greater than that of any of digital currency.
Bitcoin has offered traders and investors some promising returns, including when its price climbed more than 1,000% in 2017. (Retrieved 14 May 2019 - Coindesk) At the same time, traders must keep in mind that this digital currency is highly volatile and has suffered sharp declines at some points.
Bitcoin also provides opportunities for diversification, as market research shows Bitcoin has repeatedly displayed a low correlation to other asset classes. (Retrieved 14 May 2019 - PDF Link) In other words, Bitcoin prices don't generally follow the fluctuations associated with other asset classes such as stocks and bonds. As a result, traders and investors can potentially reduce portfolio volatility through Bitcoin.
- Bitcoin is decentralised, which means it's not issued or controlled by any central bank. Its transactions are recorded on a blockchain, which is a distributed ledger system that is both spread across many devices and also immutable. The transactions recorded on this blockchain are available to the public.
- These features are meant to safeguard against fraud. Every transaction is recorded on the blockchain, so its information is there for interested parties to see.
- Also, because no central entity controls Bitcoin, it could potentially continue to exist even if the governments of the world chose to ban the digital currency.
- Bitcoin is digital, so it's only available in electronic form. This feature makes Bitcoin very difficult to counterfeit, unlike units of fiat currency. Theoretically, a group of miners could obtain control of 51% of the Bitcoin Network's hashing (or processing) power, which would allow nefarious parties to potentially double-spend their bitcoins and even reverse transactions.
- However, obtaining this much processing power would be prohibitively difficult, and this helps keep the Bitcoin Network secure.
- Bitcoin can be used in many places. This can make the digital currency particularly helpful in areas that are suffering from capital controls or hyperinflation.
What Makes Bitcoin Unique?
Bitcoin was created to provide a new system of money that does not rely on banks or the government. Some have described this as a "trustless" system, as it does not rely on trusted third parties.
It is a digital currency, as opposed to fiat currencies such as the British pound, U.S. dollar or euro. More specifically, Bitcoin was the first digital currency to scale. Although some digital currencies predate Bitcoin, they did not earn substantial adoption.
How Is Bitcoin Created?
New units of Bitcoin are created using the Bitcoin Protocol. Bitcoin miners receive units of the digital currency by verifying transactions. This method for creating Bitcoin is entirely decentralised.
How Do Bitcoin Transactions Work?
A bitcoin transaction involves sending digital currency from one Bitcoin address to another. The digital currency's transactions were designed to be fast and inexpensive. However, there have been times when the Bitcoin Network has struggled to keep up with the demand of users. In these instances, the transactions took a significant amount of time or required substantial transaction fees.
How Do You Use Bitcoin?
For starters, you need to acquire some Bitcoin. One easy way to do this is to set up an account through an exchange and purchase some of this digital currency. Then, you need to set up a Bitcoin wallet, where you can transfer your Bitcoin and hold it.
You can spend Bitcoin by using units of the digital currency that you have stored in a Bitcoin wallet. These units of digital currency can be spent both online and in-person, either to purchase goods and services through websites or to make similar transactions at physical locations. Several websites, for example 99Bitcoins.com, list companies that accept Bitcoin as a payment method.
Another option is using one's Bitcoin to purchase other digital currencies through exchanges. By going through exchanges like Coinbase, investors can purchase Ether, XRP or Litecoin, for example.
- Leverage bitcoin: Once a user has Bitcoin, they can leverage their Bitcoin address and private key to send units of the digital currency. Every transaction is verified by the Bitcoin Network. To achieve this, a transaction must be encrypted, which turns it into a sizable string of numbers.
- Bitcoin network: The Bitcoin network then includes this transaction, along with all others that took place inside a 10-minute window into a "block." The thousands of devices that make up the Bitcoin Network then confirm the transaction using a mathematical formula.
- Bitcoin miners; Miners receive an incentive (in the form of Bitcoin) for contributing their computing power toward this process. This mining reward was designed to change over time, reducing by 50% roughly every four years.
- Block: Once all the transactions that took place within the aforementioned 10-minute window are verified, a block is mined. This block is then added to the blockchain, the distributed ledger containing every Bitcoin transaction.
Since all the transactions recorded on this blockchain are available to the public, everyone can see that they are legitimate. This approach also helps safeguard the key information of users, as verification does not require their personal data or private keys to be revealed.
How Is Bitcoin Traded?
Bitcoin is usually traded either through an exchange or over-the-counter (OTC) service. OTC services are generally used by those looking to make large transactions. One way to trade Bitcoin is to find a reputable exchange and set up an account there. Many exchanges have suffered hacks, so it is important for traders to conduct thorough due diligence before using one of these marketplaces.
For some exchanges, setting up an account requires going through a verification process. Coinbase, for example, requires all new users to confirm their identity by uploading a picture ID through either the Coinbase app or the company's website. (Retrieved 15 May 2019 - Coinbase)
Coinbase has provided various guidelines for uploading photographs of IDs, emphasizing that these pictures should be current and all information should be clearly visible. (Retrieved 15 May 2019 - Coinbase)
From there, interested parties have many different methods they can use to potentially make money from Bitcoin.
- They can simply purchase the digital currency outright in the hopes that it will rise in value and offer them a compelling return.
- They can potentially trade options and futures, derivatives contracts that are designed to help manage risk.
- Another option is contracts for difference (CFDs), which allow you to bet on where Bitcoin prices will go without purchasing the underlying digital currency. By trading these contracts, investors can benefit from leverage up to 2:11 and low spreads, which can help potentially improve returns.
Why Should Investors Trade Bitcoin?
While investors and traders have many different options, Bitcoin is an innovative digital currency that has generated some very strong returns over its lifetime. There are many stories of people who became millionaires by buying Bitcoin at the right time and holding it until it appreciated sharply. In addition, Bitcoin can provide strong opportunities for diversification, which can help investors reduce the overall volatility of their portfolio.