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It seems that everyone is talking about Bitcoin - and with good reason. In the past 2 years, the cryptocurrency has made the news multiple times. However, there still remains some confusion around what exactly Bitcoin is.
What is Bitcoin?
Bitcoin is a cryptocurrency. A cryptocurrency is a form of digital currency, and secured through the use of cryptography. It is not backed by a government, a government currency (fiat money), or by precious metals.
The creator or creators of Bitcoin remain anonymous today, going by the name of Satoshi Nakamoto. The original idea behind Bitcoin was to be used as an alternative banking solution during the financial and mortgage crisis of 2009.
Unlike currency, bitcoin isn’t physical. It is a digital currency that exists only on a digital ledger known as a blockchain and in personal digital wallets. Bitcoin is used to purchase goods and services as long as the company accepts it as payment. It can also be traded or held as an investment.
Bitcoin was created as a form of currency that doesn’t rely on banks for transactions or for governments to issue. The intention is for it to be free of the inflationary problems that plague government-backed currencies and make transactions smoother, quicker and cheaper.
What Determines the Value of Bitcoin?
Bitcoin’s value depends on the market demand for it. The more the public accepts it as a legitimate form of currency, the more it has risen in price. However it wasn’t deemed valuable in the early days. In 2010, one Bitcoin was worth $0.08, yet today one Bitcoin is worth $50,000.
Market demand is currently increasing as more businesses and services are accepting Bitcoin as currency. Large corporations are buying Bitcoin and adding it to their balance sheets. And it is becoming easier for anyone to buy it, sell it and send it to others using Bitcoin ATMs.
Bitcoin is a finite product and is limited to only 21 million Bitcoins. Today, there are over 18 million already mined. The last Bitcoin is expected to be mined in 2140.
Bitcoin Mining and the Blockchain
Mining and blockchain are two terms associated with Bitcoin. Bitcoin is mined, but it isn’t the type of mining like digging for gold. Every Bitcoin transaction has to be verified by miners. These miners use powerful computers to solve extremely complicated math problems.
Once a miner verifies a transaction, the nodes on the network will confirm it is valid. Once confirmed, the miners will then be rewarded Bitcoins for their service. And this is how new Bitcoins come into circulation.
Transactions are grouped together in blocks. Once a transaction is verified, the block will be added to the chain of existing blocks, which is where the term blockchain comes from. The blockchain is a digital ledger of all transactions. No one owns or controls the blockchain, and anyone can view it.
How to Buy Bitcoin
Bitcoin is purchased at a cryptocurrency exchange and, in some cases, brokerage firms. Bitcoin is divisible, which means it can be purchased in fractions of one Bitcoin. This is a great way to accumulate Bitcoin or buy just enough to keep in a digital wallet for spending.
Security is important. Choose the exchanges and brokerage firms with the best reputations. Most of these exchanges have a purchase minimum, some as low as $10 worth of Bitcoin.
The Bitcoin Digital Wallet
Most exchanges will give you a digital wallet to hold the Bitcoins. It is important to remember that buying Bitcoin is not like buying stocks. The Securities Investor Protection Corporation (SIPC) protects shareholders if a brokerage firm fails, but cryptocurrencies are not covered. Some cryptocurrency exchanges provide insurance against theft and fraud.
There are two types of digital wallets, cold wallets and hot wallets. Hot wallets connect to the internet, which allows for quick and easy use of Bitcoins. Cold wallets are not connected to the internet. It is common to use both types of digital wallets. It is imperative not to lose the password to a digital wallet. Lost Bitcoins cannot be replaced.
How to Invest or Trade Bitcoin
Investors can buy and hold Bitcoin, expecting it to continue rising in price. Traders can trade Bitcoin and profit from the price movement of the cryptocurrency, up or down. The various methods of trading Bitcoin include:
In addition, the first North American Bitcoin ETF recently hit $1 billion in assets.
Bitcoin can be volatile, with the possibility of it rising and falling 10% or more in a day. If someone buys $100 worth of Bitcoin today, it doesn’t mean they will have $100 in their digital wallet tomorrow. It can be used as a currency where it is accepted, and it can be bought, sold, and transferred to others around the world without having to use a regular bank.
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