Bitcoin has surpassed 60.000 $ in 2021. The growth of bitcoin in recent years triggered a frenzy that has not been seen in the financial markets for years.
The attention that this cryptocurrency is receiving raises a lot of questions, especially about the mania created by the growth registered in the last years. Will it reach unimaginable values or will it all end in a dramatic fall? Is it okay to sell or buy bitcoin right now?
But first of all, the most common test question: what is bitcoin actually and how does it make money?
- Bitcoin is a digital currency that operates outside the control of governments and banks. Its trading is fast and cheap.
- Bitcoin is not traditional money like banknotes or physical coins, and its core values are not measured in traditional terms.
- Bitcoin can be traded directly between two parties or on independent exchanges. Several intermediaries have facilitated investor transactions in recent years.
- Bitcoin is an extremely volatile investment, almost completely speculative. Extreme price variations are common.
WHAT IS BITCOIN?
The cryptocurrency bitcoin was invented in 2008 by an unknown person (or a group of people) using the name Satoshi Nakamoto. The currency started to be used in 2009 when it was launched as open-source software (computer programs offered for use under a free license, which guarantees access for all users to the source code). It was created as a secure alternative to cash, a way to make payments without the need for trust and checks from the banking system.
Defining bitcoin can be difficult. For some, it’s a commodity. For others, it’s digital cash. However, the most concrete definition of bitcoin is this: it is a software, a program designed to allow people to exchange values directly with each other.
Bitcoin is a decentralized digital currency, without having a central bank behind it or a single administrator, which can be sent from user to user in the bitcoin network, without the need for intermediaries. Transactions are verified by cryptographic network nodes and recorded in a public distribution register, called a blockchain.
Bitcoin coins are created as a reward for a process known as mining. They can be exchanged for other currencies, products or services. But the real value of the coin is extremely volatile.
The word bitcoin was defined in a paper published on October 31, 2008. It is composed of the words bit (in computer science, a bit is the measurement unit for the amount of information) and coin (currency). There is no convention for bitcoin capitalization; some sources use Bitcoin, in capital letters, to refer to network and technology, and bitcoin, in lower case, for the unit of account. The Wall Street Journal, The Chronicle of Higher Education, and the Oxford English Dictionary advocate the use of lowercase bitcoin in all cases.
What makes Bitcoin unique is that this software is running on a network of connected, but independent computers. In this way, no one has control over the network. No central bank and no government can dictate the value of the currency.
Each bitcoin transaction is recorded in a register visible to everyone, known as a blockchain. Bitcoin technology is reliable because of its ability to prevent counterfeiting and piracy.
Because bitcoin is nothing more than a string of numbers in a computer program, it has absolutely no intrinsic value. What determines the price is just how much another person is willing to pay for it.
HOW DOES BITCOIN WORK?
Each bitcoin (“BTC” is the main trading symbol, although “XBT” is also used) is a computer file stored in a digital wallet on a computer or smartphone. To understand how cryptocurrency works, here are the terms mentioned above in context:
Blockchain: Bitcoin is powered by an open-source code known as the blockchain, which creates a common public registry. Each transaction is a “block” that is “chained” by code, creating a permanent record of each transaction. Blockchain technology is at the heart of more than 10,000 cryptocurrencies that have emerged after Bitcoin.
Private and public keys: a bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions, providing proof of authorization.
Bitcoin miners: Miners – or members of the peer-to-peer platform – independently confirm transactions using high-speed computers, usually within 10 to 20 minutes. Miners are rewarded in bitcoin for their efforts.
WHAT IS BITCOIN MINING?
Bitcoin miners – also known as “nodes”; are the owners of high-speed computers that confirm each transaction independently and add a complete “block” of transactions to the growing “chain”, which has a complete, public, and permanent record of every bitcoin transaction.
Miners are paid in bitcoin as a reward for their efforts, which encourages the decentralized network to independently verify each transaction. This network of independent miners is declining. At the same time, the chance of fraud or misrepresentation decreases, as most miners must confirm the authenticity of each block of data before adding it to the blockchain, in a process known as “proof of work”.
HOW IS BITCOIN MAKING MONEY?
Bitcoin complies with the law of supply and demand – and as the demand rises and falls, there is a lot of volatility in the price of the cryptocurrency.
In addition to bitcoin mining, which requires technical expertise and investment in high-performance computers, most people buy bitcoin as a form of currency speculation, betting that the value of a bitcoin will be higher in the future than it is now.
Bitcoin can be stored in two types of digital wallets: hot wallets and cold wallets.
- Warm wallet: The digital currency is stored with your trusted provider (exchange type) and accessed through a computer browser, desktop, or smartphone application.
- Cold wallet: the coin is stored either on an encrypted portable device, similar to a memory unit that allows you to download and carry digital coins, or it can be simply transformed into a string and “stored” on a sheet of paper. of paper.
Basically, a hot wallet is connected to the internet; a cold wallet is not. But you need a hot wallet to download bitcoins into a cool portable wallet.
IS BITCOIN A GOOD INVESTMENT?
Bitcoin is almost entirely a speculative investment. There are a number of considerations that need to be weighed before investing. The main consideration is the financial objective. Another important thing is the extremely short history of bitcoin, traded on a very small market.
Since the launch of bitcoin in 2009, its followers have promoted it as a cover for inflation, as a new version of gold. But it has no operating history as such, and it is not clear that it would be effective in a larger asset class, such as gold. What bitcoin has in abundance is volatility. For a certain type of investor, it is very attractive. Based exclusively on the history of prices, Bitcoin has been a winning investment. In January 2009, it had no value; 12 years later, in October 2021, it exceeded the $ 60,000 threshold for the first time.
However, bitcoin can decline or rise rapidly, and unlike traditional markets, there are no closing switches to stop trading. Bitcoin grew by 350% in 2020 but fell by 64% in February and March 2021. While the decline was caused by the economic collapse due to the COVID-19 pandemic, sales were twice as high as the stock collapse.
What is the difference between investing in bitcoin and investing in a foreign currency?
Nakamoto conceived bitcoin as a form of money. The prices of traditional currencies are the result of an open market and the wishes of the governments that issue these currencies. The value of Bitcoin, on the other hand, is only the result of what investors are willing to pay. It is a market based on emotions, and there is no limit to how big (or small) it can be.
There are a number of well-regulated and credible exchange offices (such as Coinbase in the US, BitFlyer in Japan and Kraken in Europe, Coinzix in Romania), from where any investor can buy bitcoin. Signing up for an account is easy, although proof of identity is required.
Several mass services also allow bitcoin trading. Cash Cash, Robinhood, and PayPal now allow users to buy or sell bitcoin directly from their accounts.
For a certain level of anonymity, an attractive and controversial feature of bitcoin is that there are also unregulated exchanges. You can download bitcoin operating software directly for a digital wallet where you can store “cold” bitcoin coins. They require a certain level of technical skill, so you can access a platform like Local Bitcoins that connects buyers directly.
BUYING BITCOIN: PROS & CONS
Bitcoin is a speculative asset class, so it is best to start with the parts you should pay attention to:
Private and secure transactions at any time with lower fees. Once you have bitcoin, you can transfer it anytime, anywhere, reducing the time and potential expense of any transaction. Transactions do not contain personal information, such as a name or credit card number, which eliminates the risk of consumer information being stolen for fraudulent purchases or identity theft. (Note, however, in order to buy bitcoin through an exchange office, you will generally need to first sign in to your bank account and validate your identity).
NOTE: You can buy Bitcoin easily, fast, and secure on COINZIX.
High growth potential. Some investors who buy and hold the currency bet that once bitcoin matures, there will be more confidence and widespread use, and therefore the value of bitcoin will increase.
Ability to avoid traditional banks or government intermediaries. After the financial crisis, some investors are eager to embrace an alternative, decentralized currency – one that is essentially beyond the control of ordinary banks, government authorities, or other third parties. (However, in order to buy Bitcoin on a US dollar exchange, you will probably need to log in to your bank account.)
Price volatility. The 2017 rise of Bitcoin was driven by speculators who rushed to the bitcoin market. Recent gains are good news if you bought Bitcoin in December 2018; those who bought in 2017, when the price of Bitcoin amounted to $ 20,000, had to wait until December 2020 to recover their losses.
Security concerns. While many claim that the blockchain technology behind bitcoin is even more secure than traditional electronic transfers, hot Bitcoin wallets are an attractive target for hackers. There have been a number of high-profile burglaries, such as the one in May 2019 when more than $ 40 million in bitcoin was stolen from several high net worth accounts on the Binance cryptocurrency exchange (the company covered the losses).
Limited (but increasing) use. In May 2019, telecommunications giant AT&T joined companies such as Overstock.com, Microsoft, and Dish Network to accept bitcoin payments. But these companies are the exception, not the rule.
It is not protected by SIPC. Securities Investor Protection Corporation provides investors with up to $ 500,000 if a brokerage house fails or funds are stolen, but this insurance does not cover the cryptocurrency.
From where can I buy Bitcoin?
There are four ways to get bitcoin:
- Crypto Exchanges. There are a number of exchanges in the world, but also in Romania (such as Coinzix).
- Investment intermediation. Robinhood was the first mass investment broker to offer Bitcoin and other cryptocurrencies.
- Bitcoin ATMs. There are already over 30,000 Crypto ATMs in the world, and 7 Coinzix Crypto ATMs in Romania.
- Peer-to-peer purchases. You can buy bitcoin directly from other bitcoin owners through peer-to-peer tools such as Bisq, Bitquick and LocalBitcoins.com.
- Bitcoin mining. You can earn bitcoin by mining, but the necessary technical expertise and the cost of the computer do not make this option available to most people.
Is it worth buying bitcoin?
Buying bitcoin is an incredibly speculative and volatile action. It is worth remembering that stock trading can give you a similar thrill – and the choice of established companies’ shares is generally less risky than investing in bitcoin. But sometimes the gains are phenomenal. Anyone who mined or bought bitcoin in 2009/2010, and forgot where it was stored until last year, knows what we are talking about
Interview with a beginner
Question: So what exactly is bitcoin?
Answer: It is a way for people to change the value of the internet.
A: It is a digital form of money, but there is no government or central bank behind it to control or print the money.
Q: So it’s like currency?
A: A kind of. Bitcoin currency is a system designed to allow people to exchange value directly, without banks or intermediaries brokering the transactions. Bitcoin is global and decentralized, and there is no government to oversee it. However, Bitcoin is literally software. It is a program that runs on an interconnected computer network and facilitates those transactions between people.
Q: So there are digital currencies that are bouncing around the world without anyone keeping track?
A: Coins are transferred through a network of interconnected computers. Each of these computers run the Bitcoin program simultaneously. At the heart of this program is an open register visible to the public. Every bitcoin transaction is recorded in this register. The transaction history is then updated instantly and constantly within each computer program. This results in a Bitcoin history record that cannot be modified or deleted. This transaction log, which has come to be called the blockchain, is at the heart of the network.
It sounds complicated, but it is simply a public spreadsheet that is maintained by a bunch of users. Doing so, it means that no one controls the spreadsheet. People concerned about inflationary currencies, totalitarian governments, or fraudulent banks see it as an improvement over the existing systems.
Q: Do crooks like that too?
A: Yes, unfortunately. Bitcoin allows the existence of an account without the need for identification in any way. This is great for individuals. However, that public registry means that every transaction is fully visible to the world. If a government can get involved in fraudulent or criminal transactions, criminals can get caught red-handed.
Q: Well, I’m not a crook. How can I buy Bitcoin?
A: You can download the Bitcoin program itself, but this can be difficult to set up for someone who does not have advanced IT skills. If you don’t want to go that far, just get a wallet.
Q: What do you mean by a wallet?
A: It is a nickname for an online account such as Yahoo or Apple Pay. Some bitcoin wallets are provided by companies such as Coinzix, and others, such as the wallet that comes with Bitcoin software, are maintained directly by the owner.
A service like Coinzix keeps your wallet and access key. If you have a personal wallet through the Bitcoin program and you lose your wallet access key, you may lose access to your account forever.
Q: What about security issues? Are these real?
A: They are real. Phishing scams are notorious. Bitcoin wallets can be the target of hackers, just like any other online account. Even those with digital skills, woke up one day with their digital wealth gone.
Q: So there are no refunds if your wallet is stolen?
A: Once a transaction is registered, it can never be deleted. This is the most important aspect of bitcoin, which prevents anyone from spending the same currency twice. This also means that every sale is unique and final, so to speak. In case of theft, that money is gone forever.
Q: Maybe I shouldn’t do that.
A: Indeed, it is not for everyone.
Q: Okay, I’ll take the risk. I have a wallet. How do I buy and sell bitcoin now?
A: The easiest way is to go to an online exchange platform like Coinzix, which is similar to a traditional currency exchange platform.
Q: I saw that the price of a bitcoin reached $ 60,000. It’s a lot of money. I can’t afford that.
A: Each bitcoin is divisible to the eighth decimal place, so you can buy very small amounts if you wish.
Q: Okay, I’ll buy some bitcoin. What do I get?
A: Well, you literally get a few entries in an account in a software program. But right now, these entries have a purchasing power of about $ 60,000 for each complete bitcoin among the people who accept them.
Q: And can I sell my bitcoin and get dollars, or euros, or whatever?
A: Yes, although it is a volatile market. Keep this in mind.
Q: So bitcoin is a currency?
A: It is a security deposit or a means of making payments. It depends on your point of view. As long as others think it has value, it is an asset.
Q: Is it like gold then?
A: Some people call it digital gold or gold 2.0 because governments cannot control or depreciate it. That’s why, like gold, some people see bitcoin as a hedge against inflation.
Q: Gold has some non-financial uses, such as jewelry making. Does Bitcoin have other uses?
A: Because it is digital, it would not produce very good jewelry. But right now, with such a high price this year, you could buy some beautiful jewelry with it. Instead, the blockchain technology used to generate cryptocurrencies has other utilities.
Q: So why is the bitcoin price rising so much this year?
A: There is no definitive answer to this. Some people believe that bitcoin will become a global currency and will be widely accepted and used. Indeed, bankers are becoming more and more interested in it as an investment. It is assumed that if bitcoin becomes a mass investment, the stock of investments will increase its price more and more. A lot of people also think that everything is just a temporary mania, that people are in a hurry to buy bitcoin just because they think the price is going up.
Q: Sounds like a financial bubble. Is Bitcoin a bubble?
A: The price of Bitcoin has increased by 5,000% in the last 12 months. Whether or not this is a bubble, is something that investors have to decide in the end.
Q: A gain of 5,000%?
A: It’s not the only record of its kind. In 2013, bitcoin jumped by more than 5,000%. The following year, however, it lost 60% of its value. Caveat emptor – the principle according to which the buyer is solely responsible for checking the quality and adequacy of the goods before making a purchase.