If you have been following the news over the last decade or so, you’ve probably heard of Bitcoin. It’s one of the most talked-about assets of the past few years, largely because of its wide adoption. Bitcoin is one of many cryptocurrencies, and while notable, cryptocurrencies are a widely misunderstood phenomenon, and many people don’t know how to purchase, hold, use and dispose of them.
What are cryptocurrency and Bitcoin?
Let’s start with the basics by answering the questions: what is cryptocurrency? And how does it work? Cryptocurrency, or “crypto” for short, is a distributed, internet-based medium of exchange to conduct financial transactions. Cryptocurrencies leverage blockchain technology to make exchanges between parties. All this happens outside of any central bank or financial institution.
Bitcoin was the first popular cryptocurrency, and is known for its strong security track record (i.e. not being subject to hacking or forks). Today it is an established alternative currency around the world. It was created in 2009 by an anonymous developer(s). Bitcoin can be sent anywhere in the world. No bank controls it, so accounts can never be closed.
Essentially, it is an uncensorable monetary instrument.
Those who believe in the value of scarce, uncensorable currency predict that Bitcoin will become the money of the future.
Today there are thousands of cryptocurrencies, commonly called “altcoins”. They trade on exchanges all over the world. You can explore a list of the most popular cryptocurrencies on CoinMarketCap.com.
The act of becoming rare
There’s a fixed amount of Bitcoin (there will only be 21 million coins total), as determined by its publicly available code. Every four years, (or more specifically, every 210,000 blocks) the number of new bitcoins being mined gets cut in half. As more people buy and hold, and fewer and fewer coins are produced, less coins are available on the exchange and the value of the existing Bitcoin in circulation can increase due to speculation and demand.
Some cryptocurrencies mimic bitcoin, and only have 21 million coins. Others have billions of coins in circulation.
Setting a value on Cryptos
The price of cryptocurrencies is determined by supply and demand. The value can fluctuate drastically, so it’s critical to do your research and understand the value of the currency at the time you are looking to acquire it and based on the time you intend to hold it. As cryptocurrency is not backed or guaranteed by a central government or bank, its value is wholly dependent on the market.
How crypto works
Like most other cryptocurrencies, Bitcoin exists on the blockchain - a network of computers that check each and every transaction performed. This process, called “hashing,” is based on a mathematical computation the blockchain computers complete to verify each transaction (much like how our credit card companies verify every transaction we make with our card). When a hash is solved or a transaction is approved, it becomes a “block” and can no longer be altered. This process of adding blocks to the blockchain is referred to as “mining.”
The computers that solve that hash (miners) are then rewarded with cryptocurrency. This incentive has created a network of miners who compete to solve hashes as fast as possible, and reap the cryptocurrency reward. Every four years, the reward for miners is cut in half.
Any currency you hold is stored in your digital wallet and can be used to buy products or services through the blockchain. They can also be turned into gift cards that are redeemable at major mainstream retailers such as Target and Amazon. Not all retailers accept crypto, but it is becoming more widely accepted. Note, your wallet can be hacked and is not insured like a bank account, so be sure to protect your passwords and keys.
When is the right time to buy?
Timing your buys perfectly isn’t possible. Many people recommend using “dollar-cost averaging”, or buying the same amount of crypto periodically over time. So you could buy $50 worth of bitcoin per month for a year. This way you will pay approximately the average price during the period you buy over.
Trading cryptocurrencies short-term is extremely difficult, and most people will lose money trying to do so.
Many experts recommend simply buying and holding for the long-term.
What to know before you buy
In some countries, Bitcoin and other cryptocurrencies are illegal. Before you buy, make sure you carry out thorough research of the laws and regulations applying to your country.
Where to buy Bitcoin and other Cryptocurrencies
There are a few options to buy Bitcoin and altcoins, and each come with their own pros and cons:
Cryptocurrency exchange: This is one of the easiest ways to obtain Bitcoin and altcoins. Exchanges typically charge a percentage of the purchase price. There are a few exchanges, so do your research to compare and contrast each one before buying. The largest crypto exchanges in the U.S. include Coinbase, Gemini, Bittrex, and Binance. Make sure the exchange you pick has an excellent security record, and good customer service.
Stock brokers: If you prefer to buy from traditional stockbrokers, there are many options available today. Robinhood, TD Ameritrade, Etrade, Schwab, and others offer their clients the option to buy Bitcoin today.
Bitcoin ATMs: These are similar to cash ATMs.There are multiple ATMs in most major cities and they only require the QR code of your Bitcoin address to process a transaction. The total exchange can take less than 30 seconds, but it usually comes with a higher processing fee.
Peer-to-peer transactions: You can buy Bitcoin and altcoins directly from other holders, just like you would buy on an online marketplace such as Craigslist. Be careful though -- due to the unregulated nature of cryptocurrency, it is possible to get scammed.
Grayscale funds: The Grayscale Bitcoin Investment Trust (GBTC) allows investors to own Bitcoin as part of public shares bought and sold through the Trust. This saves investors from having to go on the exchange and create their own wallets, however this security tends to trade at a “premium” to the price of the actual bitcoin held by the trust. So most of the time you will get more Bitcoin for your dollar buying direct from an exchange.
How to store bitcoin and altcoins: Two options
Bitcoin and other coins are usually stored in either a “hot” or a “cold” wallet. The primary difference is how you access your Bitcoin, and both options come with different costs.
A hot wallet stores coins via a trusted exchange service or provider and can be accessed through any internet browser. Hot wallets are easy to find and maintain, so most trading exchanges offer a free hot wallet just for signing up. However, hot wallets can be hacked. Always use a long and unique password for exchange accounts, plus two-factor authentification like Google’s Authy.
A cold wallet involves a small, portable encrypted device that allows you to download your Bitcoin for safer keeping offline. There are a number of established providers of cold wallets today, including Ledger and Trezor. They are generally safer than hot wallets, but take more time to set up.
Making your purchase
Buying Bitcoin, or any other cryptocurrency, is simple:
Join a cryptocurrency exchange. There are many different exchanges out there, so research the right one for your needs and interests, since it’ll be the primary platform for trading and managing your Bitcoin.
Make your purchase. Once you are set up, you can then place your order. Don’t forget that one BTC can equal thousands of dollars. You can purchase fractions of a Bitcoin to a specific decimal point, so buy for an amount that fits your budget.
Decide how to store your cryptocurrency. Cold wallets are generally seen as the safest option.
Cryptocurrencies are an exciting new investment opportunity, but never invest more than you’re willing to lose. Bitcoin and other altcoins are volatile, and fluctuate in value. There are many risks associated with owning cryptocurrency, including total loss (and as cryptocurrencies are not insured, there is no equivalent to FDIC insurance), but the rewards can also be high.
In most countries, there are tax implications of buying and trading cryptocurrencies. If you’re unsure about them, consult a tax professional. In addition, most cryptocurrencies are not considered securities, so are not eligible to take advantage of long-term capital gains.
Who created Bitcoin?
An anonymous developer who went by the name of Satoshi Nakamoto. Since then it has been worked on by thousands of volunteers from the Bitcoin community.
Can Bitcoin be converted to cash?
Yes, Bitcoin can be converted to cash through a cryptocurrency exchange, such as Coinbase or Gemini.
Is Bitcoin safe to use?
If you use proper security practices, yes, it is safe to use and store. See this list of security tips for beginners from Coindesk.
Where can I spend Bitcoin?
You can spend Bitcoin at thousands of online stores, and in some retail locations. For a long list, see here.
This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.
How to Invest in Bitcoin