Bitcoin is a digital currency that operates outside the control of governments and banks. Trading is fast and cheap. Its volatile price – found by looking at BTCUSD – has made it popular with high-stakes investors, who are risk-seeking and keen on high payout capacity.
Explaining bitcoin can be difficult. For some, it’s a product. For others, it is digital money.
However, here is the most definitive definition of bitcoin: It is a software, a program designed to allow people to exchange value directly with each other. It was created by someone called Satoshi Nakamoto, was published in 2008 and launched the following year.
What makes bitcoin unique is that this piece of software is run over a network of connected but independent computers. That way, no party can control the network. No central bank and government can determine the value of the currency.
All bitcoin transactions are recorded in a publicly visible ledger, known as “the blockchain.” Bitcoin technology is trusted due to its ability to prevent side effects and slowing down. The currency database has not been drilled once since it went live in January 2009.
Since “bitcoin” is nothing more than numbers in a computer program, it has no value. What determines the price is exactly what someone else is willing to pay for.
Is bitcoin a good investment?
Bitcoin is almost entirely a speculative investment. There are several things you should take into consideration when deciding whether to invest. A key among them is your financial goals.
The most important thing to keep in mind is the very short history of bitcoin, and for all that it has traded within a very small market.
Since its launch in 2009, its fans have been hailed as a hedge of inflation, like a new version of gold. But it has no history of working like that, and it is not clear whether it would be so effective if it operated as a larger asset class, such as gold.
What bitcoin is, in abundance, is volatility. For a certain type of investor, that’s very attractive. Based solely on its price history, bitcoin has been a successful investment. In January 2009, there was no value; 12 years later in February 2021, it surpassed $ 50,000 for the first time.
However, it can move violently, and unlike traditional markets, there are no circuit breakers or closing bells to stop trading. It rose 350% in 2020, but fell 64% in February and March. While the fall was driven by the economic downturn due to coronavirus infection, sales were twice as large as the fall in stocks. It can and has grown wild within a day.
Why not invest in bitcoins like investing in cash?
Nakamoto designed it as a kind of silverware, but it disappeared in 2010 and has not been heard from since.
Prices of traditional currencies are due to an open market and the desire of the governments that issue these currencies. The value of Bitcoin, on the other hand, is simply due to what investors are willing to pay. It is a sentiment – driven market, and there is no limit to how high or low it can go.
What you know before investing in bitcoin
There are several trusted, regulated exchanges, such as Coinbase in the US, BitFlyer in Japan, and Kraken in Europe, where investors can buy bitcoin. Signing up for an account is easy, although you will need to provide proof of identity.
More mainstream services allow bitcoin trading as well. The Cash App at Square Inc., Robinhood and PayPal are all now allowing users to buy or sell bitcoin directly within their accounts.
If you want to maintain an anonymity level, an attractive if controversial feature of bitcoin is that there are also unregulated exchanges. Additionally, you can download bitcoin operating software directly. Or you can get free software and hardware and for sale to store digital wallet and bitcoins directly. But be warned, these require a certain level of technical skill. You could then go to a platform like Local Bitcoins that connects buyers directly.
Bonus: What is Ethereum?
Ethereum is the same technology as bitcoin but configured for a different purpose.
Ethereum was designed to be a more flexible version of bitcoin that would allow different types of services to be built on top of it.
Despite its intentions, Ethereum has yet to produce a version that is accessible to non-programmers.
Beyond bitcoin and Ethereum, there are thousands of other cryptocurrencies. However, they are all even smaller and more speculative.
Resources
- The original Bitcoin White Paper. A nine-page paper explaining bitcoin written by creator Satoshi Nakamoto. Definite starting point.
- Bitcoin 101. An in-depth guide to bitcoin from Coindesk, an independent news and research site.
- OnChainFX. Search site with data on hundreds of cryptocurrencies.
Level Up
- What is Bitcoin? Start-up Q&A.
- What Hackers Like About Bitcoin. An inside look at what makes bitcoin so appealing to hackers.
- Central Banks and Digital Money. The world’s major central banks are exploring the withdrawal of their own digital currencies. Here’s what you need to know.
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