Bitcoin (trading symbol “BTC” or “XBT”), the first crypto currency, is a decentralized variant of digital cash. Traditional intermediaries such as governments and banks no longer need to carry out financial transactions here.
Definition: What exactly is BTC?
The virtual coin was introduced in 2009 and was one of the newest assets called crypto currency. It is decentralized, digital cash. Traditional intermediaries such as governments and banks no longer need to approve financial transactions.
Instead, the new currency is based on a combination of peer-to-peer technology – a network of independent users comparable to the voluntary editors of Wikipedia – and software-driven cryptography. Cryptography is the science of passing on secret information that can only be read by the sender and the intended recipient. The result is a currency that is secured by code rather than physical materials such as silver and gold, or by central authorities such as the US dollar, the euro or the Japanese yen.
“What is needed is an electronic payment system based not on trust but on cryptographic evidence, allowing two parties to trade directly with each other without requiring a third party,” wrote Satoshi Nakamoto in a white paper on the introduction of open source technology. The name “Satoshi Nakamoto” is only the pseudonym of the mysterious Bitcoin inventor.
How does BTC work?
Each coin is a file stored in a virtual wallet on a smartphone or computer. To know how BTC works, these terms and their context are very helpful:
- Blockchain: BTC works with open source code. This code is called block chain and results in a common public general ledger. Each transaction results in a “block”. This block is chained to the code and creates a permanent record of each transaction. The block chain technology is at the heart of over 2,200 crypto currencies created after the first BTC.
- Private and public keys: Each Bitcoin wallet contains one public and one private key. These work together to allow the user to securely execute and digitally sign transactions. The keys are an important proof of authorization.
- Bitcoin-Miner: Miners, members of the peer-to-peer platform, independently confirm the transaction using high-speed computers, typically within 10 to 20 minutes. Miners receive coins for their efforts.
The value of each Bitcoin is based on the law of supply and demand. Since demand fluctuates greatly, the price of the digital currency is very volatile.
Save Bitcoins: Hot Wallets and Cold Wallets
Bitcoins are stored in two different forms of digital wallets:
- Hot wallet: The virtual money is stored in the cloud at a reliable exchange or with other providers. Users access their wallet via the browser or a smartphone app.
- Cold Wallet: A portable, encrypted device similar to a USB flash drive. Users can use it to download and transport their coins.
In general the Hot Wallet is connected to the Internet, it is not a “cold wallet”. Investors need a “hot wallet” to download coins into a portable cold wallet.
Buying BTC: the advantages and disadvantages
With such a speculative asset class as digital currencies, it is better to start with the downside first:
BTC – the disadvantages
- Price volatility: The rise in the Bitcoin price in 2017 was driven by speculators entering the Bitcoin market. The recent gains are good news for those who have only recently bet on the coins. All others who bought in 2017, when the Bitcoin price rose to $20,000, still have to make up for their losses.
- Attacks by hackers: Fans of digital currency are convinced that the block chain technology behind BTC is even more secure than conventional electronic money transfers. Nevertheless, Bitcoin’s Hot Wallets were an attractive target for hackers. There have been a number of complicated hacks, with more than $40 million in coins stolen from numerous accounts on the Binance crypto currency exchange.
- Growing but limited usage: The telecommunications giant AT & T, together with companies such as Overstock.com, Microsoft and Dish Network, accepts payments in digital currencies. But these companies are still the exception, not the rule.
- Not protected by SIPC: The Securities Investor Protection Corporation insures investors with up to $500,000 USD if a broker defaults or funds are stolen. However, this insurance does not cover digital currencies.
BTC – the advantages
- Private, secure transactions at all times: Once users have the coins, they can transfer them anytime, anywhere. This reduces the time and potential cost of each transaction. The transfers do not contain any personal information such as a name or credit card number. This eliminates the risk of consumer information being stolen for fraud or identity theft. It should be noted, however, that users generally need to link their bank account first in order to buy coins on a stock exchange.
- Potential for large growth: Some investors who buy and hold the currency are betting that greater confidence and broader use will follow in the future, and that the value of the coins will therefore increase.
- Traditional banks or state intermediaries are no longer necessary: Especially after the financial crisis and the great recession, investors are anxious to choose an alternative, decentralized currency. This should be essentially outside the control of regular banks, government agencies or other third parties.
Where can I buy BTC?
There are four ways to obtain digital currencies:
Exchange of crypto currencies
There are numerous stock exchanges worldwide for this purpose. The first investment brokers are already offering BTC and other crypto currencies such as Ripple and Ethereum. Other brokers have announced plans to offer trading in digital currencies in the near future. The most popular crypto currency exchanges include Coinbase, Binance and Bitstamp.
Bitcoin ATMs are becoming increasingly popular. On the Internet, users can find a suitable ATM in their vicinity.
True to its original spirit, users can buy BTC directly from other Bitcoin owners via peer-to-peer tools. The most popular providers include Bisq and Bitquick.
Investors can earn BTC through mining. However, the required technical know-how and computer costs make this option unattainable for most.
BTC – What are crypto currencies actually?
Like any currency, the virtual alternative can be used to purchase goods and services. However, compared to other currencies, crypto currencies are digital and use cryptography to provide secure online transactions.
What is particularly interesting about virtual currencies is that they are not regulated. Investors want to trade them for profit, whereby speculators often want to drive up prices.
Virtual currency is a payment method that can be exchanged online for goods and services. Many companies have issued their own currencies called tokens. These can be traded specifically for the goods or services that the company offers. This currency is similar to arcade tokens or casino chips. Users must exchange real currency for crypto currency to access the goods or services.
Crypto currencies work with a technology called block chain. Blockchain is a decentralized technology that is distributed over many computers and manages and records transactions. Part of the appeal of this technology is its security.
How many crypto currencies are there and what are they worth?
Meanwhile more than 2,200 different crypto currencies are publicly traded. And crypto currencies continue to multiply and collect money by initial coin offers or ICOs. The total value of all crypto currencies on June 6, 2019, was approximately 246 billion US dollars. The total value of all Bitcoins, the most popular digital currency, was around US$136 billion.
Why are they so popular?
Crypto currencies appeal to their supporters for various reasons. Here are some of the most popular ones:
- Supporters see crypto currencies like BTC, Ethereum or Ripple as the currency of the future. Investors are trying to buy them now before they probably appreciate in value.
- Some proponents like the fact that virtual currency prevents central banks from managing the money supply. Over time, these banks tend to reduce the value of money through inflation.
- Other supporters like the technology behind crypto currencies, the block chain, because it is a decentralized processing and recording system. It can be more secure than traditional payment systems.
- Some speculators like crypto-currencies because they are stable in value.
Are virtual currencies a good investment?
Crypto currencies may gain in value, but many investors see them as mere speculations and not as real investments. The reason? Just like real currencies, crypto currencies do not generate cash flow. In order for investors to benefit, someone has to pay more for the currency than they do.
This is called “The Greater Fool” of the investment. This theory is comparable to a well-managed company that increases its value over time by sustainably increasing its profitability and cash flow. If you see crypto currencies like BTC as the currency of the future, you should keep in mind that a currency needs stability.
The problem is that crypto currencies like BTC may not be as secure as advertised. Many important voices in the investment community have advised potential investors to stay away from them. Particularly to emphasize is that the legendary investor Warren Buffett compared Bitcoins with cheques. According to Buffett, virtual currencies are a very effective way to transfer money. After all, users can do this absolutely anonymously. But that is the only reason why checks are not worth money. And according to the star investor, virtual currencies are not worth it either.
Every currency needs stability so that traders and consumers can determine what is a fair price for goods. BTC and other crypto currencies have been anything but stable for much of their history. While BTC was trading at nearly $20,000 in December 2017, its value dropped to just $3,200 a year later. In May 2019, it exceeded USD 8,000 again.
This price volatility creates a mystery. If Bitcoins could be worth much more in the future, investors are less likely to spend and circulate them today, making them less profitable as a currency. Why spend its coins when they could be worth three times as much next year?
How do I buy crypto currencies?
While some crypto-currencies, including BTC, are available with any major currency, others require investors to pay with BTC or other virtual money.
To buy crypto currencies, investors need a wallet, an online app that can hold the currency. In general, users create an account at a stock exchange and can then transfer real money to buy crypto currencies such as BTC or Ethereum.
Coinbase is a popular crypto currency trading exchange, where users can both create a wallet and buy and sell BTC and other crypto currencies. In addition, various online brokers offer free crypto currency trades.
Are crypto currencies legal?
In Europe and the USA, virtual currencies are legal and can be used without any problems. China, on the other hand, has essentially banned their use. Ultimately, it depends on each individual country whether the virtual currencies are legal. Another important point is how investors can protect themselves from thieves who consider crypto currencies as a chance for various scams.
How do I protect myself from hackers?
If you want to buy virtual currencies in a stock exchange, it is best to read the small print in the company’s imprint. The following information should be available there:
- Who owns the company? An identifiable and known owner is a positive sign.
- Are there other major investors investing in them? It is a good sign when other well-known investors want some of the currency.
- Do investors have an interest in the company or just one currency or token? This distinction is important. Those who own a share can participate in its earnings. Buying tokens only means that investors are entitled to use them like chips in a casino.
- Is the currency already fully mature or does the company want to raise money to develop it? The further the product is, the less risky an investment is.
Combing through the small print can take a lot of work. However, the more detailed it is, the better the chances are that the currency is legitimate. But even legitimacy does not mean that the currency will be successful. That is a completely different question and it requires a lot of market knowledge.
Apart from these concerns, there is a risk of theft for investors. Hackers regularly attempt to penetrate the computer networks where assets are managed. A high-profile stock exchange declared bankruptcy in 2014 after hackers stole hundreds of millions of dollars worth of Bitcoins. These are not typical risks for investing in stocks and funds on major stock exchanges.
Bitcoin Mining: Is it profitable?
Bitcoin mining is crucial for maintaining the block chain underlying the virtual currency. But over time, miners face fewer rewards and higher costs.
In the past, mining was a term usually reserved for those who dig deep in the ground for precious metals. Today, there is another type of mining that looks for new treasures in a completely different way.
Bitcoin Miners, which are equipped with high-tech computers rather than a spade, are crucial to the Bitcoin ecosystem. They employ the critical processing power needed to maintain block chain and verify the thousands of transactions that occur daily. At the same time, they guarantee the stability of the network against hackers and track the trade.
The art of Bitcoin mining is only ten years old. However, the rewards offered show that mining has evolved from a hobby for the home to an industrialized, energy-intensive market.
Decentralization is the heart of the virtual coin. The importance of the block chain is obvious, but the functioning of this public ledger is often overlooked because it is not controlled by a single person or organization.
How does Bitcoin Mining work?
Bitcoin Mining ensures that the virtual coin works as intended. The only way is to add a new offer to the market. Miners are individuals or companies that contribute computing power to maintain and operate the block chain network on which the virtual coin as a digital currency is based.
These computers are responsible for checking all Bitcoin transactions and in return are given the ability to search for newly created coins. Although the Internet has provided a fast and universal communication channel worldwide, the emergence of a truly decentralized system that can operate globally has still been held back by three major issues.
First, if no one is in control, who will record the transfers and pay the recording fees? Second, who would hold these accountants accountable? And third, how can users be encouraged to become accountants in the first place?
Satoshi Nakamoto, the inventor of the virtual coin, had an answer for all three. Miners would use their own computers to power and maintain the block chain and organize the transactions of other users.
The computers of other miners would then check the work. So you get a public one about which transactions to confirm. If the original Miner’s information does not match the information of all the others, it is clear that something is wrong.
In return, the miners receive transaction fees and, as long as new coins have yet to be produced, the opportunity to win the new money that the logbook publishes approximately every ten minutes.
Using Bitcoin Miners to operate the block chain solves many of the problems that brought previous systems to a standstill. It is decentralized: The general ledger is not under a single point of control, and anyone can access and review the recorded transactions. It is an incentive: users use their own hardware and pay for the additional power needed to run the block chain, as they are rewarded with new coins.
Together, this makes it immune to hackers: the fact that it is powered by a large number of computers worldwide rather than a single source means that it is highly unlikely (though not impossible) that anyone can take over the network.
What is BTC: How the popular coins are created
Today, Bitcoin mining is mainly performed with powerful, specially designed computer systems known as rigs. Day and night, these rigs run customized software.
All computer systems were set up for the same reason: to search for new coins. But to get rid of this money, they have to help update the public ledger and validate the work of other miners who maintain the block chain. Every existing virtual coin was created by mining. This means that every coin belongs to a miner until he decides to sell it.
Each transaction is first entered in the network as “pending” or “not confirmed”. Therefore a constant data stream must be checked by the miners to confirm the transaction. This is the same principle as a bank processing a payment with a debit card.
These transactions contain all necessary important information such as the wallet addresses of the individual parties and the date, as well as optional data such as reference numbers, messages and transaction codes.
Why do users mine virtual coins?
The miner who completes the chain and has helped verify transactions receives two rewards: He receives the new coin and the associated transaction fees. This is one way to get virtual coins and not have to buy them.
The Bitcoin logbook determines the speed and quantity of new Bitcoin products that are launched on the market. Every ten minutes new Bitcoins are released for successful miners. The algorithm that controls this is not technically predetermined by time.
Instead, it will be adjusted how difficult it is for the miners to seal a new block in order to keep the flow of new supplies constant at this rate. This means that the rate at which coins are released will not be affected as the number of miners in operation increases or more computing power is applied.
The rewards offered remain the same no matter how many miners compete for them. Also the volume of the new offered coins remains the same, no matter how much computing power is behind it. Only the probability of which miner wins the offered rewards changes.
While new Bitcoins continue to be released over a ten-minute period, the volume of new Bitcoins issued to successful miners changes and halves approximately every four years (technically every 210,000 blocks).
Is Bitcoin celebrating its comeback as a plant?
The price of buying a Bitcoin – the world’s first and most popular digital currency – was $8,000 in May, after trading at just $3,237 in December. The recent highs are encouraging for fans of crypto currencies, but still far from Bitcoin’s meteoric rise in 2017, when the price approached $20,000.
With rising purchase prices, public interest in buying BTC is also growing. The first thing investors should know: All investments are associated with risks and experimental crypto-currencies like BTC are among the riskiest. For this reason, interested parties should never invest more than they can afford.