A beginners guide to Bitcoin | Foundation of Cryptocurrencies
Bitcoin is a digital currency that operates independently of any central bank. It was invented in 2009 by an unknown person or group using the name Satoshi Nakamoto.
Transactions are made with no middlemen – meaning no banks! Bitcoin can be used to book hotels on Expedia, shop for furniture on Overstock and buy Xbox games. But much of the hype is about getting rich by trading it.
The price of Bitcoin skyrocketed into the thousands in 2017. Bitcoins can be used to buy merchandise anonymously as well as make international payments without the need for a third party like a bank or government. It allows users to send money over the Internet without needing a centralized authority, such as a bank or payment gateway.
Differences between Bitcoin and Traditional Currencies
There are several significant differences between Bitcoin and traditional currencies (e.g. US dollar):
Bitcoin does not have a centralised authority or clearinghouse. No government or financial institution has control over Bitcoins. Users and miners around the world manage the peer-to-peer payment network. The currency is anonymously transferred directly between users through the internet without going through a clearinghouse. This means that transaction fees are much lower.
Bitcoin is created through a process called “Bitcoin mining”. Miners worldwide use mining software and computers to solve complex bitcoin algorithms and approve Bitcoin transactions. They are awarded transaction fees and new bitcoins are generated from solving Bitcoin algorithms.
A public ledger called ‘Blockchain’ records all Bitcoin transactions and shows each Bitcoin owner’s respective holdings. Anyone can access the public ledger to verify transactions. This makes digital currency more transparent and predictable. More importantly, transparency prevails over fraud and double spending of the same Bitcoins.
Advantages of Bitcoin Investment
Investing in Bitcoin comes with a lot of advantages. One of the key benefits is that the digital currency is decentralized, meaning there are no intermediaries involved in transactions. This means that investors can enjoy lower transaction fees as they don’t have to pay fees to middlemen such as banks and financial institutions.
Another advantage of investing in Bitcoin is that it has a limited supply, unlike fiat currencies, which governments can print at will. This scarcity makes it highly valuable and thus, attractive for investors looking to diversify their portfolios.
Lastly, Bitcoin investment offers high liquidity since the cryptocurrency can easily be converted into fiat currencies or other cryptocurrencies. With its easy transferability across borders and low transaction costs, Bitcoin is an ideal investment option for those who want to diversify their portfolio while simultaneously minimizing risks associated with traditional investments such as stocks or bonds.
Risks Associated with Bitcoin Investment
Bitcoin investment has gained immense popularity in recent times, but it comes with its own set of risks. The first and foremost risk associated with Bitcoin investment is its high volatility. As no regulatory authority governs the cryptocurrency market, prices can fluctuate rapidly and without warning. Investors could potentially suffer significant losses if they buy when prices are high and sell when they drop.
Another risk associated with Bitcoin investment is cyber theft. With the increasing value of Bitcoin, hackers have become more determined to steal them from investors through hacking or phishing scams. Therefore, it’s important for investors to take the necessary steps to secure their digital wallets by using strong passwords and two-factor authentication.
Investors must also consider the lack of regulation within the Bitcoin market as a potential risk. This means there may not be proper safeguards to protect investors from fraud or manipulation within the cryptocurrency market. It’s important for potential investors to carefully research before investing in Bitcoins and consider only investing what they can afford to lose.
Is investment in Bitcoins Safe?
Bitcoin has been a high-risk, high-reward investment until now. Starting at $13 in 2013, the price of one Bitcoin (BTC) hit an all-time high in 2021, with prices above 65,000 USD for the first time in February 2021, April 2021, and November 2021, respectively. Again, when I was writing this article on July 25 July 2022, it was trading at around 21,889 USD per BTC. Imagine how volatile Bitcoin has been.
Bitcoin investors are generally insensitive to price volatility and unlikely to exit their positions, barring some dire eventuality. The current price rally is driven by institutional investors, who view Bitcoin as a hedge against macroeconomic uncertainty. The result is that even if individuals don’t invest in Bitcoin, their retirement funds, insurance companies, and pension funds might be. This institutional investment is a key driver of the current Bitcoin price rally.
Conclusion
Bitcoin has definitely made a significant impact since its inception. While it currently holds a prominent position in the crypto market, whether it will rule the entire crypto world entirely is a fascinating question. The world of cryptocurrencies is dynamic and evolving, with new innovations and projects emerging all the time. It’s always exciting to follow the latest developments and see how the crypto landscape unfolds. So, while Bitcoin remains a key player, only time will tell what the future holds for the entire crypto world.