What Is Bitcoin?
Bitcoin (BTC) is the very first form of cryptocurrency. A decentralised digital currency that uses cryptography to verify and record transactions. Bitcoin was created by Satoshi Nakamoto and debuted in 2009. This cryptocurrency was the very first of its kind. Satoshi Nakamoto departed the project in 2010 whilst remaining anonymous, and so far continues to remain that way. At present, bitcoin is solely controlled by a community of users and developers. Bitcoin.org describe bitcoin as ” The first decentralised peer-to-peer payment network that is powered by its users with no central authority or middlemen… From a user perspective, pretty much like cash for the internet”.
How Does Bitcoin Work?
Bitcoin uses 3 key components; Blockchain, Asymmetric Cryptographic Keys and Miners. All transactions that are conducted are listed in a shared public ledger. Transactions are referred to as ‘Blocks’ which are then linked to code (chains). As a result, all individual transactions processed using blockchain are permanently recorded. Asymmetric cryptographic keys function is to safely store users bitcoin in a digital wallet. The private key should remain private, and only be stored on the user’s device to decrypt data. In contrast, the public key is visible to all users of the network. And lastly, the bitcoin miners, that make everything possible. They’re members of the Bitcoin Network (Peer-To-Peer platform) located all around the world. Miners are responsible for confirming transactions (Blocks) using high-speed mining devices (computers, ASICs etc). The time it takes to complete a confirmation of a transaction according to The Bitcoin.org is ” between a few seconds and 90 minutes, with 10 minutes being the average”. Miners are rewarded with bitcoin for every block that they mine. However, the profit for miners can sometimes be non-existent or only cover their running costs.
Why Invest In Bitcoin?
I will only touch on a few advantages and disadvantages of owning bitcoin as an asset. Without further ado let’s have a look at the advantages:
Decentralised – Not one single entity controls the BTC network and currency. The current monetary systems in place today are centralised, controlled by the government and central bankers. Bitcoin should be seen as a speculative hedge against the failing economic system in place today.
User Anonymity – Bitcoin can provide users with unrivalled privacy when completing transactions compared to anything seen before to this day. Users are not required to provide personally identifiable information (PII). In today’s world, where governments are craving, want increasing powers and control over our freedoms. This digital asset provides users with increased privacy when completing their financial transactions.
Limited Supply – By design, there will only ever be 21 million coins created and in circulation. Bitcoin is an extremely scarce and deflationary asset. However, the current monetary systems are extremely inflationary and have an unlimited supply. In the UK, the Bank of England and government aim for a 2% inflation target each year.
Low Transactions & Quick – Bitcoins Peer-2-Peer network provides its users with the ability to complete transactions quickly and at very little cost.
Now, let's take a look at a few disadvantages:
Volatility – Bitcoin can be extremely volatile. To get an idea of its volatility, bitcoin has fallen by more than 50% on one day and nearly doubled in value on another. However, I believe this volatility will begin to reduce and stabilise as time goes on but we will have to see.
Bitcoin Scams – With the rise of cryptocurrencies, there has unfortunately also seen a rise of pesky individuals finding ways of scamming innocent people out of their hard-earned money or bitcoin. This, unfortunately, will not ever go away but there are things users can do to protect themselves so they don’t fall foul of these bad people.
Once it’s gone, you can’t get it back! – Unlike the current financial system in place, if something goes wrong you can attempt to recover your money through a refund or chargeback. Bitcoin does not offer users the same facilities as they have in the current financial systems. If you lose your bitcoin then it’s most likely it will never to be seen again. Always remember to complete your own due diligence when sending money or paying for any product or service.
Environmental impact – Bitcoin consumes a huge amount of electricity to mine and keep the network going to complete transactions for users. The BBC allegedly reports that bitcoin consumes more energy than the whole of Argentina. In this article, Cambridge researchers state it “consumes around 121.36 terawatt-hours (TWh) a year “.
How To Invest In Bitcoin?
How can you buy or earn bitcoins? Online you will see many suggestions on how to acquire this digital asset. I will only be highlighting the main 2 main methods; via cryptocurrency exchanges and mining.
Cryptocurrency Exchanges
Crypto exchanges are an online marketplace where traders can buy & sell a variety of digital currencies (BTC, ETH etc) in just a few clicks. Some well-known exchanges are; Coinbase, eToro, CoinJar, Kraken etc. Make sure you complete your own due diligence (reputation, security, fee structure, validation checks) on any exchange you decide to use. Once you’ve purchased bitcoin, a crypto wallet will be required to safely store your new crypto. Most exchanges provide a wallet facility but some at a cost, and not at all.
Mining
As discussed earlier in the post, miners are responsible for confirming transactions (Blocks) using high-speed mining devices (ASICs etc). Every miner earns a certain amount of bitcoin for every block (Confirming transactions) they mine. The block reward as of writing sits at 6.25 BTC per BTC block mined. Mining is not cheap and does cost a lot to get started and also to maintain. You will require an extremely powerful high-specification mining device (ASICs etc). These devices have other associated costs such as storage, security, maintenance, electricity & internet costs. The BTC block rewards less than mining costs can conclude that this method may be unprofitable. For the vast majority, the mining of bitcoin will likely be unprofitable and unsustainable.
How To Store Your Bitcoin?
Ok so you have bitcoin, now where do you store it? Let’s take a look at the 2 types of wallets :
Hot Wallets
Any wallets that are held online are referred to as hot wallets. These wallets can be extremely convenient and allow you to complete transactions quickly. However, here are some things to consider:
Lack Of Security – Like with anything connected to the internet there is always a risk of it being hacked. This also applies to bitcoin and holding it online increases your risk of your precious bitcoin being stolen.
No Ownership/Control – You are simply NOT the owner of the private key of that wallet. The wallet facilities provided by exchanges are custodial accounts. In an event where the exchange was compromised then your wallet is at risk of being stolen or lost. Increased government influence could see crypto exchanges forced to freeze assets. In that scenario, your bitcoin would be under the total control of the government.
In my humble opinion, I believe a hot wallet should only be seen as a temporary wallet to complete transactions. These wallets should not be used to hold large amounts of bitcoins.
Cold Wallets
A wallet that has no connection to the internet (offline). These wallets reduce the risk significantly as they are not internet-connected. The wallet address and the private key are stored on the offline device that the user owns and controls.
Paper Wallets
You generate this wallet on a specific website that then provides you with a public and private key. You simply print and store these keys. Access to any bitcoin stored in these wallets can only be accessed if you have the printed paper.
Hardware Wallets
These devices are USB drives that are used to securely store your private keys. These wallets are not as susceptible to threats or vulnerabilities as internet-connected devices. These devices are extremely easy to set up and use. They are a clever way to discreetly and securely transport your bitcoin around with you.
My Thoughts
I personally see this new form of digital gold as a speculative hedge against the current financial system. As my readers are aware, I have zero faith in this current system. I believe a collapse will happen eventually, and each day it becomes ever more likely. Bitcoin in the last month has hit a high of $58,367 and at the time of writing sits at $46,615. The prices of assets like bitcoin, gold and silver are a result of the decrease in the value of the dollar (or other fiat currencies). I am proudly invested in bitcoin and a few other crypto assets but I follow the same strategy as I do with silver, buy and hold. I think the bitcoin highs have not yet been reached and I don’t trust governments, central banks and the manipulated financial system.
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