What is Bitcoin?

invest-rectangle-enThere’s a new currency around which is attracting more and more attention

It’s called Bitcoin.

This is Part One of a series of articles about Bitcoin

I split the original article up as it was a little too lengthy.

You can read Part Two “The Future of Bitcoin” here

 

What is Bitcoin?

Bitcoin is not a currency that you can purchase from your bank. At least not yet.

In fact, Bitcoin differs from all other currencies is that it isn’t issued by any bank.

Bitcoin is a Decentralised Digital Currency

Nor is Bitcoin controlled by any government. It’s a purely digital currency that is traded entirely online and is run by a decentralised peer-to-peer computer network.

This gives Bitcoin a big advantage. As Bitcoin is a peer to peer system with no headquarters, no central server, no central organisation, there’s no one place that any government can attack or try to gain control of in order to try and take over Bitcoin or to shut it down.

Another practical advantage of Bitcoin is that you can use it to transfer money across international borders at costs that are way below what the traditional banking sector charge. What’s more, the transactions are processed far more quickly.

Bitcoin has the potential to turn the old banking world upside down in much the same way as YouTube is shaking up the old tv channels, or Skype has shaken up the old telecoms corporations.

How Bitcoin Works

Bitcoin was created by someone with the pseudonym of Satoshi Nakamoto. Bitcoin is based on a mathematical protocol that Satoshi published as open source code back in 2009.

Bitcoins are generated by a computing process known as mining. Anyone can in theory use their computer to become a Bitcoin miner. However, in practice, mining Bitcoins requires a powerful cluster of computers, which also means correspondingly high electricity costs in order to create Bitcoins.

This has the effect of ensuring that the supply of Bitcoins remains restricted and with that it helps to maintain and increase the value of the currency. And so far the value of the currency has increased considerably since it was first created.

There is actually a total limit to the quantity of Bitcons that can ever be created. That total is set at 21 million – and this is not forecast to be reached for some years yet.

It’s not possible for politicians or bankers to artificially increase the supply of Bitcoins, which is a big plus for maintaining the integrity and value of the Bitcoin over time.

Bitcoin can act as a store of value, like gold. And this is probably what is driving a lot of the purchases of Bitcoin right now.

But as more and more businesses – particularly online businesses, start accepting Bitcoin as a payment method, this will also mean that Bitcoin will have value as a means of transaction. Something that isn’t generally the case with gold.

Bitcoin is now also being accepted as a payment method by online companies such as WordPress and Reddit.

It’s true that Bitcoin has so far suffered from a bad reputation among some people as being favouredby drug dealers, gamblers and money launderers.

But the Bitcoin currency itself is purely neutral. Bitcoin can be used for any transaction purpose or it can be used as a store of value regardless as to the purpose of those holding it.

A lot of new entrants into the Bitcoin market have been attracted by the rising value of Bitcoin on the exchanges. In other words, people are buying Bitcoin because they expect the price of Bitcoin to rise further. Which in turn causes the price to rise.

A Warning About Bitcoin

I don’t believe in leading people astray, so I want to give the following warning about Bitcoin.

Always be cautious of articles and statements about Bitcoin – including this one.

The value of Bitcoin in future may go up – or it may go down. And being a purely digital currency and a new one at that, the Bitcoin market moves extremely fast. Both down as well as up.

So always beware. Wear protective gloves. Do not drive or operate machinery. May contain nuts.

Also bear in mind that people holding Bitcoin have an interest in talking the market up.

Never invest in Bitcoin (or any other currency or asset) any money that you can’t afford to lose.

Bitcoin is a new form of currency that is still finding it’s way. At this stage of the game, Bitcoin is NOT an established investment asset with a long track record.

There are lots of things that could happen to Bitcoin. Will a bug suddenly be discovered in the code, will someone develop a hack and flood the market with “fake” Bitcoins?

Will the authorities find some way to close Bitcoin down despite the efforts of all involved to keep it independent and out of reach of governments?

Will some other currency with more advantages to it come along and become more popular than Bitcoin?

There are many possibilities.

The fact is, it’s all uncharted territory and no one has it mapped. No one knows for sure what the Bitcoin price will do in future, nor what will happen to Bitcoin itself.

But if you like adventure – and if you’re willing to accept some risk, then Bitcoin could be just what you’re looking for.

Now we’ve got the warnings out of the way, let’s take a closer look at Bitcoin.

How to Trade Bitcoins

There are a number of online exchanges where you can buy and sell Bitcoins. Two such exchanges that I’m familiar with are  Mount Gox and Bitcoin-24 . Bitcoin-24.com charge just EUR 1.24 per transaction.

If you want to track the progress of Bitcoin, then Bitcoinity is a great site that displays the current Bitcoin value, updated every few seconds.

You can create an online wallet at the exchange, or alternatively at Blockchain.info, free of charge.

Blockchain.info also has a number of useful charts which plot valuable trading information.

You can leave your Bitcoins in your wallet at the exchange, transfer them to your wallet at Blockchain or some other online wallet provider, or you can download them to your computer. If you choose to keep your Bitcoins in an online wallet, you should first make sure the provider is reputable.

You may be able to benefit from short term swings in the Bitcoin price. I think we will be seeing a lot of turbulent activity on the Bitcoin market over coming months and years, so there could well be scope here for profitable short to medium term trading.

By the way, you don’t have to buy whole Bitcoins. Bitcoin is just the name given for the currency (the exchange trading code for Bitcoin is BTC). You can purchase fractions of Bitcoins or multiples of Bitcoins, just as you wish.

Becoming a Bitcoin Trader

If you want to become a Bitcoin trader, then you should aim to learn all you can about the practice of currency trading. You should also learn all you can about Bitcoin.

Forex or foreign exchange trading is a tough business no matter what currency you trade in and it can result in many sleepless nights.

Don’t regard currency trading as a simple ticket to riches. If you don’t know what you are doing, it can just as easily turn out to be a ticket to bankruptcy. As for day trading: that’s something I would never dare do.

Medium term trading, or else long term “buy and hold” in Bitcoin is probably a safer bet. It will probably let you sleep more easily as well.

Disclaimer and Disclosure

WARNING: The value of all investments, including Bitcoin, can go down as well as up. Always seek independent professional advice before making any investment decision. Never invest in any asset or scheme that you do not understand. Never invest more money than you can afford to lose.

DISCLOSURE: The author holds investments in Bitcoin, currency and company stock at the time of writing this article.

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  1. BreakingOut.NET The Future of Bitcoin - February 2, 2014

    […] You can read Part One “What is Bitcoin” here […]

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