Understanding How Bitcoin Works and What You Can Do With It
The concept of digital currency is nothing new. Ideas about how to utilize this idea have been around for more than two decades. While some approaches have come and gone, Bitcoin remains. In fact, it’s an approach that has continued to attract attention.
Here are some of the more common questions about Bitcoin, how it works, and what you could do if you decided to utilize Bitcoin as an investment opportunity.
Precisely What is Bitcoin?
Bitcoin is the most readily recognized example of cryptocurrency. It is a piece code and does not exist in any physical form. Instead of being tied to an economic system related to a country or a traditional currency, it is operated by a decentralized authority and not a bank. You can think of it as a payment system built on the concept of cryptography and operates as part of a consensus network.
With Bitcoin, you have a truly digital currency. Think of it as cash that’s kept online and is available for different types of uses. Those uses extend to investment opportunities.
What’s the Origin?
The idea of digital currency developed right along with the launch of the World Wide Web in the late 1980s and early 1990s. Wei Dai is generally considered to be among the first to articulate the idea of creating a new form of money that didn’t rely on some central authority. This idea remained more of a great subject to discuss until around 2008.
At that time, a person or group using the pseudonym of Satoshi Nakamoto began work on the first specification and proof of the Bitcoin concept. Using the idea of an open-source community as the foundation, Bitcoin began to be generated.
How Does Bitcoin Work?
While a decentralized form of digital currency, there is structure to Bitcoin. That structure draws on elements of blockchain strategies to confirm transactions and to maintain records of transactions. Acquiring bitcoins may involve participating in computer-based attempts to solve complex puzzles and verify groups of transactions referred to as blocks. When successful, the blocks become part of the chain.
As blocks join the chain, the individuals who solved the puzzles (known as miners) receive rewards. Those rewards are bitcoins of varying amounts. It’s also possible to purchase bitcoins through various cryptocurrency chains. There’s also the potential of amassing bitcoins by purchasing them directly from people who already own them.
Is Bitcoin Legal?
Bitcoin is a perfectly legal means of exchange, although it can be challenging for some to fathom how a bit of computer code would be considered money. Details related to transactions are maintained in a ledger that can be accessed and added to as each transaction is confirmed. The ledger is sometimes referred to as a way to avoid fraud since it’s set up as a trustless system.
In most countries around the world, using Bitcoin for transactions is not a problem. That means it’s fine to buy, sell, or trade Bitcoin. There are areas of the world where attempts are made to prevent this and any other cryptocurrency. Before attempting to use Bitcoin, determine if any local deterrents would complicate the process.
How Does Bitcoin Make Money for Investors?
Using the process of mining or solving puzzles makes it possible to earn additional Bitcoins. It’s also possible to purchase bitcoins at the current going rate. Like many types of investments, bitcoins can be held in hopes that they will appreciate relative to traditional currency.
Since the value of bitcoins can fluctuate, there is some risk. This is especially true if traditional money was used to purchase the coins. Simultaneously, value increases can take a modest investment and turn it into a lucrative one that can be sold for a significant profit. If the coins do gain in value, they can always be sold at a profit. The money you gain from this investment can then be placed into a time deposit account or the investment account you have set up with a domestic or offshore bank.
Setting Up a Bitcoin Wallet?
Bitcoin wallets are essentially repositories for the codes represented by Bitcoin. It’s easy to download apps that can reside on a smartphone, tablet, or laptop and house the coins. In most cases, the wallets are free to download and can also be managed with little to no out-of-pocket expense.
Consider your Bitcoin wallet as being one more way to store currency that you plan on using in an online environment. Retailers and other sellers who accept Bitcoin can provide a bill or invoice to settle using the coins in your wallet. Once the transaction is complete and verified, the coins no longer reside in the wallet.
Why Bitcoin and Not Some Other Cryptocurrency?
Bitcoin is far from the only cryptocurrency on the market today. Even so, it stands out as one that is the best possible investment for someone who wants to try investing in and using digital currency. One of the reasons has to do with longevity. Simply put, Bitcoin is the oldest continuing currency of its type.
Stability is also something to consider. While Bitcoin value does fluctuate, it’s experienced far more gains than losses. From this perspective, it makes a better investment than other cryptocurrencies. Since it’s also one of the most easily recognized and widest used of all the current digital currencies, you can enjoy a broader range of transactions with more sellers.
Learn More About Bitcoin
These are only some of the basics that you need to know about Bitcoin and how Bitcoin works. Whether the plan is to use it for online transactions or collect coins to sell them at a higher rate, eventually, take the time to learn more about what they can do for you.
It could be that allocating some of your time and resources to this type of investment strategy would be well worth the time and effort.
Luigi Wewege is the SVP and Head of Private Banking of Belize based Caye International Bank, a FinTech School Instructor, and the published author of The Digital Banking Revolution. You can follow his posts on trends shaping the banking and financial services industry on Twitter: @luigiwewege