A cryptocurrency is a digital asset and a medium of exchange that can be used to buy goods and services. Cryptocurrencies can be distinguished from fiat currencies like U.S. dollars or Euros, which are forms of money issued by governments.
Bitcoin (BTC) is a decentralized, digital currency and it’s the first and most widely-adopted cryptocurrency.
There are over 10,000 different cryptocurrencies. Bitcoin was the first crypto to be created and is the largest in terms of market capitalization and trading volume.
There will only ever be 21 million Bitcoin in circulation. In this way bitcoin is similar to another non-renewable asset, gold. Gold is a scarce asset that must be mined; Bitcoin is also scarce and “mined” by computational means. More on "mining" is available in the sections below. On average, Bitcoins are introduced to the network each time a block is added to the blockchain — approximately every ten minutes. A blockchain aggregates information (transactional data) together in groups, known as blocks. A block refers to a set of transactions from a certain time period. Every time a new block is created, it is stacked on top of the last block, creating a ledger of transactions organized by when they occurred. Stacking blocks can be considered as a chain of blocks, hence the term the “blockchain”.
While Bitcoin is distinct from fiat currencies, it too is a medium of exchange that can be used to purchase goods and services. In fact, in the very early days of Bitcoin (on May 22, 2010), Laszlo Hanyecz agreed to pay 10,000 Bitcoins for two Papa John's pizzas. May 22 is now known as "Bitcoin Pizza Day."
Bitcoin is fundamentally fungible as each unit of currency is indistinguishable from the next. It can also be divided into smaller units known as Satoshis (or SAT)s, named after the author of the Bitcoin whitepaper discussed below.
Investment vehicle: it can be traded, sold, or held (HODL, an acronym used in crypto discussions, stands for “Hold on for dear life” and refers to the strategy of buying and holding Bitcoin).
Store of value (similar to gold): offers a way to transfer value globally through peer-to-peer transactions.
Bitcoin was invented in 2008 (and subsequently began use in 2009) when Satoshi Nakamoto (a pseudonym for an individual or group of individuals) published the first whitepaper on Bitcoin: Bitcoin: A Peer-to-Peer Electronic Cash System.
The technology outlined in this paper illustrates how one party could send digital currency to another party without going through a centralized financial system, like a bank. In other words, these transactions rely on peer-to-peer networks and do not require trusted third parties (financial institutions) to process electronic transactions.
Traditional payment systems like Venmo, Zelle, and PayPal are centralized platforms to transfer money between people by connecting an existing debit/credit account to the platform. The platform itself is the trusted third party or intermediary that facilitates the transactions initiated by its users and keeps a record of these transactions. Bitcoin, on the other hand, is entirely decentralized: any two parties can send and receive Bitcoin from one another without the involvement of any third parties, with all transactions being recorded on the blockchain. That said, digital cash and entirely electronic cash transactions existed before Bitcoin — PayPal, for example, launched in 1999.
The blockchain is a ledger — a record of all transactions on the blockchain. It is similar to a ledger used by a bank or company like Venmo but is very different in one major way. No one company, government, or institution owns or controls the blockchain, as the ledger is by definition decentralized and distributed across the entire network.
Bitcoin mining is a process where individual miners use their computational power to solve complex mathematical puzzles on the Bitcoin Network and in doing so are awarded new Bitcoin.
Miners also verify transaction information by aggregating transactions together in “blocks” and adding them to a public ledger (the blockchain). Nodes then maintain records of those blocks so that they can be verified in the future.
The current value of Bitcoin is determined by market forces that consider multiple factors including but not limited to: i. its supply; ii. the market’s demand; iii. its availability; iv. the cost of mining bitcoin; v. the market for competing cryptocurrencies; vi. the regulatory landscape; and vii. new technological and blockchain-based development.
At the time of publishing this article, Bitcoin's all-time high was $68,789.63 on November 10, 2021.
The easiest way to buy Bitcoin is through an online cryptocurrency exchange. Once you have chosen an exchange, you will set up your account and provide valid identification, connect a payment method, and place an order. The Bitcoin you purchase on an exchange is stored in a wallet, where the exchange usually holds your private keys. This is known as a custodial wallet. Exchange wallets are almost always “hot” wallets, meaning that they are connected to the internet. An alternative is “cold storage,” which refers to wallets that remain offline. Cold wallets are considered much more secure against hacking and because of this, reputable exchanges store a majority of their funds in cold storage.
Apart from crypto exchanges, several trading and investing apps have recently added crypto options to their platforms. Some online payment platforms also allow users to buy and sell Bitcoin.
Bitcoin ATMs are physical kiosks, which look like traditional ATMs, where you can withdraw crypto by using a crypto credit card or purchase it by depositing fiat currency. Instead of connecting a user to a bank account, these ATMs connect users directly to a crypto wallet or exchange.
Futures allow investors to gain exposure to Bitcoin without actually holding the asset. Futures are an indirect method of buying Bitcoin. Similar to futures for a commodity or stock, Bitcoin futures allow investors to bet on the future price of the asset.
The short answer is no. In the world of investing, Bitcoin is still a new player on the scene. And while buying an entire Bitcoin may be out of your reach, most investors get started with buying a fraction of a coin. In fact, many personal finance strategists suggest that the safest and easiest way to invest in Bitcoin is to buy a small amount of it each week or each month and benefit from the strategy of dollar-cost averaging (DCA): this is where an investor takes the total amount to be invested and breaks it up into regular purchases over time.
In practice how does this work? Let’s say you have $100 you can part with each week. Each week you purchase $100 worth of Bitcoin, regardless of whether the price is rising or falling. This way, the price at which you own Bitcoin will "average" out over time. By doing this, you reduce your reliance on picking the ideal moment in time to have purchased the asset for an expected return. Instead, your ownership will more closely reflect the asset price over the period in which you were invested.
The chart below illustrates the price fluctuations of Bitcoin since 2014 and shows DCA in action. In this example, a theoretical investor who bought $100 per week of Bitcoin, would have received a 5,472% gain.
$20,000 total investment | $1.1M accumulated value as of 08/29/21
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