A Complete Beginner’s Guide to Bitcoin
Before 2017, if people wanted to invest and multiply their wealth, the only way was to invest in regulated financial instruments such as stocks, derivatives, commodities, currencies, and bonds. These financial instruments, still widely used by many experienced investors, require a high level of financial knowledge. This analysis can sometimes be complex and end up taking time.
However, 2017 saw a new kind of asset class become massively famous, attracting many investors and rising in unprecedented value: Bitcoin.
Bitcoin was priced at Rs 7,000 in January 2017 and hit Rs 15,000,000 at the end of 2017, but collapsed to Rs 3,50,000 in 2018. Since volatility was high and was going both ways , investors (called speculators) saw an opportunity for profit. Fast forward so far, a single Bitcoin is valued at Rs 48.33.321.
How did it happen? What is Bitcoin? How to use it or invest it?
This blog will prove to be a complete beginner’s guide to Bitcoin and how you can take advantage of this new age investment instrument to make profits, trade and diversify. But first, let’s understand cryptocurrencies.
What are cryptocurrencies?
Cryptocurrencies are a digital version of money that is created and held in the form of virtual coins or tokens. Similar to how you use Indian Rupee digital payments, you can use cryptocurrencies to buy and sell items. However, the person or business must be willing to accept the cryptocurrency you offer for the products or services they sell.
Although cryptocurrencies are similar to digital payments, they differ because of their technology and the assets on which they are based. Additionally, unlike the Indian Rupee, where you can physically withdraw money, cryptocurrencies have no physical presence.
There are hundreds of cryptocurrencies available in the market where the investor can buy them and use them to trade or buy and sell items. However, bitcoin is the most valuable and the most widely traded.
What is Bitcoin?
Bitcoin or BTC is a type of cryptocurrency or digital currency started in 2008 by a group that went by the pseudonym of Satoshi Nakamoto. It has no physical form and transactions are verified by online nodes and recorded in the blockchain. Blockchain is like a digital ledger.
Each transaction is authorized and authenticated by the owner. Bitcoins are based on a set of private and public keys that help protect the payer and the payee. A public key is similar to an email address, and the private key works like an email password. These keys protect access to your Bitcoin and must be well guarded like that of an email password.
History of Bitcoin
As mentioned earlier, Bitcoin was first started in 2008 by someone with the pseudonym Satoshi Nakamoto. However, there is no clarity on who Satoshi Nakamoto is. Some speculate that it may be an individual creator, while others believe that it is a group of people who are still managing their blockchain.
It all started when an academic paper called the “Bitcoin Whitepaper” was released announcing a new asset class called Cryptocurrency. In the white paper, it was stated that Bitcoin’s goal was to create a revolutionary, next-generation “peer-to-peer electronic payment system”, completely decentralized with no central authority.
It is strongly believed that Bitcoin was created after the 2008 financial crisis to put power back into the hands of people who suffered due to strict regulations and a centralized financial ecosystem. Thanks to Bitcoin, people could make payments and transact without complying with regulations created by big banks and central authorities.
How are Bitcoins created?
The creation of Bitcoin is the result of a technique called Bitcoin Mining. Much like you dig the ground to be rewarded with what is hiding at the bottom, bitcoin miners are also rewarded with Bitcoins for their “digging” efforts. But what should they do? What are they “digging”?
In order for a Bitcoin miner to create Bitcoin, they must do the following two things:
- Assists in general ledger management by verifying 1MB (megabyte) of transactions.
- Be the first Bitcoin Miner to come up with the right answer or the closest to a digital problem.
The first part is the easy part and doesn’t need any explanation. The second part requires analytical thinking. It is not entirely true that Bitcoin miners solve a complex mathematical problem to create Bitcoins. They just try to find the 64-digit hexadecimal number (called a hash) closest to the target hash.
The process, called “proof of work,” creates a new “block” that miners add to already existing blocks to keep the system running. The hash closest to the miner wins the race, rewarding the miner with 6.25 Bitcoins as of 2020 (the number halves every four years).
This Bitcoin Mining process is how new miners create new Bitcoins.
Return to Bitcoin
Bitcoin is one of the most volatile negotiable instruments in the entire financial market. It is the result of non-regulation, high demand and an unpredictable imbalance between demand and supply balance. As long as Bitcoin returns are concerned, it depends entirely on luck.
Investing in Bitcoin is highly speculative and can generate profits if prices go up and force you to incur losses if prices go down. Moreover, there is no technique to predict the future trend and where the price might go. As a result, the return factor on Bitcoins is unpredictable and heads towards profit or loss. Therefore, it is advisable to have a high risk appetite and invest an amount that will not create a financial burden if you lose it.
How to buy Bitcoins?
You don’t have to be a miner and dive into hashes and blocks to get Bitcoins. Like all other digital assets such as stocks, you can buy Bitcoin from any existing cryptocurrency exchange. All you need to do is create a digital wallet (think of it as a Demat account for your Bitcoins), and you are good to go.
Currently, if you want to buy Bitcoins, you will need to integrate a crypto platform by creating a basic account. Once this happens, the platforms allow investors to choose a payment method. For some it is limited to digital wallets; However, some nationalized and private banks have started to provide direct transaction support to crypto platforms.
Cryptocurrencies divide the world when it comes to their ethical definition. Either way, Bitcoins continue to rise in value and offer investors a way to get rich. Now that you understand Bitcoin in its basic form, you can decide whether to see or ignore the bubble.
Frequently Asked Questions
Q.1: How are Bitcoins created?
Reply : Bitcoins are created when miners or network participants solve complex algorithms, intersect the solution with the transaction, and add it to the block. This process continues until the block is full. The completed block is then added to the longest chain. Miners are rewarded for adding the blocks to the chain with the Bitcoins generated by a system called ‘proof of work’.
Q.2: How do I get Bitcoins?
Reply : You can get Bitcoin through many crypto platforms that mediate between buyers and sellers of Bitcoin. However, you will need to create an account on the platform after completing the KYC process.
Q.3: How and where to store Bitcoin?
Reply : When you buy Bitcoins on a crypto platform, they are automatically stored in your digital wallet. You can access and sell the held Bitcoins whenever you want.