Bitcoin 101 (Beginner’s Guide to Bitcoin)

If you’re looking into Bitcoin, you’re probably wondering what it’s all about.

It remains controversial, and you might not be sure if it’s a legitimate way to make money.

And more importantly, you’re probably wondering if Bitcoin is a good investment for you.

So — is there anything to the hype?

Like anything related to investment, the answer is complicated and depends in large part on your personal preferences.

There is no one “right” answer as to whether Bitcoin is a good investment, but there is a lot of evidence that shows it has a bright future.

Keep reading to learn more about what, exactly, it is, how it differs from other forms of investment, and how to determine whether or not it’s something you should seriously consider for your own investment strategy.

What is Bitcoin?

Bitcoin is the first decentralized peer-to-peer payment network.

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In simpler terms, it’s a form of digital currency that isn’t regulated by any single person or institution.

That’s because it’s operated on a decentralized network. So unlike traditional currencies, it doesn’t have one central administrator.

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For example, while the US Dollar is governed by the Federal Reserve, and the Euro is governed by the European Central Bank, there’s no equivalent for Bitcoin.

It’s also important to note that the total amount of Bitcoin is limited, and only 21 million can ever be created.

Once this limit has been hit, the supply will be tapped out. And although it’s been around for less than a decade, over 79% of all Bitcoins have already been created — meaning that they’ll likely become scarcer and more valuable in the future.

Who invented Bitcoin?

No one knows the true identity of the inventor of bitcoin.

It was created by an anonymous programmer with the alias Satoshi Nakamoto in 2009. At the time, Nakamoto claimed that his goal was to create “a new electronic cash system” that was “completely decentralized with no server or central authority.”

Many people have been rumored to be Nakamoto, but to date, each person subject to these rumors has denied the claim.

And while Nakamoto himself claimed at one point to be a 37-year-old from Japan, there were doubts as to the validity of this claim due to his perfect English.

Today, however, Nakamoto is no longer responsible for Bitcoin. In 2011, he handed over the source code to others in the Bitcoin community, then vanished.

In an email to Bitcoin developer Mike Hearn, he explained that he had “moved on to other things.”

How does Bitcoin work?

Bitcoin operates on a public, distributed database called a blockchain.

A “block” is a digital record of a transaction, and each time a Bitcoin transaction is completed, it’s cryptographically locked to the previous block.

Aas each one enters the system, it is broadcast to the worldwide, decentralized peer-to-peer network of users for validation.

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This “chain” of records is held on every computer running the Bitcoin client, meaning that information about every Bitcoin transaction is stored on thousands of computers around the world.

As a result, all users can see each transaction, making for a transparent record and preventing fraud.

How is Bitcoin different from traditional currencies?

It’s clear that Bitcoin is unlike most of the currencies we’re familiar with today.

Here are three of the most important differences you should be aware of before deciding whether to invest.

1. It’s decentralized

Every other currency in the world is regulated by governments and banks. But because that’s not the case with Bitcoin, there’s no central control or management.

This means that it isn’t vulnerable to devaluation as a result of economic depressions or recessions within a specific country.

It also means that it’s possible to use Bitcoin without interacting with any third-party institutions.

While most people do opt to use third-party exchange platforms and services to manage their Bitcoin, these aren’t required.

It’s possible to deal with these funds directly and privately, without relying on a centralized service — and that’s not the case with any traditional form of currency.

2. It doesn’t exist in physical form

Unlike traditional currency, Bitcoin does not exist in physical form. This means that it’s stored entirely in digital format and cannot be damaged.

Users can store their Bitcoins in a “digital wallet,” either in the cloud, on a computer or smartphone, or on offline hardware.

On the surface, a Bitcoin wallet appears similar to an online bank account. But these wallets don’t actually hold Bitcoins. Rather, they hold private keys that allow their owners to access their Bitcoin addresses.

The security level of these wallets varies by type. While cloud-hosted wallets require users to trust a third-party with their keys, hardware wallets are virtually impossible to hack.

But regardless of the option you choose, it’s important to keep a secure backup. If you lose your wallet or forget your password, it’s extremely difficult to regain access — which can result in losing access to your Bitcoin entirely.

3. It’s worldwide

Most countries have their own form of currency, and using it is required for making purchases within that country.

This means that international transactions almost always involve currency exchanges that come along with fees.

But because Bitcoin is a worldwide currency, not regulated by any one government, that’s not the case. Transactions are typically tax-free and easy, regardless of where the sender and receiver are located.

How can you get Bitcoin?

If you’re interested in acquiring this cryptocurrency, you’ll want to know where and how to buy Bitcoin.

1. Mine it

Mining” is the process by which new Bitcoins are created.

It’s also the most difficult way to acquire them.

Whenever a block of Bitcoin transactions is created, miners work to solve a cryptographic problem that allows it to be added to the blockchain.

They take the information in the block, then apply a mathematical formula that turns the information into a random sequence of numbers and letters, known as a cryptographic hash.

These hashes must meet specific criteria, which are dynamically changed — meaning that it’s difficult to produce a block with a valid hash.

Generating one requires iteratively changing the contents until a match is found, which is an intensive task even for extremely advanced computers.

In fact, generating a valid Bitcoin block requires an average of more than 100,000,000,000,000,000,000 iterations.

But every time a miner correctly solves a block hash problem, new Bitcoins are created.

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So whenever a miner successfully solves a block hash problem, they’re rewarded with the newly-created Bitcoin and the transaction fees included into the block.

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For the average Bitcoin investor, however, this process is simply not a feasible option because it requires specialized hardware.

So if you’re looking to acquire Bitcoin, one of the next two options is likely a better choice.

2. Buy it

The easiest way to get Bitcoin is to purchase it on marketplaces called “bitcoin exchanges.”

These marketplaces accept many different currencies and enable users to buy them using cash, credit, and debit card transfers.

Today, popular marketplaces include Coinbase, Bitstamp, and Bitfinex.

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People can also use these marketplaces to send bitcoins to one another in a process similar to sending cash digitally.

What can you do with Bitcoin?

So, Bitcoin is a form of digital currency.

But what can you actually buy with Bitcoin?

Today, some major companies, including Expedia, Overstock, and Microsoft are beginning to accept it as payment.

The more common use of Bitcoin, however, is as a form of investment. Like investing in stocks, there is a degree of risk involved in this, because the Bitcoin price fluctuates.

Of course, that means there’s the potential for high returns as well. But some people would rather play it safe and invest in something they know will remain valuable for a long time.

The most traditional of these forms of wealth storage is in precious metals like gold or silver. Unlike stock in a company, the value is fairly guaranteed to hold its worth, even for centuries.

But here’s where Bitcoin stands apart from other investments. It’s also valuable as a measure of wealth storage like gold.

There is a limited supply of Bitcoin, and while it’s “mined” in a method very different from gold, it requires tremendous resources all the same.

As we mentioned above, Bitcoin is “mined” using high-caliber computers with state-of-the-art processors. This makes it nearly impossible for an average user to acquire more Bitcoin.

This scarcity also means that Bitcoin will hold its value in much the same way as gold.

In fact, there’s an argument to be made that Bitcoin will eventually become more valuable than gold.

The value of gold is based on a belief that the world’s remaining supply of gold is difficult to mine. This belief in continued scarcity is what keeps gold’s value steady.

And unlike gold, Bitcoin has an absolute limit.

Because only 21 Bitcoins will ever be mined, this puts Bitcoin in a position of extreme scarcity, making today’s coins far more valuable in years to come.

Based on the scarcity alone, Bitcoin can only go up in price, since it will never be easier to acquire Bitcoin as it is now — making its projected inflation and supply rate looks promising for investors.

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Finally, Bitcoin has value as a storage of wealth that can be a hedge against paper money.

It’s no secret that fiat currencies, that is, those controlled by a government, suffer from constant inflation. In struggling economies like that of Venezuela, Bitcoin has been a savior.

The United States dollar, for instance, is always worth more today than it will be in a year or a decade. This is good for the government but bad for those saving their money.

This inflation means that your savings are actually decreasing in value. Like investments like stocks and commodities like gold, Bitcoin doesn’t have an inflation problem.

In fact, Bitcoin is more likely to grow in value the longer you hold it, making it a safer choice than paper money or bank savings in some respects.

What are the advantages of using Bitcoin?

There are a few clear advantages of choosing Bitcoin as an investment option.

1. It’s transparent

One of the biggest advantages of Bitcoin is its high level of transparency.

Because every transaction is visible to users in the Blockchain, it acts as a public ledger. As a result, it’s nearly impossible to manipulate data for fraudulent purposes.

On the surface, this may sound like an invasion of privacy. After all, who wants their financial details shared with an entire network?

Fortunately, Bitcoin is a pseudonymous network — meaning that while transactions are public, the identities of the parties involved are not.

2. It’s safe

Bitcoin is extremely resilient to hacking and counterfeit attempts.

Because each user’s Bitcoin is only accessible with the keys stored in their digital wallet, they’re difficult to steal.

It’s also worth noting that all Bitcoin transactions irreversible. This means that once a user sends Bitcoin, they can’t defraud the recipient by attempting to take them back.

Plus, thanks to the digital nature of this currency, it’s possible to create backup copies. This way, even if the computer or smartphone on which your wallet is stored dies or breaks, you can recover it — unlike physical currency, which is impossible to replace when lost or damaged.

3. It’s fast and portable

In terms of convenience, it’s hard to beat Bitcoin as a payment or investment method.

Transfers are virtually instantaneous, and depending on how they’re done, can be done for an extremely low transaction fee.

And because it’s entirely digital, it’s easy to transport. Transactions can be done from virtually any computer or smartphone — making for an unmatched level of portability.

What are the disadvantages of using Bitcoin?

Like any investment, you need to know the risks associated with Bitcoin if you’re going to make a smart choice about where to put your money.

At its heart, there are a few issues with Bitcoin that could make investments problematic. Let’s look at each in turn.

1. It’s unpredictable

The first issue with Bitcoin is volatility or the fact that its price changes frequently.

Because it’s a new currency, Bitcoin has yet to establish a clear value that remains stable from day to day. It can fluctuate wildly, making it difficult to estimate properly.

Of course, this happens with all currencies to some extent. If you were to exchange one US dollar for Mexican pesos, you’d get about 19 pesos.

If you traded in January 2017, however, you would have gotten 21 pesos. In a few months, it could be back up to 21 or even lower.

This is natural for a currency. But Bitcoin, especially in its early days, varied far more. It might be a few cents today, then as much as a few dollars the next day or even hour.

This made it difficult to accurately assess the value of Bitcoin since it changed so often.

The good news about this risk factor is that the volatility is on a downward trend, from 16% in 2011 to 2% in 2017.

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While 2% may not sound like a huge change from 16%, it’s now on par with the currency I mentioned earlier–the Mexican peso.

If you were taking a trip to Mexico, you probably wouldn’t be concerned about exchanging your money for pesos, since the currency will stay roughly the same.

Based on the data, the same is mostly true for Bitcoin at this point.

In the early days, small news events were usually at the heart of these changes. Anytime a major player commented on Bitcoin, the price would reflect the market’s reaction.

But today, Bitcoin’s price has stayed fairly consistent during times of both good and bad press.

2. It’s uncertain how regulations will develop

When any technological changes start a tectonic shift in the global economy, there is some doubt as to how government agencies will handle it.

Governments have struggled to find their place in regulating new technologies like the internet, a problem that continues even to today.

This causes regulatory uncertainty, meaning companies are unsure of what will happen when the government takes a side.

In the case of the internet, even recent changes have caused a decrease in infrastructure investment.

Companies simply aren’t willing to invest if the government could limit or restrict the technology in a few months or years.

The same thing is happening with Bitcoin.

Regulation globally is mixed, to put it charitably.

Laws and restrictions across the world vary by country, with some accepting it (indicated by green on the map), others banning it (formally banned represented by red; hostility by yellow), and many without a position yet (represented by dark grey.)

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This means that international Bitcoin usage is still in a state of limbo, and it’s unclear how things will sort themselves out in the coming years.

On the positive side, most western industrial nations, including the US, have given support for the currency. This provides a strong reason to have faith in its acceptance.

But most countries in the developing world, most notably Asia, are enacting restrictive policies that could do serious harm to Bitcoin in those countries.

3. There’s no telling what kind of technology is on the horizon

Another issue with Bitcoin is the onslaught of new technologies.

The same technology that has allowed Bitcoin to flourish continues to grow.

More and more developments are on the horizon, and there is some concern that these will compromise Bitcoin’s fledgling popularity.

There are two specific concerns at the forefront of the speculation.

First is the possibility of hacking Bitcoin services. The Bitcoin protocol itself has never been hacked and is considered very safe by most security experts.

But programs that run Bitcoin exchanges and wallets are notoriously unsafe. Most Bitcoin programs are less secure than banks, making them prime targets for rogue hackers.

There are ways around this, of course. The safest is the simply keep your Bitcoin private key (essentially a password) in a safe place rather than stored on a Bitcoin company’s database.

The second concern is over quantum computing. This is a new form of computer that uses technologies based on quantum mechanics that allows for exponentially faster computation.

This means that while computers currently can’t hack the private keys used by users, a quantum computer could do just this.

Companies have already begun to develop quantum computing chips, though the technology is far from mainstream usage.

But experts seem to indicate that the quantum computer that would be required for hacking Bitcoin in this way is a decade or more away from being created.

Google’s quantum computing expert John Martinis has stated that in regards to quantum computing, we are “closer to Kitty Hawk than the moon.”

Another cryptographer stated that the first hack would need to be performed on a $50 million computer, something far outside the range of almost any single entity.

By that time, experts expect the Bitcoin technology to be developed to a point where computing won’t be able to crack the codes so easily.

Today, hacking and security teams use increasingly sophisticated technology to combat the other.

The future will likely have the same duality, with the advanced technology of quantum computing being used to strengthen Bitcoin and stay one step ahead of hackers.

4. It’s not yet widely recognized

As a payment method, Bitcoin is not yet widely recognized.

While some businesses are beginning to accept it as payment for goods and services, that’s not the case for most.

This means that using Bitcoin as your primary form of currency isn’t a viable option. That’s why today, most people use it solely as an investment — and not as a replacement for more traditional currencies.

5. It’s difficult to recover

If you lose the “keys” to your digital wallet, it’s extremely difficult to regain access.

While most financial institutions have systems in place to help their account holders verify their identities and gain access to their funds if they forget an account number or PIN, that’s simply not the case with Bitcoin.

Is Bitcoin a pyramid scheme?

Investor and billionaire Howard Marks stated in 2017 that digital currencies are “nothing but a pyramid scheme.”

He claimed that they’re “nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it.”

This statement led many people to question the validity of Bitcoin as an investment option.

Fortunately, it’s simply not an accurate characterization.

A pyramid scheme involves investors getting returns from subsequent investors’ money.

And to be clear, this is never a good investment option.

But with Bitcoin, the value comes from the limited supply of coins. It doesn’t rely on other users’ investments — meaning that Marks’ description of it as a pyramid scheme is unfounded.

Is Bitcoin a bubble?

One of the most common reasons that many people hesitate to invest in Bitcoin is that they’ve heard it called a bubble.

According to Investopedia, a “bubble” is an economic cycle characterized by the rapid escalation of asset prices followed by a contraction.

To answer the question of whether that’s an accurate description of Bitcoin, we need to look at the growth it’s had as a whole.

Of course, since Bitcoin is relatively new currency, we can’t go back very far with our understanding of the price valuation.

Bitcoin has only been around since 2009 and didn’t gain mainstream popularity until a few years after that.

When we look at the historical price of Bitcoin, you can quickly see how the currency is growing exponentially in value.

The truth is that Bitcoin has had a number of massive spikes.

The first took place in June 2011.

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Then, a spike in November 2013 was so much larger in comparison that it made the 2011 spike look insignificant.

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And in 2017, there was another jump that dwarfed both of the previous spikes.

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So while the current trend makes it look like Bitcoin is a bubble about ready to burst, historical precedence shows that it could be a tiny predecessor of a spike 10x greater.

This is a common trend with stocks that climb quickly. Analysts predict them to be a bubble, but the overall trend creates an investment that skyrockets over time.

A great example of this is Apple. While it’s currently respected as a blue chip stock, it’s had its share of ups and downs over the years, leading analysts to cry “bubble” along the way.

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Of course, none of this is guaranteed. Like any investment, hindsight is 20/20, and there is risk involved in the moment. Early investors in Apple didn’t know for certain their investments would make them millionaires.

But the point is that if you look at this as a long-term investment, you can stand to see another spike once the hype around this one dies out.

If you look carefully at the 2013 spike, those who gave up after two years ended up losing money. Same with those who gave up within two years of the 2011 spike.

But those who kept their money for three or four years following the hype saw gains of 5x or even 10x. And in investment terms, three or four years is nothing.

How is Bitcoin taxed?

As with any investment, it’s important to be aware of the tax implications of Bitcoin.

At this point, many countries have yet to put regulations in place for taxing the currency.

And for those that have, they vary greatly.

In the U.S., for example, Bitcoin is treated as property instead of currency. People who sell goods and services for Bitcoins have to include the value of their Bitcoins in their tax returns and treat them as capital gains or losses.

In the European Union, on the other hand, Bitcoin is considered currency. It can be taxed, and  UK tax authorities treat it like foreign currency.

In Japan, it’s also recognized as a payment method but is exempt from consumption tax.

So if you’re considering investing in Bitcoin, it’s important to check on what the tax regulations are in your country, and stay up-to-date on news related to these regulations.

In many places, they’re still developing — and staying in the know is essential for making sure that you won’t be caught off guard by fees.

Should you buy Bitcoin?

At this point, you’re probably wondering if you should invest in Bitcoin.

Sure, CEOs and celebrities like Cameron and Tyler Winklevoss have grown rich on Bitcoin.

But what about the average, everyday person?

As with any investment, there are stories of unsuspecting people making investments early on, then seeing their holdings grow to huge amounts.

Bitcoin is no different.

The hidden secret to these instant millionaires is less than obvious. Instead of constantly trading and exchanging, watching prices by the day, they waited.

And that patience paid off, big time.

But will the same market factors that helped their meteoric rise to affluence affect you as well?

It’s impossible to say for sure — but let’s turn to what the experts in the industry say.

When you look at what major players in the investment space have to say about Bitcoin, the prospects look good.

Now, to be fair–many of these people have invested in Bitcoin or Bitcoin-related technology themselves, so they have a financial interest in promoting the currency.

But in many ways, that’s even more confirmation that they believe what they say.

Top investors don’t have time to play games, and their investments show that they’re willing to bet money on their predictions.

The first investor in Snapchat was Jeremy Liew of Lightspeed Venture Partners, someone who clearly has an idea of what investments will take off in the future.

Liew has stated that as markets become less stable around the world, the interest in Bitcoin will only grow.

“If you’re going to be an investor in anything,” he was quoted by CNBC, “you want to be where the most trading volume is happening, and right now that’s happening in Bitcoin.”

Another prominent leader in the technology space is John McAfee, founder of the anti-virus software that bears his name to this day.

He fully expects a single Bitcoin to be worth USD 500,000 within three years.

According to Michael Novogratz, who formerly worked as a manager at the $72 billion firm Fortress, Bitcoin will reach $10,000 in the next 6-10 months.

One of the members of the PayPal Holding, Inc.’s board of directors, Wences Casares, says he expects Bitcoin to reach $1 million in ten years.

While their numbers vary widely, many experts with a broad range of experience agree that Bitcoin will likely continue to grow in the coming months and years.

But what about the data? How does Bitcoin stack up to more “secure” investments?

When you’re deciding whether or not Bitcoin is a good investment, you can’t just look at it in a vacuum. Instead, you need to consider how it compares to other investments.

After all, there is an opportunity cost associated with Bitcoin. The money you spend towards in Bitcoin is money you could spend elsewhere.

So is it worth it? Is Bitcoin where you’ll get the highest returns? When you compare it to other investments in 2017, Bitcoin has had far greater returns than any other investment.

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Bitcoin has outperformed even the high-performing stocks like Tesla (76% growth), Alibaba (72%), NVIDIA (66%), and Boeing (53%) with a staggering 304.54% growth in 2017.

That means your money would have tripled in less than 12 months. That’s a seriously good return!

Of course, as the investment website disclaimers say, past history does not represent future results. But it’s still a strong sign that Bitcoin has maintained such consistently high growth.

If you’re going to invest in Bitcoin, remember a few key ideas.

First, never invest more than you’re comfortable losing.

Of course, the chance that Bitcoin will suddenly plummet to $0 per coin is unlikely, but could happen, just like any stock could take a sudden dip and cause you to lose money.

Second, be wary of “FOMO” buying, or buying due to “fear of missing out.” If you see people making significant money from Bitcoin, this is probably the worst time to buy Bitcoin.

It means people are selling for a high price, and this is the exact wrong time to buy. Instead, wait for a time when people aren’t making money from Bitcoin, when the price is low.

And finally, you should expect the investment to pay off in years, not months or days. Plan to hold your investment for a while before trying to cash in.

The earlier you start, the more of a return you’ll see on the money you put into Bitcoin. When you see a good opportunity, go ahead and invest.