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Bitcoin is the largest, most traded and most well-known cryptocurrency. A cryptocurrency is a digital medium of exchange that exists solely online.
Bitcoin was the first cryptocurrency, invented by Satashi Nakamoto in 2009.
Bitcoin is a distributed system that uses a trustless ledger. That means there is no central issuing authority needed, because an immutable record of transactions is kept on machines spread around the internet, acting together to verify the data. This is called the blockchain.
Unlike pounds, dollars, and other ‘real’ or ‘fiat’ currency, new Bitcoins are not issued by a central authority. Instead they are ‘mined’ by computers on a network.
These computers work together in groups to verify and process transactions made using Bitcoin, by solving extremely complex math problems. When the problem is solved, a new Bitcoin is created and the miners get a payment in Bitcoin.
Bitcoin mining requires very powerful computers and uses a lot of power. Miners share the costs by joining a mining pool, a group of computers working together to solve the math problems.
When Bitcoin was invented it was possible for a single person to make some money mining Bitcoin; now it is only cost-effective for massive data centres full of powerful computers.
The main way to get some Bitcoin is to buy some online from a cryptocurrency exchange.
There are many exchanges out there, dealing in many different cryptocurrencies, large and small. All of them have their own features, and their fees will vary. You need to do your research to find a reputable platform that works best for you.
You set up an account with a cryptocurrency exchange by providing them your personal information and the verification documents required by ‘know your customer’ regulations. You create a username and password and you can get started.
Once your account is set up, you need to deposit funds into it, using a bank transfer, credit/debit card, or whatever payment methods the platform supports.
Now it’s time to buy some Bitcoin. Note that the current price for one Bitcoin is approximately £80,600 so you won’t be buying a whole Bitcoin, just fractions of one, unless you have a large amount of capital to play with! But that’s ok, cryptocurrency exchanges let you specify how much money you want to spend on Bitcoin. For example, at that price, buying £1,000’s worth of Bitcoin would get you 0.1249280 of a Bitcoin.
Incidentally, a fraction of a Bitcoin is called a Satoshi, after the inventor, and 1 BTC equals 100,002,321 SATS. So your £1,000 would get you 12493089.957888 SATS.
When the transaction is verified, the money will be deducted from your account, and the Bitcoin added.
Bitcoin is stored in a cryptocurrency wallet, which can be handled by the online exchange you bought the Bitcoin from, or using a program/app on your computer or mobile phone, or a separate device called a hardware wallet.
A cryptocurrency wallet has an address, which is a long string of letters and numbers. If anybody wants to send you some Bitcoin, you give them this address; similarly, if you want to send Bitcoin to somebody else, you will need their wallet address.
Exchange Wallets
When you buy any cryptocurrency from an exchange, it is put into your wallet on the exchange. You will have a separate wallet for each different cryptocurrency you buy – Bitcoin, Ethereum, Solana, etc – each with its own address.
Leaving the Bitcoin in the exchange wallet is generally considered safe so long as you are using a reputable cryptocurrency exchange. Just make sure you keep the password to your exchange account secure.
Computer or Phone Wallets
You can get a program for your computer or app for your phone that will let you store your Bitcoin locally. The app will have its own address which you use to transfer the Bitcoin to it. The drawback is you could get hacked, or have your phone stolen.
Hardware Wallets
A hardware wallet is a device that usually looks like a USB memory stick. Its sole purpose is to store your cryptocurrency. It is protected by a strong password so nobody except you can transfer Bitcoin out of the wallet. The danger here is that if you lose the device, you lose the Bitcoin – there is no backup.
The main uses for Bitcoin are buying things, a store of value or hedge, and trading.
Making Purchases Using Bitcoin
Bitcoin is digital money so it is possible to use it to buy goods and services so long as the vendor accepts cryptocurrency payments. You just need to know the wallet address of the vendor so you can transfer the payment from your wallet to theirs.
You can also use a payment app which will either transfer your Bitcoin directly to the vendor, or will convert your crypto into pounds or dollars in order to make a payment to those who don’t accept cryptocurrency.
The transfer will happen almost instantly. There will probably be a small transaction fee charged by the exchange.
However, it’s relatively uncommon to use Bitcoin or other cryptocurrencies in this way.
Trading Bitcoin
You can buy Bitcoin with a view to holding it long-term until it increases in value, or you can trade it over a shorter period to try to take advantage of price fluctuations. In both cases it is similar to other assets such as gold or equities.
In the US you can also invest in a Bitcoin ETF (exchange-traded fund) but in the UK these are only available to professional investors.
To trade in Bitcoin you speculate on the price movements, by taking a long position (buying Bitcoin) if you think the price will go up, or a short position (selling Bitcoin) if you expect it to decrease. This can be done through your cryptocurrency exchange. You can also trade Bitcoin through brokers that offer Contracts for Difference (CFDs). These allow you to speculate on future market movements without owning the actual asset.
Traders have tools available to them such as leverage and margin, which have the potential to boost profits but also increase the risks.
Before starting to trade Bitcoin you need a solid understanding of market analysis.
Bitcoin As A Store Of Value or Hedge
Bitcoin has been called the new gold because it is a place to put your funds, an alternative to buying stocks or bonds. However, the volatility of Bitcoin’s price make it a high-risk place to stash your cash. Still, it can be a useful addition to a diversified portfolio.
Bitcoin can also be used to hedge against inflation, and is used as ‘flight capital’ because it is easy to transfer it from one country to another.
Advantages of Bitcoin As A Hedge or Store of Value
| Durability | Unlike other assets, Bitcoin is not subject to wear or degradation. |
| Portability | Bitcoins are easy to transport and store because they have no physical existence. They can be transferred across the globe quickly and conveniently, or put on a hardware wallet and carried elsewhere. |
| Liquidity | Bitcoin is highly liquid, which means it can be bought and sold on many legal exchanges with no delay, allowing the holder to access funds when needed. |
| Scarcity | The supply of Bitcoin is capped at 21 million coins. This makes the asset scarce which will prevent issues with supply outstripping demand in the long-term. |
Bitcoin has no physical presence, so a robber can’t break into your house to steal your stash. However, that doesn’t mean there are no security issues with Bitcoin – far from it.
Cryptocurrency exchanges go to great lengths to secure themselves, but hackers are resourceful and there are armies of crypto criminals out there trying to steal your coins. If you use a reputable broker you should be protected because they will often guarantee to reimburse you if they get hacked and you suffer losses.
You can only access your account if you have the password, along with whatever two-factor authentication the exchange uses. This means:
Forget the password and you may have trouble accessing the account. Let someone else guess the password and you could lose your Bitcoins.
You can transfer your Bitcoins out of the exchange and into a cryptocurrency wallet on your computer, mobile phone, or a secure hardware wallet. These apps or devices allow you to secure the wallets using a series of complicated fallbacks, such as master passwords, but again, if you forget the passwords, or lose the device, you lose the Bitcoin.
Security really is a minefield. The best defence is to spread your coins around between different exchanges and devices, so that if one gets hacked or lost, you don’t lose everything.
1. Who Is Satoshi Nakamoto?
Satoshi Nakamoto is the inventor of Bitcoin, but nobody knows their identity. He or she remains completely anonymous. Several people over the years have claimed to be Satoshi but their claims have not held up to scrutiny. Many have tried to unearth the identity of Satoshi but to no avail.
2. What is fiat currency?
Fiat currency is a government-controlled currency that is not backed by a physical commodity such as gold; instead it is backed by the government that issues it. Most modern paper currencies are fiat currencies, including GBP, USD, etc. Cryptocurrency differs from fiat currency in that it is not controlled by a government, and in the case of Bitcoin and many others there is no central controlling authority at all.
3. How many Bitcoins are there?
There is a finite number of Bitcoins that can exist: 21 million. Right now there are approximately 19,795,046 in circulation at the time of writing, with more being created all the time (about one every 10 minutes). The remainder will only be in circulation as they are created by Bitcoin mining.
4. What is a Bitcoin block?
A Bitcoin block is a group of transactions stacked together. Each block stems from the preceding one and forms the foundation for the next block. A chain of blocks forms the blockchain.
5. What is the blockchain?
The blockchain is a public ledger which records all cryptocurrency transactions. New blocks are formed when Bitcoin miners complete a complex maths puzzle and verify the transactions in the previous block. The blockchain is decentralised, so not controlled by any one entity.
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Trading in futures and options carries substantial risk of loss is not suitable for every investor. The valuation of futures and options contracts may fluctuate rapidly and unpredictably, and, as a result, clients may lose more than their original investments.
The information provided in this article is for informational purposes only and should not be construed as financial, investment, or professional advice. The views expressed are those of the author and do not necessarily reflect the opinions or recommendations of any organizations or individuals mentioned. Always consult with a qualified financial advisor or other professionals before making any financial decisions. The author and publisher are not responsible for any actions taken based on the content provided.
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