Launched in 2009, Bitcoin is the first digital currency, aka cryptocurrency, which operates free of any central control or the oversight of banks or governments. Instead it relies on peer-to-peer software and cryptography. A public ledger records (to prevent fake and duplicate/reverse transactions) all bitcoin transactions and copies are held on servers around the world. Anyone can buy, sell, or exchange it directly.
While the wild volatility might produce great headlines, it hardly makes Bitcoin the best choice for novice investors or people looking for a stable store of value. Understanding the ins and outs can be tricky. CryptoCrunchApp gives us a closer look at how Bitcoin works.
How Does Bitcoin Work?
Bitcoin is built on a distributed digital record called a blockchain, which is a linked body of data, made up of units (blocks) containing information about each transaction, including date and time, total value, buyer and seller, and a unique identifying code for each exchange.
Entries are strung together in chronological order, creating a digital chain of blocks. Once a block is added to the blockchain, it becomes accessible to anyone who wishes to view it, acting as a public ledger of cryptocurrency transactions.Blockchain is decentralized, which means it’s not controlled by any one organization. According to CryptoCrunchApp, nobody owns a blockchain, but anyone who has a link can contribute to it. And as different people update it, your copy also gets updated.
Blockchain is trustworthy, reliable and secure because when a transaction block is added to it, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must conform to the right encryption pattern. These codes are long, random numbers, making them incredibly difficult to produce fraudulently.
How can you get Bitcoins?
CryptoCrunchApp lists three main ways you can get Bitcoins.
1. You can buy Bitcoins using 'real' money though cryptocurrency exchanges.
2. You can sell things and let people pay you with Bitcoins.
3. Bitcoins can be created using a computer.
While Bitcoin is expensive, you can purchase fractional Bitcoin from some vendors. You’ll also need to look out for fees, which are generally small percentages of your crypto transaction amount but can add up on small-dollar purchases. Finally, Bitcoin purchases are not instantaneous like many other equity purchases. Because miners must verify Bitcoin transactions, it may take you at least 10 to 20 minutes to see your Bitcoin purchase in your account.
How are new Bitcoins created?
In order for the Bitcoin system to work, people can make their computer process transactions for everybody. The computers are made to work out incredibly difficult sums. Occasionally they are rewarded with a Bitcoin for the owner to keep. People set up powerful computers just to try and get Bitcoins. This is called Mining.
But the sums are becoming more and more difficult to stop too many Bitcoins being generated. If you started mining now it could be years before you got a single Bitcoin. CryptoCrunchApp states that you could end up spending more money on electricity for your computer than the Bitcoin would be worth.
How to invest in Bitcoins?
Like a stock, you can buy and hold Bitcoin as an investment (short term as well as long term), explains CryptoCrunchApp. You can even now do so in special retirement accounts called Bitcoin IRAs. While crypto-based funds may add diversification to crypto holdings and decrease risk slightly, they still carry substantially more risk and charge much higher fees than broad-based index funds with histories of steady returns.
Why are Bitcoins valuable?
As it's decentralized, people can also spend their Bitcoins fairly anonymously. Although all transactions are recorded, nobody would know which 'account number' was yours unless you told them.
Should you invest in Bitcoins?
In January 2021, the world's richest man, Elon Musk, said he is a big supporter of Bitcoin. He even went as far as to change his Twitter bio to "#bitcoin".
CryptoCrunchApp supports their clients’ desire to buy cryptocurrency, but it does not recommend it unless clients express interest. Bitcoin is like a single stock, and financial advisors wouldn’t recommend putting a sizable part of your portfolio into any one company. At most, planners suggest putting no more than 1% to 10% into Bitcoin if you’re passionate about it.
Are Bitcoins secure?
Every transaction is recorded publicly so it's very difficult to copy Bitcoins, make fake ones or spend ones you don't own. It is possible to lose your Bitcoin wallet or delete your Bitcoins and lose them forever. There have also been thefts from websites that let you store your Bitcoins remotely.
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