The Basics of Bitcoin Every Investor Should Know
Bitcoin is a secure digital currency that has sparked the interest of many investors across the world. It presents an exciting opportunity for people who want to venture into a new asset class.
That said, here are some basic information about Bitcoin that you should know as a potential investor.
What is Bitcoin?
Bitcoin is a type of currency that exists entirely on the Internet. It was created by Satoshi Nakamoto, a pseudonym for an individual or group who chooses to remain anonymous. Bitcoin is all of the following things:
- A currency, which is both a medium of exchange and a store of value
- A trade, when buying low or selling high
- An investment, which you can buy and hold onto for the long term
- A hedge against traditional markets
What Can You Do with Bitcoin?
Aside from using Bitcoin to buy and sell goods and services online and in physical stores, here are a few great ways to use or spend Bitcoin:
- Tipping and Charity - There are apps today that allow you to pay it forward with Bitcoin and donate to your preferred cause.
- Investment - Given the volatility of Bitcoin, investors often incur short-term gains and losses when actively trading. However, there is also potential for Bitcoin as a long-term investment because of the limited supply cap that is expected to be reached in the year 2140.
- Gambling - If you like playing the odds, you can try your luck with sites like mintdice.com that offer Bitcoin as an alternative payment method to credit cards and bank transfers. You can also redeem your winnings easily to your Bitcoin wallet.
- Bills Payment - Depending on where you are located, certain service providers already accept Bitcoin as a form of payment. From your phone bill to your mortgage payment, you can now pay for your use and consumption of utilities and other services using Bitcoin.
- Purchase Other Cryptocurrencies - You can also use your Bitcoin to purchase other up-and-coming altcoins. For traders and investors, jumping in on the bandwagon earlier than most offers an edge, both in terms of rates of return and experience.
What Affects the Price of Bitcoin?
The value of Bitcoin depends heavily on three factors:
- Political risks involving national currencies affect Bitcoin’s price since people use it to hedge against price movements in a specific currency. For example, before the referendum for Brexit on June 2016, the fears of the people caused an increase in the value of Bitcoin and a corresponding decrease in the value of the British pound.
- Regulations concerning Bitcoin can also affect the price of Bitcoin. National regulations, such as how the cryptocurrency will be treated by the tax system, can send the price of Bitcoin soaring or plummeting.
- Psychological factors such as the faith of investors, media coverage and treatment, or the public’s willingness to learn and use this new type of technology can affect Bitcoin price. Among traders, this is referred to as “animal spirits,” because it involves a decision-making process that is based on intuition or other people’s behavior instead of hard analysis.
Why Should You Invest in Bitcoin?
Throughout its history, Bitcoin has an overall upward trend—with a fast-paced increase in value, followed by a slow and steady decrease, until it finally stabilizes. Although there is definitely a lot of disagreement about the future of Bitcoin, the overwhelming sentiment is that Bitcoin can only continue rising and growing.
What Do You Need to Start Investing?
If you are already set on adding Bitcoin to your portfolio, here are some of the things that you need to prepare:
- Digital Wallet - You need a place to safely store the coins you buy. A digital wallet is typically composed of two distinct cryptographic keys: a public key and a private key. The public key is where transactions are deposited to and withdrawn from. It is similar to a digital signature or a public username, since this is the key that appears on the Blockchain.
- Identification Documents - In certain countries, you need to present a number of documents to verify your identity before you can register for digital wallets. In the United States, for instance, the Security and Exchange Commission requires registrants to provide their driver’s license and their Social Security number as part of their anti-money laundering efforts.
- Secure Internet Connection - Always use a secure network if you are planning to access your wallet or trade Bitcoin online. Using unsecure or public networks will make you more vulnerable to security threats such as hacking.
- A Reliable Exchange - Exchanges allow you to acquire Bitcoin and is similar to the platforms used by traders to buy stock. There are various types of exchanges, including decentralized exchanges, centralized exchanges, P2P marketplaces, and many others. Understanding the pros and cons of each will help you determine which one is right for your specific needs. Try to avoid the exchanges that are known for wash trading. Stick to larger, more popular exchanges, especially if you are just starting out.
The private key is, essentially, a password that you’ll need to buy, sell, and trade Bitcoin. Once you lose your private key, all your coins are virtually unrecoverable. Because of this, make sure that you store your private key in a secure location.