What is Bitcoin: The World’s First Cryptocurrency
Key Questions Answered
Cryptocurrencies have been rising in popularity and hitting numerous milestones, such as reaching a $3 trillion market cap in late 2021. Cryptos have also been front and center in the news due to the exploding interest in Bitcoin (BTC), non-fungible tokens (NFTs), memecoins (such as DOGE and SHIB), and decentralized finance (DeFi). In this article we’ll take a look at the cryptocurrency that started it all – Bitcoin.
What Is Bitcoin?
Bitcoin (BTC) is the first and the most well-known cryptocurrency in existence today. As a cryptocurrency, Bitcoin uses cryptographic proof as a security measure and can be used as a currency to pay for products and services. Like any other currency, Bitcoin allows users to store, measure, and transfer wealth, without the need for an intermediary. Moreover, Bitcoin is digital, meaning it doesn’t have a physical form. Instead, it’s represented as code stored on computers, unlike other stores of value such as gold and oil. Currently, one Bitcoin is worth around $40,000.
Benefits of Bitcoin. (Source: Infopark)
How Does Bitcoin Work?
All transactions involving Bitcoin are recorded onto a blockchain, a public ledger not under the control of any single authority. Basically, Bitcoin is the cryptocurrency and the blockchain is the distributed database (or ledger) that keeps the records of all Bitcoin transactions. Copies of this ledger are kept on servers (also called “nodes”) worldwide, making Bitcoin decentralized by nature. As a result, there’s a low possibility that a central authority can interfere or halt operations. Furthermore, unlike fiat currency such as the US Dollar, Bitcoin isn’t backed by government authorities.
The difference between centralized and decentralized networks. The Bitcoin network is a decentralized network.
The Bitcoin that a user has in their possession is kept on the blockchain in a specific address. The address is also the user’s pseudonym, meaning the user can make transfers without having to reveal their identity. To access Bitcoin, the user requires a cryptocurrency wallet, a program or physical device containing the public and private keys, which are strings of randomized numbers and letters. The public key is derived from the private key and serves as the public address that others can see and utilize to send crypto to. Also called a secret key, the private key works like a password used to decrypt and encrypt the wallet as well as sign transactions and prove wallet ownership.
When a Bitcoin transaction is made, it needs to be verified. Specialized computers, or mining rigs, solve mathematical puzzles to verify if the user’s wallet has the required funds and whether the transaction is signed by the user’s private key. This verification process is called proof of work (PoW).
In very simple terms, the puzzles involve guessing the encrypted serial number (hash value) until one of the guesses yields the correct answer. Once solved, other miners can try the serial number and confirm if it’s the solution. The verified transaction is grouped with other verified transactions into a block, which is then appended onto the blockchain. Due to Bitcoin’s code, the miner with the solution will then be rewarded with newly created Bitcoin. This process where new Bitcoin enters circulation is called mining.
The way Bitcoin works. (Source: Euromoney)
Currently, there are under 19 million Bitcoin in circulation. The maximum supply of Bitcoin is 21 million. Once all the total supply of Bitcoin reaches that amount, no more Bitcoins will be mined or created.
Who Is Behind Bitcoin and Why Was Bitcoin Created?
Bitcoin was created by a person or group that went by the name “Satoshi Nakamoto.” Nakamoto first released Bitcoin’s whitepaper in late 2008, which outlined the principles behind Bitcoin. In the whitepaper, Nakamoto explicitly stated that he created the cryptocurrency for people to control their money themselves without relying on third-party intermediaries. Bitcoin would serve as an alternative payment system where people didn’t need to pay huge fees when conducting digital monetary transfers, especially when transferring money overseas. However, the purpose of Bitcoin has changed throughout the years. Now, Bitcoin is regarded more as a store of value than a currency to spend for retail transactions.
Bitcoin was officially launched on January 3, 2009, when Satoshi Nakamoto mined the genesis block of Bitcoin. Two years later, Nakamoto stepped down and passed leadership to Gavin Andresen, a lead developer for part of the Bitcoin project at the time. While there have been numerous rumors of Nakamoto’s identity, nothing so far has been confirmed. Nonetheless, Nakamoto’s departure does not interfere with Bitcoin’s development. As Bitcoin is a free and open-source software, and any developer can contribute to the project.
Is Bitcoin a Good Investment [Updated 2022]?
Bitcoin’s price is heavily influenced by supply and demand and market sentiment. Bitcoin’s supply is limited, but investor demand is actively increasing, which results in huge price run-ups. On the other hand, the market sentiment also significantly impacts Bitcoin’s price. For example, governmental regulations like China’s cryptocurrency ban can cause immense price drops while news about adoption can boost the price.
What Should I Know Before Investing?
Thus, before investing in Bitcoin, you should understand that Bitcoin is extremely volatile due to its speculative nature and maturity as an asset compared to other investment vehicles and currencies. For example, at the start of 2022, Bitcoin fell by 50% from its all-time high to under $35,000. However, drastic price crashes like this are common and experienced investors and traders commonly see these as money-making opportunities. Moreover, volatility works both ways where you can also make hefty profits. For example, if you bought Bitcoin at the start of 2020 and sold it at the end of the same year, you would have made a 300% profit.
Ultimately, Bitcoin is a “high-risk, high-reward” asset and should be treated the same as any other risky investment.
What Are Popular Bitcoin Trading Strategies?
For beginners, here are three of the most popular and easy to follow trading strategies for Bitcoin:
- Dollar-cost averaging (DCA) is one of the most popular and mature trading strategies. The concept of this strategy is simple where a user purchases Bitcoin with a set amount of money over some time in regular intervals. By buying in regular intervals instead of a lump sum, the user reduces the negative impacts of market volatility. To adopt this trading strategy, you start by choosing the purchase amount and interval of your choice and stick to it until you achieve your investment goals.
- Buy and hold (HODL) involves buying Bitcoin and holding onto it long-term without following a set interval. The use of the term “HODL” began as a misspelling of the word “hold” on a cryptocurrency forum and now stands for the phrase “hold on for dear life.” Nonetheless, you should only follow this strategy if you have a positive outlook on Bitcoin. Similar to DCA, you should take profits once you reach your desired investment goals.
- Trend trading is trickier than DCA and HODL, wherein you try to make profits from trends in the market. The basic rule is to trade based on the current market trend. If Bitcoin’s price is going up, you should go long by buying low and selling high. If Bitcoin’s price is falling, you should go short by selling at a high price and repurchasing the Bitcoin at a lower price, thereby pocketing the difference. To avoid extreme losses, you should set proper position sizings and Stop Loss orders to close your positions when the price falls to a certain value. Once you get the basic idea of trend trading, you may include technical indicators to analyze price movements and maximize your gains.
To summarize, Bitcoin is a new type of currency created to reduce the reliance on traditional third-party intermediaries. It’s also a “store of value” and an alternative payment system where users can transfer and receive money without paying the same fees associated with traditional monetary systems. The blockchain technology introduced by Bitcoin also provides secure, pseudonymous, and immutable digital monetary transfers. Moreover, it’s a self-sustaining system where participants in charge of verifying the transactions and keeping the network secure are incentivized with new Bitcoin.
Bitcoin has received wide adoption since its inception in early 2009 and has been on a consistent uptrend. For beginners that are new to crypto, you may opt to keep a small amount of Bitcoin first to try it out. Once you get more familiar with the crypto space, and you come to like investing in this new asset, you may increase your Bitcoin allocation. If you want to get your hands on some Bitcoin, you can buy and trade Bitcoin on Phemex, a professional and trustworthy global cryptocurrency and derivatives trading platform.