The first step to understanding how these markets work and how you can use them to your financial advantage is understanding what the asset is that you are trading. Many of you know Bitcoin because it is what’s reported on by media, but there are thousands of cryptocurrencies. Some are scams or ponzis, some serve no essentially no purpose at all, and some have real-world applications that are going to change the way that we do business someday. Let’s begin with Bitcoin.
Bitcoin is the original cryptocurrency. It was created by an anonymous, but intriguing character who is known by all of us as Satoshi Nakamoto. In his whitepaper, he described Bitcoin as a peer-to-peer payment system. It is the goal of Bitcoin to create an economy in which the people have control over the money supply and the money that they own themselves. This would hopefully cut out large financial institutions, which have been known to take advantage of the consumer. If Bitcoin or another competing cryptocurrency succeeds in its goal, it would change the world.
To me, Bitcoin represents a way to have complete control over my own money–how it is spent, who can see it, and of course who can access it. In a traditional bank account, you have legal claim to your money. However, banks can lend it out, spend it, or do whatever they like with it. If everybody suddenly wanted to withdraw their money from a bank, this would cause problems and it’s possible that they won’t have enough to pay each account holder. You can clearly see why this is a problem.
Another advantage of Bitcoin is that there is a set supply. The US Dollar is controlled and issued by the federal reserve, who can print as much as they’d like. The dollar itself has no value, is overinflated, and really inefficient to send and receive electronically. Most of our daily transactions using USD are electronic, whether it be through wire transfers, debit card transactions, or third-party service providers like PayPal. So, if you think about it, Bitcoin is not so different from how we use the dollar in the modern world. There are a few key differences, however, that I believe makes Bitcoin the superior currency.
- There is a limited supply of Bitcoin. Only 21 million Bitcoin can ever be mined. This is vital. It means that we cannot make more Bitcoin whenever we choose, limiting the supply and ensuring that demand never goes away.
- Bitcoin is decentralized. It is not owned or ruled or controlled by a government. It is controlled by the users. Any changes to the technology must be voted on by the people.
- Bitcoin can be easily sent around the world, at any time of the day, in mere seconds. This is what made Bitcoin originally popular. Since then, the network has slowed and fees have gotten high, so it has been causing some dissatisfaction within the community. Other cryptocurrencies have risen to the task and perform these same functions for near-zero fees and even faster than Bitcoin ever did. We’ll talk about these later.
- Bitcoin is durable. Dollars and coins can be lost or stolen. Bitcoin will never fade, wear, tear, or break. It is electronic and easy to store. If you control your cryptocurrency responsibly, it cannot be stolen or lost. No bank or other person has control over what happens to your money–just you.
After you purchase Bitcoin, next you need to figure out how you are going to store it. If you buy from Coinbase (highly recommended), they will provide you with a wallet. If you are in possession of large amounts of Bitcoin, you should transfer it out of your Coinbase wallet to a secure wallet that you control the keys to. A Bitcoin wallet is a secure way to store your Bitcoin. When you create a Bitcoin wallet, it is important to store your private key in a secure location. In the event that you lose your phone or computer, you will have to use your private key to recover your wallet.
There are two pieces of information needed to send a bitcoin transaction: a receiving address and an amount. A Bitcoin address is a string of letters and numbers used to specify a destination. When sending Bitcoin, always double check the address. If you send to an incorrect address, there is little chance of recovering your coins. Once you are sure that the address is correct, then you just specify an amount and send it.
When it comes time to receive Bitcoin, you only need to give the sender your receiving address. In most wallets, the receiving address is easy to find and copy.
Those are the basics of Bitcoin. Remember, Bitcoin is one of thousands of cryptocurrencies. Some of the projects being worked on in this space are truly going to change the world. The first step to unlocking this world of innovation is understanding the most basic cryptocurrency and how we use it to purchase and invest in other cryptocurrencies. I will go over that in a future post, but it is important to understand how Bitcoin is used today by traders and investors.
In the next post, I will cover some of the other top cryptocurrencies and what functions they serve.