How does Bitcoin investing work?

How does Bitcoin investing work?


Is Bitcoin a currency? An investment? An asset? A stock? Well, yeah. It can be all of them. One individual Bitcoin is a piece of digital currency, otherwise known as BTC. As a general concept, Bitcoin is a system for securely buying, storing, and using money digitally. Bitcoins are found by Bitcoin miners and added onto the public blockchain network - but we'll get to that later.

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Thanks to rapid advances in public interest in the cryptocurrency, you can buy Bitcoins online or on your phone with popular apps like Coinbase - though many still choose to mine Bitcoins. Once you have Bitcoins, stored in a Bitcoin wallet, you're welcome to use them as currency or you can hold onto them as an asset to invest in (much like gold). Bitcoin, which is mined with expensive hardware designed to solve intricate mathematical problems, is that there is a finite amount of it - 21 million Bitcoins, to be exact.

The idea behind Bitcoin is for there to not only be a digital currency, but a decentralized network behind it in contrast to the highly centralized system banks use for fiat currency. Bitcoin transactions are irreversible, and the pseudonymous public ledger the transactions are made to give it a level of transparency other financial systems don't offer.

The History of Bitcoin

The Bitcoin system was created and put into place by "Satoshi Nakamoto." That's in quotes because nobody knows who that is, whether it's one man or woman or a group of people. What is known is that early in 2009, Nakamoto mined the first 50 Bitcoins, and an industry was created.

The next enormous step in Bitcoin's progression came nearly a year and a half later, when a man named Laszlo Hanyecz paid 10,000 Bitcoins for two pizzas, the first confirmed purchase in the cryptocurrency's history. At the time, the Bitcoin rate was mere fractions of a penny for 1 BTC. Today, that same number of Bitcoins is worth over $70 million. Let's hope it was at least pretty good pizza.

By 2011, Bitcoin began increasing rapidly in value, from penny fractions to be worth over one dollar. Over the next couple of years, controversies drive the price up (via seemingly random periods of investors getting involved) and down (after a security breach of Mt. Gox, then the top Bitcoin exchange), an absurd level of volatility that has become the norm for cryptocurrencies. After 2013, though, it stagnated for several years. Its rise goes from speedy to slow and steady.

But 2017 brought back the crazy up and down Bitcoin we know and love, as Wall Street began to see Bitcoin as more viable than ever. The end of the year sees a massive BTC price peak, coming close to $20,000 in Bitcoin value. A more detailed timeline can be found at New York Magazine.

The idea Nakamoto had for Bitcoin was outlined in a 2008 white paper. Nakamoto believed that the use of third parties (like banks) in financial transactions made them too susceptible to fraud, saying that people needed "an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party." Nakamoto was able to attain this decentralized network with blockchain technology.

Buying and Selling Bitcoin

You've likely heard of Bitcoin mostly in terms of people holding onto it and seeing how it changes in value. And that's often how people use BTC. But it is a currency, and for those wondering, it is entirely possible to both buy Bitcoin and sell Bitcoin.

Buying Bitcoin is quite a bit easier than mining for it. Most major Bitcoin exchanges allow you to purchase BTC using your credit/debit card or bank account. This includes some of the most notable and largest exchanges out there for crypto, like Coinbase or Coinmama. There will be some added security measures, like proof of identification and two-factor authentication, to make it a safe transaction. Take advantage of any security measures you can get to try and avoid hackers.

These exchanges usually also allow you to sell your Bitcoins as well. This is where you'd want to have your bank account information ready in the exchange and your security measures in place so that you can more safely sell your BTC back to the exchange and get the fiat currency value back into your bank account.

If you'd rather use cold hard cash, check and see if there is a Bitcoin ATM at a location near you. Some places, especially major cities, have Bitcoin ATMs scattered about where you simply need to prove your identification and present your Bitcoin wallet QR code to get your desired amount of BTC transferred into it.

Bitcoin exchanges can be convenient, but they're also a third party in a system that was built to not deal with third parties. So when buying or selling, some try to bypass exchanges entirely and use trading websites that instead partner you with another individual whom you can exchange BTC with. This is, of course, an extremely risky thing to do. It can be hard to trust a random person to do a fair trade with you if you don't know them.

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