Know Your Crypto — BTC Edition

You might be hearing a lot about Bitcoin and wondering what it is and if it’s right for you. Here’s everything you need to understand its benefits and risks.

Not only is Bitcoin (BTC) the first cryptocurrency, but it’s also the godfather of more than 19,000 cryptocurrencies in existence today. Financial media eagerly covers each new dramatic high and stomach-churning decline, making Bitcoin an inescapable part of the landscape. 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 — let’s take a closer look at how Bitcoin works and how it compares against traditional currency.

An Introduction To Bitcoin

Bitcoin is a decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin’s creator — Satoshi Nakamoto — originally described the need for an electronic payment system based on cryptographic proof instead of trust. Every Bitcoin transaction that’s ever been made exists on a public ledger accessible to everyone, making transactions hard to reverse and difficult to fake. Core to their decentralized nature, Bitcoins aren’t backed by the government or any issuing institution, and there’s nothing to guarantee their value.

Since its public launch in 2009, Bitcoin has risen dramatically in value. Although it once sold for under $150 per coin, as of June 8, 1 BTC equals around $30,200. Because its supply is limited to 21 million coins, many expect its price to only keep rising as time goes on, especially as more large institutional investors begin treating it as a sort of digital gold to hedge against market volatility and inflation. Currently, there are more than 19 million coins in circulation. But what’s interesting about Bitcoin is that mining difficulty grows in parallel with how coins are there in circulation.

Understanding Bitcoin Was Easy! But How Does Bitcoin Work?

Bitcoin is built on a distributed digital record called a blockchain. As the name implies, blockchain is a linked body of data, made up of units called 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, with every chain linked to the next.

Blockchain is decentralized, meaning it’s not controlled by any one organization. It’s like a Google Doc that anyone can work on. Nobody owns it, but anyone who has a link can contribute to it. And as different people update it, your copy also gets updated. While the idea that anyone can edit the blockchain might sound risky, it’s actually what makes Bitcoin secure. For a transaction block to be added to the blockchain, it must be verified by Bitcoin holders, and the unique keys used to recognize users’ wallets and transactions must conform to the right encryption pattern.

Okay! So Tell Me About Bitcoin Mining Now

Bitcoin mining is the process of adding new transactions to the blockchain. It’s a tough job. People who choose to mine Bitcoin use Proof-Of-Work (PoW), deploying computers in a race to solve mathematical puzzles that verify transactions. To entice miners to keep racing to solve the puzzles and support the overall system, the Bitcoin code rewards miners with 6.25 BTC for each new block. That amount of BTC equates to nearly $190,000. This is how new coins are created. It was possible for average users to mine Bitcoin in the early days, but that’s no longer the case.

The Bitcoin code is written to make solving its puzzles more and more challenging over time, requiring more and more computing resources. Bitcoin mining also pays less than it used to, making it even harder to recoup the rising computational and electrical costs. In 2009, when this technology first came out, every time you got a stamp, you got a much larger amount of Bitcoin than you do today. There are more and more transactions [now, so] the amount you get paid for each stamp is less and less. By 2140, it’s estimated that Bitcoins will have hit saturated circulation.

Can I Use Bitcoin Just Like I Use Fiat Currency

In the U.S., people generally use Bitcoin as an alternative investment, helping diversify a portfolio apart from stocks and bonds. Companies that accept Bitcoin include Microsoft, PayPal and Whole Foods, to name a few. You may also find that some small local retailers or certain websites take Bitcoin, but you’ll have to do some digging. You can also use a service that allows you to connect a debit card to your crypto account, meaning you can use Bitcoin the same way you’d use a credit card. This generally involves a financial provider instantly converting your Bitcoin into dollars.

In other countries — particularly those with less stable currencies — people sometimes use cryptocurrency instead of their own currency. Bitcoin provides an opportunity for people to store value without relying on a currency that is backed by a government. It gives people an option to hedge for a worst-case scenario. You’re already seeing people in countries like Venezuela, Argentina and Zimbabwe (countries heavily in debt) where Bitcoin is getting tremendous traction. When you use Bitcoin as a currency, not an investment, you do have to be aware of certain tax implications.

Bitcoin Is Acceptable As Payment! But Where Can I Buy It?

Most people buy Bitcoin via cryptocurrency exchanges. Exchanges allow you to buy, sell and hold cryptocurrency. Setting up an account is similar to opening a brokerage account — you’ll need to verify your identity and provide some funding source, such as a bank account, credit or debit card. You can buy it from any major cryptocurrency exchanges including Burency. Regardless of where you buy your Bitcoin, you’ll need a Bitcoin wallet in which to store it. This might be called a Hot Wallet or a Cold Wallet.

Hot Wallets are held by an exchange or a provider in the cloud. Providers of online wallets include Exodus, Electrum and Mycelium. A cold wallet (or mobile wallet) is an offline device used to store Bitcoin and is not connected to the Internet. Some mobile wallet options include Trezor and Ledger. A few important notes about buying Bitcoin: 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.

What About Investment Options In Bitcoin, Parallel To Stocks?

Like a stock, you can buy and hold Bitcoin as an investment. You can even now do so in special retirement accounts called Bitcoin IRAs. No matter where you choose to hold your Bitcoin, people’s philosophies on how to invest it vary: Some buy and hold long term, some buy and aim to sell after a price rally, and others bet on its price decreasing. Bitcoin’s price over time has experienced big price swings, going as low as $5,165 and as high as $28,990 in 2020 alone. Consumers can also invest in a Bitcoin mutual fund by buying shares of the Grayscale Bitcoin Trust (GBTC).

However, the minimum investment requirement is $50,000. This means the majority of Americans aren’t able to buy into it. In Canada, however, diversified Bitcoin investing is becoming more accessible. In February 2021, Purpose Bitcoin ETF (BTCC) started trading as the world’s first Bitcoin ETF, and the Ontario Securities Commission has also approved the Evolve Bitcoin ETF (EBIT). While crypto-based funds may add diversification to crypto holdings and decrease risk slightly, they carry substantially more risk and charge much higher fees than broad-based index funds.

What Do Financial Experts Suggest About Bitcoin Investment?

Financial experts support their clients’ desire to invest in crypto, but they don’t recommend it unless clients’ express interest. The biggest concern for us is if someone wants to invest in crypto and the investment they choose doesn’t do well, and then all of a sudden, they can’t send their kids to college. Then it wasn’t worth the risk. Bitcoin is like a single stock, and advisors wouldn’t recommend putting a sizable part of your portfolio into any one company. At most, financial planners suggest putting no more than 1% to 10% into Bitcoin assets if you’re passionate about it.

Non-Financial Advice: The data, resources, and statistics in this article have been consolidated from multiple sources and neither the author nor the site is responsible for any financial profit/loss incurred from the data and opinions present in this article. Readers understand that all risks associated with cryptocurrency are taken on by themselves.