What is Bitcoin?
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Bitcoin is becoming an increasingly popular financial instrument, although not everyone understands the basics behind the digital currency. This article promises to close the gap for everyone still catching up on Bitcoin, and to address the basic questions, such as: How does Bitcoin work? How does Bitcoin mining work? Is Bitcoin risky? And more. This article will also provide a preview of advanced Bitcoin concepts, such as blockchain, Bitcoin payments, and transfers.
What is Bitcoin?
Bitcoin is a digital currency or ' cryptocurrency', due to the fact that it uses cryptography to secure transactions within its infrastructure, which represents a distributed online database, or 'blockchain'. Additionally, In case you didn't already know, it is possible to trade CFDs on Bitcoin (BTC/USD) in a risk-free demo trading account with Admiral Markets, so you can test out everything you learn about cryptocurrencies first, before you attempt your strategies in the live markets.
What is the Abbreviation for Bitcoin?
The abbreviation for Bitcoin is simply BTC. The same principle as with USD (US Dollar) and EUR (Euro) applies. Bitcoin can also be paired with other currencies. In that case, the CFD contract name could be, for example, Bitcoin vs US Dollar CFD (or BTC/USD).
How Does Bitcoin Work?
Bitcoin offers the opportunity to make fast, secure and low cost peer-to-peer payments without the need of a bank or a central processor. The system transactions take place directly between users' digital wallets and are verified in the blockchain. The transactions are digitally signed with unique private keys, which proves that they've come from the owner of the wallet.
What is Blockchain Technology?
A blockchain is essentially a decentralised public ledger of all Bitcoin transactions that have ever been executed. A certain number of transactions forms a database unit, known as a 'block', and each block stores information about the previous block. In addition, each transaction stores information about its preceding transaction. This way, the blockchain enables full transparency of payments.
Bitcoin's blockchain infrastructure introduced a revolutionary method for financial data storage that is accessible to anyone, and is fully transparent, and co-developed using an open-source code, and does not belong to any person or entity. Instead, blockchain maintenance is performed using the collective power of millions of computers that verify transaction, and then add them to the 'blocks'. Collectively verified transactions cannot be modified or deleted, so all Bitcoin payments are final and indisputable.
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What is Bitcoin Mining?
Once a new block is created in the blockchain, it is rewarded with 12.5 Bitcoins, which occurs approximately every 10 minutes. This is a reward for the so-called 'mining' process, which is spending the electric and computational power for the maintenance of the network. Mining involves a lot of people and specialised companies worldwide, and creates the basic value of Bitcoin.
The system generates new Bitcoins automatically and self-regulates the speed of this process, so there is no way to circumvent the global rules and earn bitcoins faster, other than through scaling the investments with mining hardware, and spending more on electricity bills. The reward per block will halve in 2020 and will continue halving every 4 years, until 21 million Bitcoins are generated. This means that Bitcoin has a finite potential for value growth.
Who Invented Bitcoin?
It is thought that Bitcoin was created by Satoshi Nakamoto, who announced the invention on 31 October 2008, in a cryptography mailing list within a research paper called Bitcoin: A Peer-to-Peer Electronic Cash System. What is more interesting is that his name is probably an alias used by the unknown person, or persons, who designed Bitcoin originally. In 2016, Australian entrepreneur, Craig Wright, declared himself as 'Mr. Bitcoin' - a claim that has been widely accepted by prominent members of the Bitcoin community.
When Was Bitcoin Created?
The financial history of Bitcoin originates in 2010, when someone bought a pizza. The pizza wasn't the most important part of the transaction – but what was used to pay for it was. The meal cost 10,000 Bitcoins, which was the first time this virtual currency was used to buy something in the real world. The day is now annually celebrated by Bitcoin enthusiasts as Bitcoin Pizza Day.
Things have come a long way since then. Bitcoin's use and value have soared significantly. If that diner had held onto those 10,000 Bitcoins, they may not have made history, but they would have been around $20 million better off several years later.
Where Can You Spend Bitcoin?
There are plenty of things you can buy using Bitcoin – besides pizza! There are even more places that accept it. According to Coindesk, in 2015, the number of merchants that accept Bitcoin exploded. Many of them were online e-commerce sites, but an increasing number of bricks-and-mortar stores are now also accepting BTC. The list is constantly expanding, and soon you might be able to spend it literally anywhere. Here are some examples of products you can purchase using Bitcoin, and places you can do so:
- Common household Items
- Video games
- Gift cards
- Tipping and charity
- Online and offline shops
Most Bitcoin payment processors will also provide a QR code at the checkout, which represents a Bitcoin address and a payment amount. QR codes are very convenient, making it easy to pay via the Bitcoin wallet application on your smartphone. Simply scan the QR code and it will pre-fill the recipient Bitcoin address, and the requested payment amount. Once you send the transaction, the payment is complete.
Are Bitcoin Transactions Traceable?
Bitcoin is fully transparent. All Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network. Bitcoin addresses are the only information used to define where Bitcoins are allocated, and where they are subsequently sent. These addresses are created privately by each user's wallets. Since users usually have to reveal their identity in order to receive services or goods, Bitcoin addresses cannot remain fully anonymous. Also, the Bitcoin network is a peer-to-peer network, and it is possible to log user's IP addresses.
Which Countries Back Bitcoin as a Currency?
The legal status varies from country to country, but the list of countries that accept the BTC is constantly expanding. Bitcoin operates independently of any central bank, contrary to other well-known currencies (e.g. the US Dollar and the Euro). The Bitcoin network does not have any other central point or single administrator either, which makes it a decentralised digital currency.
Bitcoin's fundamental value is generated through mining, and is closely tied to electricity and computer hardware costs, while the rest of its value is boosted by its limited amount, with a slow generation process and increasing demand. Bitcoin is spreading across the globe as a valid method of payment for which you can purchase various goods and services, which is boosting the demand even further.
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Is Bitcoin Legal?
Regulations vary country-by-country. At the moment only Japan officially recognises Bitcoin as legitimate currency, while in other countries, there is no specific legislation yet. But you can expect to see national financial regulators become increasingly interested in Bitcoin and other virtual currencies, as long as blockchain technologies continue spreading quickly, and the size of the crypto economy keeps growing.
Is Bitcoin Safe to Trade?
Bitcoin is a volatile asset, with daily price changes in excess of 10% being quite frequent, which makes it considerably risky for investing and trading. Of course, there is no high reward without high risk, and you don't have to invest or use any funds that you cannot afford to lose. The good news is that Admiral Markets provides an advanced set of conditional orders - Volatility Protection - which have additional utility for highly volatile instruments.
Is Bitcoin a Bubble?
The situation surrounding crypto technologies closely resembles the dotcom bubble of the early 2000's. There are a large number of blockchain-related projects which announce their ICO's every day. ICO stands for Initial Coin Offering, and is a crowdfunding stage of the project. It is a sort of IPO, but in the crypto economy.
Projects are collectively financed by the public who purchase their 'tokens' in exchange for Bitcoin, and other major cryptocurrencies. Of course, just like in any other industry, 90% of projects will fail to deliver a working product, and it is likely that it won't be long from now that we'll begin to see a number of resonant bankruptcies. At the moment, the price of Bitcoin can be, to some extent, overheated, due to massive spending of Bitcoin during the ICOs
What's Next For Bitcoin in 2019?
Source: Admiral Markets MT4,BTC/USD 4-hour chart (between 11 November 2018 and 1 February 2019). Accessed: 1 February 2019
Bitcoin has been trading in a less volatile range in early 2019 than we saw in 2018, holding at fairly stable levels throughout January 2019 that are largely consistent with prices that prevailed at times during December 2019. During January, the price has not fallen any lower than $3300 nor risen any higher than $4050, meaning the peak price has been roughly 23% above the month's low.
By way of comparison, for example, in November 2018, Bitcoin plunged from $6175 to below $3500 in the space of less than two weeks. Looking at that price move in the same way as the range in January, the peak price of Bitcoin over that span was roughly 76% higher than the low, showing how much more volatile prices were just a couple of months prior. Putting these price ranges into a historical context, the value of Bitcoin has varied widely over the past five years, as can be see in the price chart below.
Source: Admiral Markets MT4, BTC/USD weekly chart (between June 2014 and January 2019), Accessed: 1 February 2019
Given that Bitcoin made substantial losses in 2018 —dropping about 73% of its value over the course of the year — the cryptocurrency may face headwinds in attracting capital flows. Consider that the Dow Jones fell 5.6% in 2018 as a comparison. This huge disparity in performance between cryptocurrencies such as Bitcoin and traditional Wall Street investments last year is unlikely to win over any sceptical investors and could well deter those with a conservative risk approach.
That said, Bitcoin remains the most well-known cryptocurrency and the challenges that have rattled the cryptocurrency market as a whole may serve to winnow out some of its smaller, less-established peers. A significant development expected in early 2019 is the launch of a physically-settled Bitcoin Futures contract by Fortune 500 company Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange. ICE had originally scheduled the launch for late January 2019, but later amended the launch timeline.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.