A Complete Beginners’ Guide to Bitcoin
Before 2017, if people wanted to invest and multiply their wealth, the only way was to invest in regulated financial instruments such as equities, derivatives, commodities, currencies and bonds. These financial instruments, which are still used widely by numerous experienced investors, demand high financial knowledge. This analysis can sometimes be complex and end up consuming time.
However, 2017 saw a new type of asset class becoming massively famous, attracting numerous investors and rising unprecedented in value: Bitcoin.
Bitcoin was priced at Rs 7,000 in January 2017 and reached Rs 15,00,000 at the end of 2017 but crashed to Rs 3,50,000 levels in 2018. Since the volatility was high and going both ways, investors (called speculators) saw an opportunity to profit. Fast forward to now, one single Bitcoin is valued at Rs 48,33,321.
How did this happen? What is Bitcoin? How can you use or invest in it?
This blog will prove as a complete beginners’ guide to Bitcoin and how you can leverage this new-age investment instrument to make profits, transact and diversify. But first, let’s understand cryptocurrencies.
What are Cryptocurrencies?
Cryptocurrencies are a digital version of money that is created and held as virtual coins or tokens. Similar to how you use digital payments using the Indian rupee, you can use cryptocurrencies to buy and sell items. However, the person or the business must be willing to accept the cryptocurrency you are offering against the products or services they are selling.
Although cryptocurrencies sound similar to digital payments, they differ because of their technology and the asset they rely on. Furthermore, unlike the Indian rupee, where you can physically take out the cash, cryptocurrencies have no physical presence.
There are hundreds of cryptocurrencies available in the market where the investor can buy and use them to either trade or buy and sell items. However, the most valuable and widely traded is Bitcoin.
What is Bitcoin?
Bitcoin or BTC is a type of cryptocurrency or digital currency launched in 2008 by a group that went by the pseudonym of Satoshi Nakamoto. It has no physical form, and the transactions are verified by online nodes and recorded in the blockchain. The Blockchain is just like a digital ledger.
Every transaction is authorised and authenticated by the owner. Bitcoins rely on a set of private and public keys that help protect the payer and the payee. A public key is similar to an email address, and the private key functions as an email password. These keys protect access to your Bitcoin and should be well guarded like that of an email password.
History of Bitcoin
As mentioned earlier, Bitcoin was first launched in 2008 by someone with the pseudonym of Satoshi Nakamoto. However, there is no clarity on who Satoshi Nakamoto is. Some speculate that it can be an individual creator, while some think that they are a group of people who still manage its blockchain.
It started when an academic document called ‘Bitcoin Whitepaper’ was published, announcing a new asset class called Cryptocurrency. In the whitepaper, it was stated that the goal of Bitcoin was to create a new-age and revolutionary “peer-to-peer electronic cash system” that is completely decentralised with no central authority.
It is highly believed that Bitcoin was created after the 2008 financial crisis to put power back into the hands of people who suffered because of tight regulations and a centralised financial ecosystem. Through Bitcoin, people could make payments and transact without adhering to the regulations created by large banks and central authorities.
How are Bitcoins created?
The creation of Bitcoin is the result of a technique called Bitcoin Mining. Just like you dig out the soil to be rewarded with what’s hiding deep down, bitcoin miners, too, get rewarded by Bitcoins for their ‘digging’ efforts. But what do they have to do? What do they ‘dig’?
For a Bitcoin Miner to create Bitcoin, they have to do the following two things:
- Help in managing the ledger by verifying 1MB (megabyte) of transactions.
- Be the first Bitcoin Miner to arrive at the right or the closest answer to a numeric problem.
The first part is the easy part and doesn’t need any explanation. The second part requires some analytical thinking. It isn’t entirely true that Bitcoin miners solve a complex mathematical problem to create Bitcoins. They just try to come up with the closest 64-digit hexadecimal number (called a hash) to the target hash.
The process, called ‘Proof of Work’, creates a new ‘block’ that the miners add to the already existing blocks to keep the system going. The closest hash of the miner wins the race, rewarding the miner with 6.25 Bitcoins as of 2020 (the number halves every four years).
This process of Bitcoin Mining is how new miners create new Bitcoins.
Return on Bitcoin
Bitcoins are one of the most volatile tradable instruments in the whole financial market. It is the result of being unregulated, high in demand and having an unpredictable imbalance in the demand and supply equilibrium. As long as the returns on Bitcoins are concerned, it entirely depends on luck.
Investing in Bitcoins is highly speculative and can yield profits if the prices go up and force you to incur losses if the prices fall. Furthermore, there is no technique for predicting the future trend and where the price might go. As a result, the return factor on Bitcoins is unpredictable and heads towards profits or losses. Hence, it is advised that you have a high-risk appetite and invest an amount that will not create a financial burden if you lose it.
How can you purchase Bitcoins?
You don’t have to be a miner and dive into hashes and blocks to have Bitcoins. Like any other digital assets such as equities, you can buy Bitcoins from any existing Cryptocurrency exchange. You just have to create a digital wallet (think of it as a Demat account for your Bitcoins), and you are good to go.
Presently, if you want to purchase Bitcoins, you will have to onboard a crypto platform by creating a basic account. Once it happens, the platforms allow investors to choose a payment method. For some, it is restricted to digital wallets; however, some nationalised and private banks have started to give direct transaction support to crypto platforms.
Cryptocurrencies are dividing the world when it comes to their ethical definition. Either way, Bitcoins are still rising in their value and providing a means for investors to garner wealth. Now that you understand Bitcoins in their elemental form, you can decide to see or ignore the bubble.
Frequently Asked Questions Expand All
Bitcoins are created when miners or network participants solve complex algorithms, cross-checks the solution with the transaction, and add it to the block. This process continues till the block is full. The completed block then gets added to the longest chain. Miners are rewarded for adding the blocks to the chain with the Bitcoins generated by a system called 'proof-of-work.’
You can obtain Bitcoin through numerous crypto platforms that work as a mediator between Bitcoin buyers and sellers. However, you will have to create an account on the platform after completing the KYC process.
When you buy Bitcoins from a crypto platform, they are automatically stored in your digital wallet. You can access and sell the held Bitcoins whenever you want.