Bitcoin this, cryptocurrency that. By now, you must have heard of bitcoin and its peers. It may even be tempting to take a crack at owning some. If only you could figure out how to do that.
I know, I know. It is confusing at first (kids these days, coming up with their currencies). You may be thinking, “What is bitcoin? What is a blockchain? I have to mine what now?” No need to worry! You do not have to mine anything. Here is everything you need to know about bitcoin.
What is Bitcoin?
The idea behind bitcoin and other cryptocurrencies is not only about having a store of value. Or something that can you can use to buy physical goods and services. Bitcoin is not a VISA prepaid card. It is more than that.
Instead, consider bitcoin as an infrastructure. One that is for completing financial transactions between two entities without a third party. Sure, there are digital coins that can act as a currency, but that is only part of it. The novelty behind cryptocurrencies lies in something called the blockchain.
Think of the blockchain as a distributed digital ledger. And its use is to verify ownership of goods and to verify financial deals. After a transaction, computers on the network confirm the inputs (“I used this much coin”). And the outputs (“valued at this dollar amount”). The confirmation involves comparing the results from many computers. And these confirmed results will come together, forming a chain. Thus, the blockchain.
What is the Advantage of Using the Blockchain?
The blockchain is the store of the records of every transaction completed (by definition). Activities are less private than using cash. The identities of those behind each event are not readily displayed. But, it is still possible to trace them back to specific individuals or entities. So, generally, bitcoin is private. But not exactly anonymous. Well, unless you take some extra steps. But the reputation of bitcoin as a secretive currency for cybercriminals is untrue.
These attributes are quite different than other financial tools. And these provide a couple of advantages.
For example, the blockchain allows financial contracts without a third party. The community oversees the transaction ledger, rather than an individual at a bank. And this lowers transaction fees. It is also pretty hard- and expensive to alter transaction terms. And this is because a majority of computers on the network must agree on the same verification. That results in excellent security.
Several types of blockchains have different advantages and disadvantages. Details aside, the growing adoption, regulation, and acceptance of blockchains to conduct financial transactions have played a significant role in driving up the value of bitcoin. It is not all hype.
How is Bitcoin valued?
Bitcoin does not have financial metrics like EPS or revenue, which makes it easy for seasoned investors to dismiss it as a bubble.
It sure can be hard to see the point of cryptocurrency or a logical reason for a 100% weekly gain. But there are several financial metrics for bitcoin that should be more familiar to investors.
For example, bitcoin has a market cap of 117.81 billion U.S. dollars. You calculate this by multiplying the number of circulating coins by the price of a single bitcoin. And although the number of coins increases over time, it becomes harder to create a bitcoin as the blockchain expands. And this results in slower rates of coin creation. More demand for a limited resource helps to drive up the price. Sure, some of the “demand” comes from the speculative buying of bitcoin. But some are also caused by greater adoption for purchasing real goods or storing value.
How is Bitcoin Created?
Remember those distributed computers validating the terms of financial transactions. And who also build the blockchain? Well, they do so in a record-keeping action called mining. And this is a fancy word for completing the digital ledger.
After completing a block, the miners involved receive a reward. It is more or less the bounty for doing the work of a digital secretary. And each time a block gets completed, 12.5 bitcoin goes into circulation. Contributing more computing power to a block- results in receiving a larger slice of the new bitcoins.
There is a limited number of coins that can ever be in circulation.
When the 21 millionth bitcoin joins the circulation, that will be it! No more bitcoin for miners. And all value from the system will come from transaction fees.
How do you own it?
You can own bitcoins through bitcoin mining. But, you do not have to do this to own bitcoins. You can buy bitcoins on the open market on several exchanges. The most used platforms are coinbase, blockchain.com, Binance exchange. These platforms allow you to buy, sell, and gift several crypto tokens. All these, with the comfort of buying with your credit cards from home.
But, bitcoin is bound to split. Once again, like stocks for public limited companies, cryptocurrencies can split. The difference is that, instead of creating more shares that are identical to those existing (save for the price per share), splitting- or halving a cryptocurrency is complex. And thus, full of uncertainty.
Should you own yours?
There is no denying that speculation has played a role in inflating the value of bitcoin. Yet, it is also true that tangible progress has and is being made that will increase the use and adoption of bitcoin. Bitcoin has a high tendency to grow into new global infrastructure. One for transferring value and executing financial contracts. By then, a market cap of $117.81 billion will look pretty cheap.
So, should you own bitcoin? As with any investment decision, it is your decision. And you have to take your personal goals and needs into consideration. You’ll also need to educate yourself more before making any decision. And when you do choose to include cryptocurrencies as a part of your portfolio, then Foolish investing principles still apply: think long-term.