What is Bitcoin ? How to invest ? is it safe ? alternatives to Bitcoin? All questions answered

Bitcoin: All Questions Answered

When the world’s most prominent business tycoon commits a whopping $1.5 billion to a virtual currency, you know something big is about to go down. Elon Musk did not just invest a large sum but also suggested that Tesla plans on accepting Bitcoin as a payment method. When the world woke up to this news, Bitcoin’s value had skyrocketed.

With all the buzz around Bitcoin, it is natural for your curiosity to get the best of you.

Here are the questions we will address to feed your curiosity :

• What is Bitcoin?
• How does Bitcoin work?
• What does Bitcoin derive its value from?
• Is Bitcoin safe?
• How can you buy Bitcoin?
• Which are the top 3 alternatives to Bitcoin?

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What is Bitcoin?

Bitcoin is a cryptocurrency or a virtual currency that was launched in 2009. In simpler words, it is a decentralized form of money in a digital format. Much like the cash sitting in your bank account, you can make purchases using your Bitcoin. However, this may not be entirely possible as of now given the lack of acceptability. To complicate things further, some countries have put a complete ban on cryptocurrencies altogether.

Bitcoin essentially substitutes financial intermediaries like governments and banks with a combination of peer-to-peer technology and software-driven cryptography. Much like how paper currency is backed by the central bank, a cryptocurrency is backed only by a code. 

How does Bitcoin work?

Bitcoin works as a low-cost payment method. You can transfer your Bitcoin payment through a computer instantly.

Interestingly, Bitcoin is categorized as a fixed asset. Why? Well, there are currently only 21 million coins. That being said, there is practically unlimited potential for growth since Bitcoin is divisible.

Bitcoin was also accompanied by another intriguing invention – blockchain. Also known as Distributed Ledger Technology (DLT), blockchain has immense potential to change the landscape of business operations and financial settlements. DLT maintains a track of ownership and facilitates instant Bitcoin transfers.

What does Bitcoin derive its value from?

Bitcoin’s value is derived solely from its demand. Since demand and supply can vary greatly from time to time, the price of Bitcoin tends to be quite volatile.

Other than miners, most people buy Bitcoin to profit from fluctuations in the currency’s price. In essence, they believe the price of one Bitcoin (in USD or any other currency) will rise in the future. However, this is a risky bet.

Is Bitcoin safe?

Well, not entirely.

The good thing is that each Bitcoin transaction is publicly documented which makes copying and counterfeiting difficult.

However, you could mistakenly delete your Bitcoins and permanently lose them, or you could lose your Bitcoin wallet. Also, there have been reports of theft from websites that allow you to remotely store your Bitcoins.

The safety concerns are not limited to security, though. Bitcoin is an extremely volatile asset which means it is not the most ideal store of value. If this volatile asset’s value drops (which is quite possible), investors could lose a large chunk of their invested amount. 

How can you buy Bitcoin?

Bitcoin can be purchased via the following 4 methods:

• Brokers

The first-ever broker to facilitate trading Bitcoins was Robinhood. However, there are several other international as well as domestic brokerages that allow trading Bitcoins like eToro, BitMEX, Binance, and PrimeXBT.

• Exchanges

The largest exchange that lets you trade Bitcoins and 30 other cryptocurrencies is Coinbase. There are several others too like WazirX, BuyUcoin, and Zebpay.

• Peer-to-peer purchases

This is the most basic form of Bitcoin transaction that involves purchasing Bitcoins from those who already own some. To make a peer-to-peer purchase, you will need to use tools such as LocalBitcoins, Bitquick, and Bisq.

• Mining

While it is possible to earn Bitcoins via mining, it requires technical expertise and powerful computers. These factors put this method out of most people’s reach.

Which are the top 3 alternatives to Bitcoin?

Although Bitcoin was the first cryptocurrency that was introduced to the world, many others have followed suit. Some of these cryptocurrencies are just as promising as Bitcoin, if not more.

• Ethereum

Ethereum is second only to Bitcoin in terms of market capitalization. If you have ever invested in a cryptocurrency, you are certainly familiar with Ethereum.

Ethereum was first coined by Vitalik Buterin in 2013 as a cryptocurrency, the scope of which is quite wider than just transferring currency to each other. Ethereum comprises 3 components: Ethereum Virtual Machine (EVM), the underlying currency Ether (ETH), and fuel (gas).

Note that when we refer to Ethereum, we are actually talking about Ether (ETH) – which is Etherium’s underlying currency.

• Ripple

The third-largest cryptocurrency in terms of market capitalization is Ripple. Ripple has also scored a deal with American Express – quite a feat indeed. Ripple aims to become a global settlement network that enables people to make international transfers within seconds at minimal currency conversion cost.

Ripple has established a protocol that allows banking and other financial institutions to incorporate Ripple into their existing system, which would then enable their customers to use Ripple.

Over time, Ripple hopes to entirely wipe out systems like SWIFT and WU. It also has set a goal to establish Ripple as an underlying currency for all inter-currency transfers.

• Litecoin

Developed and introduced in 2011 by a former employee of Google, Charlie Lee, Litecoin was formed with a 2.5-minute block generation time and a hashing algorithm that differs from Bitcoin.

The lower block generation time translates to faster transactions, consequently allowing a high volume of transactions. What’s more, the relatively faster block generation makes it twice as difficult to hack Litecoin.

Litecoin’s current market capitalization stands at $11.625 billion, so you certainly cannot ignore its existence. The cryptocurrency written in C++ is accepted at all places that accept Bitcoin and can be traded via exchanges, just like Bitcoin.  

Final Thoughts

Bitcoin continues to shower investors with mammoth returns. However, you must also consider your risk appetite while you decide if Bitcoin is a good investment for you. If the past is any evidence, Bitcoin fluctuates aggressively and could potentially wipe out a lion’s share of your investment overnight.

If you are chasing alpha returns, you might find it worth your while to invest in bluechip stocks of established companies. It offers returns greater than debt instruments, while still maintaining a relatively low-risk portfolio. Nevertheless, it is always best to speak with your financial adviser to see what works best for your age, income, and other variables.