Let’s talk bitcoin for beginners! We will be covering all the basics of bitcoin as well as how you go about investing in bitcoin. This video should give you a basic understanding of bitcoin and help you make the decision of whether or not this is something you want to invest in. Bitcoin is a decentralized cryptocurrency payment network. A cryptocurrency is a digital currency where encryption techniques regulate the generation of units and verify transactions. As a decentralized network, it operates independently from a centralized network or bank.
The currency is used to purchase thousands of legal items each day. However, bitcoin was used on the silk road marketplace, the black market of the deep web, to purchase things like guns, drugs, forged documents and even hitman services. This is no reason to shy away from bitcoin, as plenty of people use traditional fiat currency for illegal activities each day.
Bitcoin is a finite resource, unlike traditional fiat currencies. Bitcoin is similar to commodities like gold and silver because we cannot make more of it. The maximum number of bitcoins is 21 million. Right now, just under 16.5 million bitcoins have been mined and about 1800 to 2000 are mined per day. This will decrease due to the block reward halving frequency. Every 4 years, the reward for bitcoin mining diminishes by 50% as a way to control the supply entering the market. The last bitcoin will be mined in the year 2140. One interesting note is that the majority of the bitcoins out there are inactive, as they are sitting in wallets untouched. Each bitcoin has a detailed history and it is non-physical, as such it is impossible to counterfeit.
Why use a digital currency like bitcoin?
1. There is no central authority.
2. Freedom from a government, rules are set by the market.
3. No political issues associated with fiat currencies.
4. No bank account is needed.
5. Bitcoins are commodity money backed by a finite resource.
A fiat currency is what most of us are familiar with. This is a legal tender whose value is backed by the issuing government. Fiat currencies can be inflated or deflated through supply. Fiat currencies are not backed by a physical commodity.
Bitcoin is exchanged from one digital wallet to another in a peer to peer network. Bitcoin exchanges allow the coins to be bought and sold on the open market like a stock exchange. Bitcoins can be used to purchase things and the currency can be divided infinitely. Every bitcoin transaction is recorded on the block chain as a public record.
Bitcoin miners solve math problems and are issued bitcoins in exchange for the effort involved. This provides an incentive for mining as well as a smart way to circulate new currency. The miners validate transactions and ultimately keep the network secure. Transactions are added to the block chain as a public record.
What determines the value of bitcoin?
1. The finite supply already on the market: Roughly 16.5 million bitcoins
2. The fixed number being added to the market each day: Roughly 1800 to 2000 bitcoins
3. The finite number of bitcoins that exist: 21 million
4. Slowing supply over time
5. Supply and demand
There are some concerns with bitcoin. First of all, the lack of regulation and anonymity is one. Second, this abrupt appreciation in bitcoin value has led some to believe that this is a speculative bubble. Third, because there is no fixed value this currency is not very functional.
If you are looking to invest in bitcoin, it is very easy. You can buy or sell bitcoin through the Coinbase marketplace or trade the coins on a bitcoin exchange like BitStamp. Coinbase has to source the coins, so this results in low liquidity. With BitStamp, you are trading with others on the market so liquidity is not an issue during price moves.