Bitcoin for dummies

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A stash of Bitcoins
Please be aware that a Bitcoin is not a physical coin.

W hen the American Erik Finman was twelve years old, he made the wisest decision of his life: he bought Bitcoin worth 1000 dollars. Today, six years later, he’s a multi-millionaire—the cryptocurrency has made him rich. Such stories are currently making the headlines, Bitcoin is on everyone’s lips.

The digital currency is currently worth more than gold, this week it rose above the 7,000 dollar mark for the first time in its history. Investors are literally intoxicated. So is it worth the effort to jump on the bandwagon now? An overview of the most important questions and answers.

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“Today, six years later, Erik Finman is a multi-millionaire”

What are Bitcoins anyway?

Bitcoin is a virtual currency in which there are no notes or coins. But it serves the same purpose as the dollar or euro, for example: people should be able to pay with it. Bitcoins (“Bit” is the smallest memory unit on the computer, “Coin” speaks for itself) are calculated, encrypted data blocks. They are not created by one computer, but by many computers. This network of computers is called the blockchain.

At the moment there are not many possibilities to pay with Bitcoin. However, many people consider the currency to be so promising that they are already investing a lot of money in owning many bitcoins.

What makes Bitcoins so special?

Bitcoin works with the so-called “blockchain technology”. Every bitcoin is stored in a kind of database that is always transparent. It is not located on one server, but on many different computers. The same applies to transactions: each transaction is visible. Every time a user executes a transaction, it must be confirmed by all users. There is no central body like a bank that regulates everything, but it functions only through all parties involved.

Unlike our banking system, there is no one who controls the currency, collects fees or manages money. Everyone has their own small wallet with their own computer. The inventors of Bitcoin and the supporters of cryptocurrencies are concerned about the fact that people can manage their possessions independently of state systems. Bitcoin is therefore already widely used today, especially in countries where currencies are not stable or where only a few people have checking accounts.

How are Bitcoins made?

Behind the “mining”, the creation of Bitcoin, lies a mathematically complex process. To understand this, it is important to know that several computers around the world are involved in the operation of Bitcoin. To put it simply, all the computers involved receive a mathematical problem that they solve in a kind of competition. The first person to complete the task is credited with Bitcoins.

A lot of miners doesn’t necessarily mean that many bitcoins are digged. The more people are digging, the harder the task becomes. This is because the inventor of the Bitcoin, Satoshi Nakatamo, has added a rule to the programmed code for this case. As a result normal consumers can no longer dig bitcoins. The computing process would consume so much power that the cost would exceed the value of the bitcoins.

Why have Bitcoins become so valuable?

The fact that there is a currency that exists only in digital form is difficult for many people to understand. The easiest way to compare it with gold is to say that it is very rare, which is why it is so valuable. Bitcoins are limited: The upper limit is 21 million bitcoins that can be created. There can not be more than that, that is what has been set.

The fact that this digital currency is so valuable at the moment is due to its current popularity. When Bitcoin was invented, only a few people were interested in it—at that time they were only worth a few cents. Over the years, more and more people wanted bitcoin—and so the value increased.

Where to buy and sell Bitcoins?

There are many cryptocurrency exchanges like Bitfinex and Cex.io, where you can buy and sell Bitcoin. The exchanges demand a copy of the identity card if you want to deposit a certain amount of money, and you have to disclose everything. This is because the providers have to comply with certain laws and rules. This is the only way to ensure that the stock exchange is legally compliant and that users are well protected.

Bitcoins are limited: The upper limit is 21 million bitcoins that can be created

The Bitcoin blockchain has never been hacked before—except for the cryptocurrency exchanges. That is why Bitcoin experts advise you to put Bitcoins in an offline digital wallet and not leave it on an online account. The online account with a Bitcoin exchange should be seen as a bank account, but the really large quantities should be on a savings account, that is your private hardware wallet.

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Are Bitcoins a good investment?

The answer to this question is a matter of intense debate. I believe in the long-term positive development of Bitcoin, especially the blockchain technology. However, an investment in cryptocurrencies, and Bitcoin in particular involves high risk because of its volatility—the ups and downs. There are so many people who believe in becoming millionaires with Bitcoin overnight. Surely this is possible, but one should definitely keep a close eye on the latest developments in technology behind it.

“People should only invest money that they can afford to lose or sit out
if Bitcoin stagnates or even loses value.”

Be aware that things will not always be going uphill. After all, there are many large shareholders who own a lot of bitcoin at the moment. If they start selling, this could have a serious impact on the bitcoin market. For this reason, people should only invest money that they can afford to lose or that they can sit out if Bitcoin stagnates or even loses value over a longer period of time.

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