Bitcoin is currently the most well-known and popular cryptocurrency on the virtual currency market. Bitcoin has become a worldwide phenomenon, especially when in 2017, only one coin traded for $20,000. The coin has triggered a lot of speculations and the community is usually divided on the long-term prospects of the coin. Experts such as Warren Buffet and Jamie Dimon have called the coin “hoax” and predicted that its value will eventually go to zero. Whether this is true, we don’t know, but one thing is very clear: Bitcoin is the largest cryptocurrency by market cap as of 2019 ($150bn).
Bitcoin is a well-known and frequently traded cryptocurrency (also referred to as a digital currency or virtual currency). It can be bought, sold and traded against other currencies on online exchanges and through online brokers who may specialise in cryptocurrencies or provide a wide range of other financial instruments as well. Bitcoin can be used online as cash to pay for goods and services in any outlet where the seller accepts Bitcoin as a payment method. This is entirely at the discretion of individuals and companies, so while there are plenty of online retailers that accept Bitcoin, it’s not as common as it was once expected to be.
Bitcoin, like other cryptocurrencies, really is a virtual currency. Each Bitcoin is basically just a computer file along with the private code that is associated with it. When you see pictures of Bitcoin online, these are simply novelty coins used as a visual representation of the currency, but you won’t ever ‘see’ your virtual currency in real life. They are stored in an online digital wallet, and they can be transferred between wallets when trading the coins or used to pay for goods and services.
Bitcoin transactions are recorded in a public list called the blockchain, which makes it possible to track the movement of Bitcoins through the virtual economy. A single Bitcoin is now so valuable (each one is worth over 12,000 USD at the time of writing) that it is possible, and often necessary, to use fractions of Bitcoins in everyday trading and transactions. For this reason, Bitcoin is most commonly expressed in one of three denominations:
It is also common to hear those who work with Bitcoins on a daily basis refer to satoshis. The satoshi is currently the smallest unit of the Bitcoin currency recorded on the blockchain. It is a one hundred millionth of a single bitcoin (0.00000001 BTC). The unit is named after the somewhat mysterious original creator of Bitcoin, Satoshi Nakamoto.
Bitcoin was first created in 2009 by someone known as Satoshi Nakamoto, whose true identity has never been confirmed and who may be an individual or group of individuals. What Bitcoin was, how it was supposed to function and how the blockchain network would work was all laid out in a 2008 white paper called Bitcoin: A Peer-to-Peer Electronic Cash System, published under the name Satoshi Nakamoto. The first recorded purchase of goods made with Bitcoin was in May 2010. It was a purchase of two pizzas at a cost of 10,000 BTC. At that point, one Bitcoin was worth less than one US cent.
Bitcoin slowly increased in value. It reached parity with the US dollar in early 2011, and by July of that year, it reached a value of $31.00 before sharply dropping again to just $2.00 by the end of the year. Since then, Bitcoin has fluctuated wildly, reaching a high of $18,000 in December 2017. The currency has continued to show a lot of volatility but was valued at over $12,000 in June 2019. Bitcoin has now become an accepted, if still relatively uncommon, way to pay for goods and services and is now a commonly traded currency on international exchanges. It has also paved the way for other digital currencies that work in similar ways, with over 1,000 coins now on the market.
Right now, the price has bottomed out at around $5,500.
There are a few different ways that individuals and companies can acquire Bitcoin. You can buy Bitcoin on online exchanges using ‘real’ money, also known as fiat currency. Fiat currency is basically any currency that is issued by a national government. It is usually regulated and controlled by the central bank of the country in which it is legal tender. You can also, of course, buy Bitcoin using other digital currencies, and many traders specialising in cryptocurrencies may well trade different digital currencies against one another, speculating on the rise and fall of prices to potentially make a profit.
It is also possible to acquire Bitcoin by selling something online and accepting payment in Bitcoin. As already mentioned, some online retailers will accept Bitcoin for a wide variety of goods and services. There are even online casinos where you can gamble with Bitcoin.
Lastly, Bitcoin can be created, or ‘mined.’ Mining for Bitcoin is not easy, but it is the backbone of the Bitcoin network as Bitcoin miners provide security and confirm Bitcoin transactions across the network. Bitcoin miners use powerful, specialised computers to solve complex problems and chain together blocks of transactions (thus the term ‘blockchain’ for the process of recording Bitcoin transactions across the world wide web). Bitcoin miners are rewarded for their work with newly created Bitcoins. This process of mining for Bitcoin is a complex and difficult one and is certainly not the easiest way to acquire digital currency.
You may have noted that many online brokers state that you can trade with them using both Bitcoin and Bitcoin Cash. Bitcoin Cash was developed in 2017 by Bitcoin miners and developers who were concerned that Bitcoin itself had various limitations, specifically related to scalability.
In practice, there is very little difference between using Bitcoin or Bitcoin Cash. Bitcoin Cash (BCH) has its own blockchain and is created through mining, just like Bitcoin. However, the technological differences between the two means that Bitcoin Cash allows for more transactions per second, which generally means faster transfer processing times and lower transfer fees. Put simply, a Bitcoin Cash “block” (in the blockchain) is significantly bigger than a Bitcoin block, making BCH faster, cheaper and more scalable.
There is some confusion over the legality of Bitcoin due to the fact that it is not legal tender in any country, but this does not mean it is illegal. It simply means that it is decentralised and unregulated. Unlike fiat currencies, which are legal tender, Bitcoin is not issued by a national government or controlled by a central bank. It is however legal in most countries to trade Bitcoin and also to mine it, use it as payment (where accepted) and send and receive it online.
There are a few countries that have made Bitcoin illegal, and others that have restricted it in some way. It is important to check the current legal status of Bitcoin in your country because some countries have a tendency to keep recategorising it. China, for example, has banned and unbanned Bitcoin over the years and also placed legal restrictions on its use. In some countries, there are no legal guidelines at all, meaning that Bitcoin is neither illegal nor officially legal. In many countries including the UK, the US, Australia and most of Europe, Bitcoin is, at the time of writing, completely legal and unrestricted, but as already mentioned, this could easily change.
Many regulatory bodies around the world are trying to figure out what to do with Bitcoin and how to regulate it. The most current issue comes from the SEC that constantly rejects Bitcoin ETF applications – a product that has long been on the minds of investors.
There are two main ways to trade Bitcoin.
If you’ve used CFDs before when trading other financial assets, you will be aware of the advantages. However, you won’t get the leverage you would expect on other assets (and in particular other currencies) when trading Bitcoin and other cryptocurrencies. To start trading Bitcoin with a broker, you will need to open an account, verify details and deposit funds. If you are already registered and verified with an online broker, you may be able to start trading cryptocurrencies with them, but first check if this is the case. Not all online brokers offer digital currency trading as it is quite specialised.
Bitcoin exchanges are popular and work the same way as other financial exchanges, allowing traders to buy and sell Bitcoin to and from other members of the exchange. They generally operate 24 hours a day, 7 days a week, which is an advantage, bearing in mind how volatile Bitcoin can be. Setting up an account may also be quicker and less involved. Some exchanges do not require verification to start trading digital currencies as they would for other instruments. Every transaction is still, of course, recorded and stored publicly on the blockchain, so the sense of anonymity may be misleading, but the system is certainly quicker and easier to set up.
Interested in learning more about cryptocurrency trading? Check out our extensive archive of articles on digital currencies.