There is no denying bitcoin has taken the world of currency trading by storm. The bitcoin market is growing day by day. More investors are showing interest and backing it up as a legitimate cryptocurrency.
What is bitcoin, you may ask? In simple words, bitcoin is a type of decentralized cryptocurrency. This means there is no central structure that can control its value or trade.
Read on to learn everything you need to know about the crypto world and bitcoin trading.
Cryptocurrency: The Basics
There are two things you should know about cryptocurrency — it is digital, and it is secured by cryptography, which makes it impossible to counterfeit or double spend. This is where the word stems from: the encryption used to secure the network makes cryptocurrency unique.
The database that stores cryptocurrency is the blockchain. What makes blockchain stand apart is the way it stores data. In a standard blockchain, data gets divided into blocks. Once the blocks fill up, they are chained to one another. So data is essentially available in chronological order.
In the world of bitcoin trading, blockchain is a ledger for transactions. The blockchain records all financial exchanges taking place via bitcoin. As mentioned earlier, Bitcoin has no authority. So the blockchain is permanent and is accessible to anyone.
Bitcoin is the first blockchain-based cryptocurrency and remains the most popular. Several new digital currencies have emerged in recent years, but the expansiveness of the bitcoin trading platform is undeniable.
Understanding How Bitcoin Works
Now you know bitcoins are a type of cryptocurrency. Their storage takes place in a database known as the blockchain. But how exactly does trading work?
The bitcoin system is run by a collection of computers (known as "miners" or "nodes"). As of 2021, there are nearly 10,000 nodes that play a role in bitcoin trading — making it almost impossible to commit a crime.
You will have access to a "public" key and a "private" key. The public key is comparable to your bank account number. It is just a string of numbers and letters others can access. When it comes to buying bitcoin, your assets will be sent to your public key.
The private key is like your ATM PIN. It is meant to authorize transactions. People generally keep this information to themselves.
However, Bitcoin is one type of cryptocurrency with a finite supply. The current cap is 21 million. Markets and investors believe this will run out by 2140. Why is there a limited supply? Primarily to increase demand and consequently increase the price of bitcoin.
What Is Trading Bitcoin?
When trading bitcoin, you are essentially predicting the cryptocurrency's movement in price. This is much like how the stock market involves betting on a company's success or failure.
Traditionally, this meant buying bitcoin and hoarding it as bitcoin cash. Investors hoped the value would go up in the future.
But prior experiences in crypto trading have shown volatility is inherent. It is neither reliable nor a risk-free process. These days, bitcoin exchanges rely on derivatives to ensure financial security. Some common derivatives include futures, options, and perpetual contracts.
Derivatives: A Simple Example
To better understand derivatives, let’s say you want to speculate on the oil price. There are two ways of going about this. You can physically go and purchase barrels of oil and sell them when prices go up. But this is costly and impractical.
Instead, you can opt to trade an instrument whose price has ties to the oil. In trading bitcoin, you sign a contract with someone who believes its price will go down. But you believe the price will go up. If it goes up, the other party pays you the difference.
For example, you may argue the price of Bitcoin will rise to $11,000 from its current price of $10,000. But your partner argues it will fall to $9000. If it actually does rise to $11,000, your partner pays you the difference of $1000. If it goes down, you pay $1000. Consequently, it is possible to make money even if the value of Bitcoin falls.
A unique feature of bitcoin trading is the absence of an intermediary. An intermediary would normally help conduct currency trading. Instead, transactions happen directly between individuals or organizations. The lack of an intermediary is seen as a benefit because it supports "smart contracts."
Certain conditions are essential for a crypto transaction to be successful. All transactions are essentially self-enforcing.
In such circumstances, how can you remain safe? This is where the bitcoin "miners" step in. A miner's job is to ensure credibility. He is in charge of processing transactions on the blockchain. Their incentive to do so? Release of new bitcoin into their accounts for free.
Mining is the process of the creation and circulation of bitcoin. Puzzle solvers enjoy mining because a complex computational puzzle needs to be solved to add a new block to the database.
Each time this process is successful, miners receive rewards as bitcoin. These add to their digital assets. But this reward drops to half every 210,000 blocks. For example, in 2009, the reward was 50 new bitcoins for every new block. In May 2020, this had dropped to 6.25.
The next halving will take place around 2024, and the reward value will fall to 3.125 bitcoins per block.
One bitcoin is divisible into eight decimal places (100 millionths of one bitcoin). This smallest unit is called the "Satoshi," drawing from Satoshi Nakamoto. This is an anonymous person or organization credited with the creation of Bitcoin.
Is Bitcoin Legal?
As of June 2021, Bitcoin was granted legal status in the U.S, Japan, U.K., and many other developed nations. China continues to restrict its usage heavily. India banned banks from using bitcoins and left the overall status of cryptocurrencies questionable.
The bottom line is you will need to consider specific laws in different countries. El Salvador is the most recent addition to countries that legally recognize Bitcoin.
Advantages and Disadvantages of Bitcoin
Whether or not you choose to invest in Bitcoin depends on your financial goals. If you are skeptical, we don't blame you! However, with the right financial support and knowledge, bitcoin investment comes with tremendous returns.
Aside from the high profit, trades are immediate and inexpensive. Contracts are not too complicated as there is no intermediary involvement.
On the flip side, the risk of loss is undeniable. Prices are never stable and may plummet at any minute. Furthermore, it is unregulated, and refunds are also not possible.
Bitcoin has a large appetite for electricity. It currently consumes around 93 Terawatt hours (TWh) of electricity per year.
This alarming figure has led many people to reject these exchanges due to their impact on the climate. However, mining accounts only for only 1.29% of a country's energy consumption.
Several initiatives, such as the Crypto Climate Accord, seek to bring down Bitcoin's carbon footprint.
Bitcoin Trading vs. Foreign Exchange
Bitcoin trading and forex trading are subject to market forces of demand and supply. But a few significant differences do stand out.
Forex matters have links to the economic decisions of a nation. This is why there is a lot of supply uncertainty in forex trading. For example, in 2015, the Swiss National Bank disengaged its currency from the Euro. Naturally, this created turmoil.
But mining bitcoins is more predictable. The cryptocurrency ecosystem is an abstract entity. This is the second major difference. Bitcoin is not a real "thing"; hence it is not as straightforward as forex trading.
The biggest difference has to do with liquidity. The forex currency market is worth around $6 trillion. But the bitcoin market is smaller and has its value in the billions. This is why volatility is a feature of this market; it simply has not grown enough. The element of liquidity in Bitcoin is complex because there is nothing to "liquidate" in the traditional sense. But the forex market has physical validity.
How to Buy and Sell Bitcoin
Investing in a cryptocurrency can seem intimidating. It certainly carries some inherent risks. Finance educational tools often advise against being reckless with cryptocurrency trading.
However, despite the high risk, Bitcoin exchanges are growing by the day. Around the world, markets are opening up to the possibility. Exchange is becoming easier.
If you are looking to trade bitcoin, read on to know more! Here are a few pointers to keep in mind as you start investing and buy bitcoin:
Step One: Choose an Exchange
Signing up for an exchange in the crypto world will allow you to buy bitcoin as well as sell it. There are many types of cryptocurrency exchanges. They guarantee security and decentralization for any transaction.
Step Two: Connect a Payment Option with Your Exchange
Gather your documents and connect your bank account or debit or credit card with your chosen exchange platform. Investment advice usually recommends against credit card use due to volatility.
While the United States of America recognizes Bitcoin, some banks continue to question its legality. If you seek to enter the market, financial services recommend checking with your bank if they are open to the idea or not.
Step Three: Place an Order
Once your account is set up, you are free to carry out any transaction of your choice. However, make sure to follow a clear strategy to avoid pitfalls and increase your gains.
Security and safety are of utmost importance here. Crypto exchanges do their best to ensure this is not compromised. Moreover, there are many types of orders and types of investments they offer. Currently, Kraken provides the most. Look into your investment strategy and choose what works best for you.
Step Four: Safe Storage
Cryptocurrency wallets are a secure way of saving your funds. Moving your funds to a wallet ensures greater control over your private key. You will be taking ownership of digital assets.
You can choose from two types — hot and cold wallets. A hot wallet is connected to the internet. While this is convenient, it is susceptible to risk and hacks. A cold wallet is not associated with the internet. It can be more tedious, but it is much safer. Some examples include paper wallets and hardware wallets.
The world of Bitcoin has shown a lot of promise recently. Despite its risk and uncertainty, many believe the pros outweigh the cons. Bitcoin does seem like it will be an undeniable part of our future.
Bitcoin provides the opportunity to protect oneself from the harms of inflation. You can also gain significant profits if the value increases in your favor. But remember to exercise caution. Have a thorough understanding before delving deep into investing part of your portfolio in it.