Unless you’ve been on vacation for the last month or two (which if so, good for you!), you’ve likely heard about a rapidly growing technology called Bitcoin. Bitcoin has experienced dramatic growth over the past couple of months, thought largely to be fueled by global economic instability. This theory works because if you, as someone who holds a certain country’s currency, don’t have faith in the value of your currency, you might look at converting that cash into something else. Bitcoin has become attractive because it is not controlled by any governments, and thus is not tied to the general success or failures of those governments.
What are Bitcoin, Cryptocurrencies, and Exchanges?
There are a lot of foreign concepts in the world of Bitcoin. I’m going to attempt to give you a super brief crash course. You likely don’t even need to know all of this in order to get started, but it’s not a bad idea to start trying to understand it, if you’re going to seriously invest your money into it.
Bitcoin is one of many different cryptocurrencies that exist. Cryptocurrencies are entirely digital units of value which are backed by a massively distributed ledger which records ownership and transactions. This distributed ledger is operated by miners, which include regular people like you and me, who run a small piece of software on their computer in order to help validate the blockchain. The blockchain is simply the term that refers to the distributed database running across all the different computers in the network.
This all works because of several fundamental key aspects of blockchain technology. Perhaps the most important is the immutability of past transactions. Once a transaction is recorded in the blockchain, it can never be changed. This is because every computer in the blockchain network has to validate new transactions against the blockchain, so to try to forge an older transaction, you would have to rewrite the blockchain, and also get a majority of the computers in the network to accept your new blockchain. This is an incredibly difficult thing to do with intent to change an existing transaction.
Exchanges are a common vehicle used in stock markets to trade units of stock. So, a Cryptocurrency Exchange is simply a way for you to trade cryptocurrencies! Many exist, and not all are created equal. The price you pay (or get) for a Bitcoin will be determined by the exchange you participate in.
How can I buy Bitcoin?
Buying Bitcoin has become as easy as online banking. You first need to choose a cryptocurrency exchange. There are dozens, perhaps hundreds, out there. You want to select an exchange that is easy to use, has good trading volume, and is respected/trusted by the community. Trust is important when using exchanges, because at some point, they will be in control of your money. If you can’t trust them, then you’ve just signed away your fortune.
I highly recommend Coinbase for both new and old Bitcoiners, and I use it often. They’ve made it so easy to buy and sell Bitcoin that it really doesn’t feel any different from moving money around in an online savings account. Coinbase also has industry leading protections, such as FDIC Insurance on your USD Wallet equivalent to what you get with US Banks. ($250,000 insured) They also have general insurance protecting against cyber attacks, hacks, and employee theft. This is all very important, even though it’s probably the last thing you want to think about!
What about Ethereum and other altcoins?
You may have already heard about “competition” to Bitcoin by the likes of Ethereum or perhaps another cryptocurrency. These are grouped together to be known as the “altcoins” (alternative coins). Coinbase allows you to trade in Ethereum and Litecoin, in addition to Bitcoin. Each cryptocurrency has a wealth of information and community behind them, and they are not all the same. For example, Ethereum aspires to be more than a cryptocurrency. It seeks to provide a distributed platform for “smart contracts”, which are basically small software applications, that run when certain conditions are triggered. This allows for a much more flexible exchange and ownership of anything valuable, such as titles and deeds. If you want to explore other cryptocurrencies, you should do your research just like you would if you were researching a company to invest in stocks of that company.
Where is all of this going?
Bitcoin seeks to provide a viable alternative for using fiat currency. It can already be used to buy goods from thousands of merchants online and in traditional brick-and-mortar stores. It’s still in its infancy in terms of being a widely used payment mechanism, but the future looks bright with change. As more tech companies work to make the technology easier to use and more accessible, more and more people are adopting it. Each of the other cryptocurrencies seeks to fulfill some other purpose, all of which are just starting to explode now.
If you’re simply interested in the speculative nature of the Bitcoin price, you can easily find analyst opinions saying anything from Bitcoin reaching $4000 by the end of this year, to hitting rock bottom instead. Yes, it’s possible that Bitcoin and the other altcoins can lose some, or all, of their value. It’s an open, global market, just like any other. But as long as there is demand for it, the price will continue to rise.