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You may have heard about Bitcoin and wondered what it really was. There is always a lot of news about this digital currency and especially how it rises and falls in price dramatically at times. Well, here we will give you the complete 101 on Bitcoin.
As we already mentioned, Bitcoin is a digital currency. You may think that there are actual coins available but there are not. These are just fabrications. The original intention of Bitcoin was to send payments anonymously and securely online. This is still true to a certain extent today.
A Decentralized Currency
A number of countries around the world are scared of Bitcoin. It is a totally decentralized currency not controlled by any governments or centralized banks. Some countries have actually banned Bitcoin.
A major advantage that Bitcoin has over conventional fiat currencies is that it is not affected by any inflationary of deflationary measures imposed by countries. There is a limited supply of Bitcoin which increases its value – similar to gold.
The Technology behind Bitcoin
Blockchain is the technology behind Bitcoin. This is a public ledger system which adds to a large chain of confirmed transactions which is where the name blockchain originated from. Anyone can see the entire blockchain for Bitcoin since it began in 2009. This is a lot of data and will grow even larger in the future.
With blockchain technology after verifying a financial transaction you cannot change it. It creates immutable records. This is excellent for security but not so good if you make a mistake with a Bitcoin transaction. There is no turning back after verification and confirmation.
Thousands of computers (nodes) in the blockchain network for Bitcoin validate it all of the time. This means that it is virtually impossible to hack a blockchain network as you would require more processing power than all of the computers that make up the network.
The process of verifying Bitcoin transactions falls to Bitcoin miners. These are individuals, groups or companies that use high powered computer equipment to solve the complex cryptographic codes needed to verify each transaction.
Bitcoin miners receive rewards for this work in the form of Bitcoins. With Bitcoins being very valuable these days, mining can be a very rewarding task. The problem is that with the creation of new Bitcoins the number of new ones available falls.
You need a great deal of computer processing power to participate in Bitcoin mining now. A powerful desktop computer is nowhere near good enough. So, if you want o be a Bitcoin miner you need to invest in high spec computer equipment (and lots of it), and be prepared to run them 24/7 with the electrical costs that that brings.
Where can you get Bitcoins?
You can purchase Bitcoins in your native fiat currency e.g., US Dollar by using a cryptocurrency exchange such as Coinbase.com. There are fees involved for buying and selling as you can imagine.
A cryptocurrency wallet stores your purchased Bitcoins. The cryptocurrency exchange will provide you with an online wallet and there are other forms of Bitcoin wallet such as a desktop wallet, a paper wallet and a hardware wallet.
The hardware wallet is the most secure because you do not leave it plugged into your computer or mobile device. An online wallet is the least secure because if you can access it online then so can hackers.
There are a number of stories about Bitcoin traders that have made a great deal of money on the back of the volatility of the digital currency. Some traders are able to make consistent profits most days with Bitcoin. So, if you are just starting out with Bitcoin should you trade or go for longer term investment?
If you are new to Bitcoin then it is not impossible for you to make trades to make regular profits. But this is not an easy thing to do. It takes a good deal of experience and you need to be mentally and financially ready. To make consistent profits from trading you need to buy low and sell high.
When you first start to trade Bitcoin it is natural for you to panic when prices change. Bitcoin is now very valuable and there can literally be thousands of dollars at stake. The more money that you are using the more likely you are to panic.
Learn how to Trade Bitcoin
We would never recommend that you just jump into Bitcoin trading. You need to learn everything that you can about it first. A number of the exchanges will provide you with a dummy account where you can practice. These accounts have real time prices like the real ones and if you make a mistake then you can learn from them.
It doesn’t matter if you blow all of the pretend money in a demo account. Just get another demo account and try again. But imagine this was real money you were trading with – it would be devastating to lose everything wouldn’t it?
Create a Trading Plan
The best Bitcoin traders have a plan. They have minimum buy prices and sell prices. They stick to this plan no matter what and never enter into emotional trades because they “feel right”. When you start trading Bitcoin forget about making a ton of money in a day. If you have this attitude, you are more likely to make a lot of mistakes.
Never go all in on a trade. Just use small amounts of money to trade with until you develop the skills and experience that you need. It doesn’t matter how good an opportunity seems to be – just stick with small amounts when you are starting out.
The difference between Bitcoin investing and trading is the amount of time involved. With Bitcoin investing you are committing to the longer term which we believe is a smarter decision. When you invest over the longer term you are able to cover off the volatility of Bitcoin and have the best chance of a good return.
One of the best methods to use for Bitcoin investment is the dollar cost averaging method. The concept here is to invest smaller amounts regularly so that you can take advantage of price swings.
For example, if you decide you can invest $100 a week then some weeks you will get more Bitcoins for your money and other weeks you will get less. Over a period of time this should always average out so that at the end of the investing period you have still made a reasonable return.
Bitcoin mining is essential to keep the Bitcoin network going. The miners verify and confirm all of the Bitcoin transactions and without them the whole thing would grind to a halt. There would be no more transactions and no new Bitcoins created.
What is Bitcoin Mining?
Bitcoin miners use very powerful computer equipment to update the Bitcoin decentralized ledger. They need to solve very complex cryptographic challenges and the first to do this will update a block and receive a reward in Bitcoins (at the time of writing this is around 12 Bitcoins).
With Bitcoins being worth thousands of dollars these days this seems like a really good idea. But is it really? You cannot perform Bitcoin mining successfully with a powerful desktop computer. You need to invest a ton of money into very high-end computing power and then pay for the running costs of these computers.
The Process of Bitcoin Mining
Anyone can get involved in Bitcoin mining. There are already thousands of Bitcoin miners that update the Bitcoin blockchain ledger and thousands more want to get involved. With Bitcoin mining you need to guess a number that will solve an equation that the blockchain generates.
You need to use powerful computers to make these guesses. When you have a lot of computing power you can make many guesses per second which increases your chances of being the first to get it right.
When you guess right the mining software on your computers works out which of the currently pending transactions need grouping together in the next block for adding to the blockchain. After this the entire Bitcoin network validates the transaction.
Bitcoin Mining is difficult
The inventor of Bitcoin and blockchain, Satoshi Nakatomo, created rules for mining where the more mining power in the network the more difficult it is to guess the right random number. As more and more people are becoming Bitcoin miners the difficulty level continues to rise.
The reason behind this increasing difficulty is to create a regular flow of Bitcoins. In reality this means that it takes around 10 minutes to create a new transaction block on average. The actual times vary considerably. It is all about mining power these days and the more you have the more likely you are to succeed.
Bitcoin Mining Pools
To get involved in Bitcoin mining these days is beyond most individuals. The costs of the equipment required and the running costs are just too much. There is increased competition as well with many miners collaborating together.
One solution to this problem is the Bitcoin mining pool. This is a simple concept where groups of people create a pool and combine their mining power and share the rewards. Even small players can get involved with Bitcoin mining in a pool.
There are a number of large Bitcoin mining pools existing today. They will take a percentage of any success that you have. Usually this is around the 2% mark.
So, is Bitcoin Mining worth it?
If you are a newcomer then the answer to this is probably not. There are a lot of factors to consider if you really want to get involved in Bitcoin mining. If you want to go it alone then you will have to invest a ton of money into computers that can make very high numbers of guesses every second.
Then you have to keep these super computers running which usually means storage costs (they need proper cooling as they run all of the time) and electricity costs. In truth you would be better off using the money that you would need to invest to purchase Bitcoins.
It can be really exciting getting involved with Bitcoin. But a number of newcomers keep making the same mistakes when they get involved. Some of these mistakes can be very costly so we bring you 5 mistakes that you must avoid at all costs to ensure that you get the most out of your participation with Bitcoin.
1. Using your Exchange Wallet to Store all of your Bitcoins
Bitcoins are now worth a lot of money which makes them attractive to new investors. It also makes them attractive to hackers and thieves as well. Most people purchase their Bitcoins from a cryptocurrency exchange. When they do this the exchange provides them with an online wallet to store their Bitcoins.
Keeping all of your Bitcoins in your exchange wallet is a bad idea for two main reasons. The first of these is security. It is almost impossible to hack the blockchain for Bitcoin but online exchange wallets are a much easier prospect. If a hacker gets into your online exchange wallet, they can then take all of your Bitcoins.
The second reason you should never keep all of your Bitcoins in an exchange wallet is because they can suspend or even close down your account for a variety of reasons. If they close your account down altogether then you lose any Bitcoins in your exchange wallet.
2. Not having Secure Places for your Bitcoins
There are different types of wallets that you can use to store your Bitcoins. The online or mobile wallet offers the highest level of convenience but the lowest level of security. You can use these wallets for small and regular Bitcoin transactions.
You can get a more secure wallet which is an application for your desktop or laptop computer. Some of these are free and some require a small payment. These are medium security Bitcoin wallets as you can disconnect your computer from the Internet.
Paper wallets are more secure. As the name suggests you print off your vital Bitcoin information to paper and then you can store this where nobody else will have access to it (such as in a safety deposit box).
Finally, the most secure wallet is the hardware wallet. This is a USB stick where you can store your Bitcoins. You only need to use the hardware wallet when you are making transactions. Take it out of the computer when finished. Hardware wallets are fairly expensive but they are worth it.
3. Price Change Panics
It is no secret that Bitcoin is a volatile currency. Price swings of around $100 a day up or down are commonplace. Sometimes newcomers to Bitcoin investing panic when they see these price changes – particularly price drops.
There is no need to panic. Bitcoin tends to go up and down in price in cycles. It has steadily risen in value over the years and there is no reason to think this will not continue.
4. Shifting from one Cryptocurrency to another
If you are going to invest in Bitcoin then stick with Bitcoin. Jumping around from one cryptocurrency to another never works well. Don’t be tempted by Altcoin as this is not as well established as Bitcoin.
5. Not knowing enough
You need to know as much as you can about Bitcoin to get the most out of it. Understand how it works and study its price change patterns. There are many Bitcoin communities that you can join on social media.
The value of Bitcoins has risen significantly over the last few years so it is no surprise that there are scammers out there that want to steal Bitcoins or take your money for no return. Here we will discuss the most common Bitcoin scams and how you can avoid them.
The Fake Bitcoin Exchange
Buying and selling of Bitcoins is usually performed using a Bitcoin or cryptocurrency exchange. Some of the exchanges will allow you to purchase Bitcoins in your native fiat currency while others will allow you to use other cryptocurrencies to exchange for Bitcoins.
There are many cryptocurrency exchanges available and more joining the group all of the time. Not all of these exchanges are legitimate and some exist to steal your Bitcoins or your money – or both.
To all intents and purposes these exchanges look and feel like real ones. They will display the real time prices and have a trading platform. But they will just take your Bitcoins and siphon them off to their accounts or take your currency and never provide you with the Bitcoins you paid for.
Malware is a small computer application that downloads onto your computer. Recently there has been cases of malware that have keyloggers detecting all of the keystrokes you make. These can discover your private keys for Bitcoin or your login details to a cryptocurrency exchange.
When this happens hackers will use this information to steal your Bitcoins. You can download malware without realizing it and the cyber criminals are getting better at this with each passing day. Never click on a website link that you don’t entirely trust.
This is another popular scam. Thieves purchase domain names that are similar to the reputable exchanges. For example, they might get their hands on Coinsbase.com rather than Coinbase.com.
They then send fake emails using these domain names and ask recipients to check their cryptocurrency accounts. They provide a link in the email which goes to their fake website. It looks exactly like the real login page of the legitimate exchange.
The user has to enter their login details which the hackers steal. Hackers can prevent the user from logging in to their real accounts and very quickly they divert any Bitcoins in their wallets to their accounts. You need to thoroughly check any link in an email that has supposedly come from your cryptocurrency exchange.
You may have come across websites before that claim that they can double the amount of Bitcoins that you hold or provide you with a guaranteed return on your Bitcoins every day. Nobody has the power to double your Bitcoins and with the volatility of the digital currency guaranteed daily returns are impossible as well.
If you see any websites making these claims then stay well away from them. There only intention is to steal your Bitcoins. Sometimes they will pay out for a few days and then completely disappear along with your Bitcoins.
Bitcoin Cloud Mining
The thought of free money compels a lot of people to look into Bitcoin mining. It is very expensive to buy and run the computer equipment needed to do this on your own so lately cloud mining solutions have emerged where you can pay a company to do this for you.
There are some legitimate cloud mining services but there are scammers as well. It is not cheap to get involved with cloud mining and the scammers take your money and of course they do not perform any mining on your behalf.
The blockchain technology used for the Bitcoin network is very secure. But some Bitcoin wallets are not so secure. You need a wallet to store your Bitcoins in and to make transactions. There is no need for you to confine yourself to one type of wallet. In fact, we strongly recommend that you have more than one.
If a thief or a hacker accesses your Bitcoin wallet then they can transfer all of your currency into their accounts. And remember that blockchain creates immutable records that you can’t change so there is no chance of you getting your Bitcoins back if this happens. So let’s take a look at the different types of wallets.
If you use a cryptocurrency exchange to buy and sell Bitcoins as most people do, they will provide you with an online wallet to store your Bitcoins in. These are very convenient as all you need to do is to connect to the Internet and you can use your online wallet to perform transactions. A mobile wallet is an online wallet for mobile devices.
Online wallets are “hot wallets” which means you can call them into action immediately for your Bitcoin transactions. You can access your online wallet with an Internet connection from anywhere in the world. The problem is so can thieves and hackers.
The other issue with online wallets provided by cryptocurrency exchanges is that the exchange can block your access to your wallet if you have your account suspended for some reason. If they close your account for good then you will lose everything.
A desktop wallet is a software application that you download to your laptop or desktop. It is a medium security wallet. If you disconnect your computer from the Internet then there is no way that a hacker can access your desktop wallet. But as soon as you connect again you are somewhat vulnerable.
It is a lot more difficult for a hacker to access your desktop wallet than it is an online wallet. But it is possible. If your computer becomes inoperable and you haven’t made a backup copy of your desktop wallet then you will lose everything.
In this scenario your Bitcoin wallet is a piece of paper with all of your private key information on it. You might think that the idea of using pieces of paper to store your Bitcoin information doesn’t really match up with modern technology but actually it is a very safe way to store your Bitcoins.
There are no recorded cases of cyber criminals hacking pieces of paper and nor are there likely to be. The biggest issue with paper wallets is where to keep the paper so that nobody else can find it. If you have a lot of Bitcoins then consider a safety deposit box.
A hardware wallet is the most expensive option and is usually a USB stick that you can carry around with you wherever you go. These are the most secure Bitcoin wallets out there and if you are going to be a serious investor then we highly recommend that you get one.
All you need to do is to plug the hardware wallet into your computer when you want to make a Bitcoin transaction. When you complete the transaction remove the hardware wallet and keep it in a safe place.
The only way to obtain Bitcoins when it first launched was to use the peer-to-peer network. You could do this anonymously and you didn’t need permission from anyone to acquire Bitcoins. With the growth in popularity of Bitcoin there are now several ways you can acquire them.
You can register with a cryptocurrency exchange like Coinbase.com and purchase Bitcoins using your native currency. Some countries do not allow the purchase of Bitcoins so you need to check this first.
When you sign up with a reputable exchange like Coinbase.com you will need to provide a number of personal details. This certainly includes your name and address and other financial information. This is to comply with the Know Your Customer (KYC) laws that exist in a lot of countries.
This defeats one of the key cornerstones of Bitcoin which is anonymity. The network was set up so that you could perform Bitcoin transactions without anyone knowing who you were or where you were from.
There are some cryptocurrency exchanges that allow you to use fiat currencies to purchase Bitcoins and there are others where you can only make purchases with cryptocurrencies. You need to check that an exchange provides the service that you need.
A cryptocurrency exchange charges a transaction fee for every purchase of Bitcoins. The good news is that these fees tend to be a lot lower than those charged by traditional financial institutions.
In the last few years Bitcoin ATM’s have emerged in North America and Western Europe. They are now in other countries too. Here you can use funds from your bank account or a credit card to purchase Bitcoins.
Most of the ATM’s will allow you to make transactions as well. So if you want to send Bitcoins to another person or receive them then you can do this. The rise in the number of Bitcoin ATM’s proves the growing popularity of the digital currency.
Work for Bitcoins
A lot of freelancers in different parts of the world like payment in Bitcoins. Employers like it too because sending Bitcoins is a lot cheaper than setting up a bank transfer to another country. It takes a lot less time to receive a Bitcoin payment than it does a bank transfer payment.
There are freelancing websites where you can receive payments in Bitcoin. One of the biggest freelancer websites, Fiverr.com, will pay you in Bitcoins if you want and so will other big sites such as Upwork.com, Freelancer.com, Guru.com and PeoplePerHour.com.
Complete Tasks for Bitcoins
These days you can join websites that require you to perform small tasks and receive Bitcoins as a reward. Some of these tasks include:
- Watching videos
- Completing surveys
- Online shopping
- Signing up to free trial offers
- Playing online games
These tasks will take you a few minutes to complete and you will receive fractions of Bitcoins called Satoshi’s for doing this.
Sell Products and Services for Bitcoins
If you own a conventional brick and mortar store or an online store you can receive Bitcoins as a form of payment. In a brick-and-mortar store all you need to do is to print out the QR code for your wallet and then customers can use their smartphones to scan the code and pay you using Bitcoin.
With an online store there are a number of scripts and plugins available that create a Bitcoin payment gateway.
Since Bitcoin was launched in 2009 over 80,000 businesses have adopted it. The reason that these businesses and many more, like dealing in Bitcoin is because it offers them some incredible benefits. In this article we will examine all of the major benefits that including Bitcoin as part of a payment system works so well.
The Risk of Fraud is much lower
When a business allows their customers to use Bitcoins to make payments it is an advantage to the buyer because they do not have to share any of their confidential financial details such as debit or credit card numbers.
With conventional payment methods a business usually stores the customer’s financial data for future transactions. This is fine if their systems are secure and they do not suffer from any data breaches where cyber criminals can steal their information.
Trading in Bitcoins is really a form of digital cash and hackers cannot intercept a Bitcoin transaction. Also, this protects your identity and in the event of a data breach your financial details are not at risk.
There is no Inflation or Deflation with Bitcoin
With traditional currency the government of a country can manipulate the money supply by increasing or decreasing it. There are no governments involved with Bitcoin and therefore it doesn’t suffer from any inflation or deflation.
There are a finite number of Bitcoin tokens so creating more of them is not possible. When there is no possibility of inflation an investor can choose Bitcoin as a more stable investment than fiat currency.
The Transaction Fees are lower
The transaction fees associate with credit card payments and wire transfers are pretty high from banks and other financial institutions. In comparison, Bitcoin transaction fees are very low.
Most businesses accept credit cards and end up passing on the cost of the transactions to their customers. With the low fees associated with Bitcoin payments they can reduce the sale prices of their products and services.
Payments can be Faster
Although credit card payments are usually fairly fast, there can be problems where a business will not receive their money for a number of days especially if customers initiate chargeback’s.
Once a Bitcoin transaction goes through then it is irreversible. It normally takes less time to receive a Bitcoin payment than it does a credit card payment. It is common to receive a Bitcoin payment in around 2 business days.
Bitcoins are Safer
There are no third parties involved in Bitcoin. No government can seize your Bitcoins or freeze your account. It is very difficult to steal Bitcoins as well if you secure them in the right way.
Faster and less expensive International Payments
These days a lot of businesses look to outsourcing specific tasks for their business to freelancers who are located in different countries. This is fine but usually there are high transaction fees associated with making international payments.
Also the freelancers have to wait several days to receive their money. International bank transfers are notoriously slow. You can make a payment in Bitcoins anywhere in the world for a very small transaction charge. The recipient also receives the Bitcoins a lot faster than an international bank transfer.
Blockchain technology supports the Bitcoin network. It is extremely secure and now many organizations across the world are seriously looking at it for not just financial transactions but for their supply chain processes as well. In this article we will discuss the 3 pillars of the blockchain technology behind Bitcoin.
The Decentralization Pillar
Before the invention of blockchain most transactions over the Internet involved a central server. This server stored all of the essential data that supported the service that it provided. A good example of this is the banking system. Your bank stores your money and when you need to pay someone you have to use them and they charge you for this.
Client server technology is everywhere online. When you use a search engine to find something your query ends up on a central server which dispatches the information that you asked for. The problem with client server is that there are a number of vulnerabilities:
- The biggest and most obvious of these is that everything is stored in one place. This makes a central server a real target for hackers.
- If there's any operational issues with a central server, the whole system grinds to a halt.
- The data held on a central server can be compromised which shuts down the whole operation.
The solution to these centralized vulnerabilities is decentralization. With a decentralized network all computers have the same information stored. If you want to interact with someone else on a decentralized network you can do this without any third-party intervention. You can send and receive Bitcoins without the use of a bank and a centralized server.
The Transparency Pillar
A lot of people do not fully understand the concept of transparency when it comes to blockchain technology. Isn’t the Bitcoin network supposed to be private? Yes, it is but it is also public for verification purposes.
You need to understand the concept of public and private keys here. A public key is used on the blockchain to show that you have made a transaction. Your private key is never shared. It is linked to your public key to make the transaction valid.
With the Bitcoin blockchain you can see the public keys associated with all transactions. No other financial system has ever had this kind of transparency. There is a much-needed level of accountability with blockchain that financial institutions certainly want.
When you have a blockchain public address you can view all of the transactions made using that key. A lot of financial institutions are looking at blockchain because of this but some are concerned that it will force their hand to reveal all of their transactions!
The Immutability Pillar
Blockchain technology creates immutable records. This means that after verifying a transaction you cannot change it. Once your transaction is added to the blockchain there is no turning back. You cannot reverse the transaction.
The immutability in blockchain comes from the cryptographic hash functionality. The blockchain system takes input strings of any length and converts these to an output string of a fixed length. The Bitcoin blockchain uses the highly secure SHA 256 algorithm.
Blockchain is basically a linked list of transactions. Each block has a hash pointer connecting it to the previous block. If a hacker tries to change the details of a block it will affect the entire blockchain which is impossible to do.