In this article, we will attempt to provide as broad an overview as possible of a highly topical issue that has affected our time especially in the last two decades. We are talking about cryptocurrencies and, specifically, Bitcoins.
In the vast sea of cryptocurrencies available in financial markets around the world today, we decided to focus on the most emblematic cryptocurrency, and ultimately, the most relevant if one wants to attempt to get a comprehensive overview of such a complex and diverse “world.”
Bitcoin (BTC), is not only the first commercially released cryptocurrency, but it is also the best known of the more than 20,000 cryptocurrencies in existence today, with a substantial buying and selling market that is constantly active and bustling. In a sense, it can be said that Bitcoin is really dictating the trend line for cryptocurrencies, at least from a “macro” point of view.
We will try to define briefly, but nonetheless in detail, what Bitcoins are, how they work, how “mining” works, how to use, buy and invest in Bitcoin, with a brief final commentary on whether or not it is worthwhile to “jump in” as the case may be. So let’s start with the basics.
Bitcoin: what are they?
Bitcoin is a decentralized digital currency that can be bought, sold and traded directly, without the presence of an intermediary, such as a bank. Bitcoin’s creator, Satoshi Nakamoto, originally described the need for “an electronic payment system based on cryptographic proof instead of trust.”
In fact, Bitcoin is based on transferring currency between public accounts using public key cryptography. All transactions are public and stored in a distributed database that is used to confirm and track movements. An important aspect of Bitcoins, is that their value is not primarily influenced by the government or any issuing institution.
Intuitively, one can grasp in this sense a first major difference from traditional currencies, which instead rest precisely on a certain trust connected to the institutions that guarantee their value. “The reason Bitcoin is worthwhile is simply that we, as people, have decided that it has value, like gold,” says Anton Mozgovoy, co-founder and CEO of digital financial services company Holyheld.
Since its release to the market in 2009, the value of Bitcoin has increased significantly. Its initial price, in fact, corresponded to 0.00076 €, while today 1 BTC is equivalent to about 16,000 € . Its symbol is ฿ or BTC and its capitalization is €303,709,847,314. Market capitalization is the total value of all coins that have been mined. It is calculated by multiplying the number of coins in circulation by the current market price of a single coin.
Bitcoin: how do they work?
Bitcoin is built on a digital structure called blockchain. As the name suggests, the blockchain is a computer network of nodes that uniquely and securely manages a public ledger consisting of units called blocks containing information about each transaction including: date and time, total value, buyer and seller, and a unique identification code for each exchange. The entries are put together in chronological order, creating a digital chain of “blocks.”
“Once a block is added to the blockchain, it becomes accessible to anyone who wishes to view it, serving as a public book of cryptocurrency transactions,” says Stacey Harris, consultant for “Pelicoin,” a cryptocurrency ATM network.
The blockchain is decentralized, which means it is not controlled by any organization. “It’s like a Google document that anyone can work on,” says Buchi Okoro, CEO and co-founder of the African cryptocurrency exchange Quidax.
So no one owns it, but anyone with a connection can contribute to it and become one of the very many “owners.” In addition, even if a person’s Bitcoin count remains the same, its value undergoes changes as different people acquire it. (If we have 1 BTC, it can change its value to dollars, euros, etc. but it will not increase or decrease the amount of BTC held).
Although the idea that anyone can change the blockchain may seem risky, it is actually what makes Bitcoin reliable, or at least, what limits its volatility. For a transaction block to be added to the Bitcoin blockchain, the unique codes used to recognize wallets and user transactions must conform to the correct cryptographic model.
These codes are long strings of random numbers, making them incredibly difficult to produce fraudulently. The level of statistical randomness in the blockchain verification codes, which are required for each transaction, greatly reduces the risk that anyone can make fraudulent Bitcoin transactions.
After these very first basics necessary to understand how Bitcoins work, let us now delve a little deeper into the subject of their production, or so-called “mining.”
How mining works
As mentioned earlier, Bitcoin mining is the process of adding new transactions to the blockchain. It is a job that requires a large investment of human as well as computer capital; in fact, the process is not completely automatic as one might intuitively think but on the contrary requires human reasoning over machines.
People who choose to mine Bitcoin work in very large spaces dedicated entirely to this activity, in which a large number of computers are distributed and workers “compete” in a race to solve mathematical puzzles useful for verifying transactions in the shortest possible time and with the greatest possible efficiency.
To entice “miners” to be as high-performing as possible in solving “puzzles” and supporting the overall system, the Bitcoin code rewards miners with a varying amount of BTC for each new block. “This is how new coins are created” and recent transactions are added to the blockchain,” Okoro says.
In the beginning it was possible for the average person to mine Bitcoin; today this is no longer the case. In fact, the Bitcoin code was written to make solving its puzzles more and more challenging over time, requiring more and more computing resources. Today, Bitcoin mining requires powerful computers and access to huge amounts of cheap electricity to be successful.
Bitcoin mining also yields less than before economically, making it even more difficult today to recover rising computational and electrical costs.
“In 2009, when this technology first came out, every time you printed (from “Stamp,” the product of mining) you received a much larger amount of Bitcoin than you do today,” says Flori Marquez, co-founder of BlockFi, a cryptocurrency asset management company. “There are more and more transactions [now, so] the amount you receive per print is less and less.” By 2140, it is estimated that all Bitcoins will have entered circulation, meaning that mining will not release new coins and miners (those who work in mining) may instead have to rely on transaction fees.
Bitcoin: how to use them?
Let us now look at how Bitcoins can be used. After the first decade of the 20th century, with the stratospheric “spike” in the value of this cryptocurrency, there were many people, especially in America, who chose to invest very large amounts of money in what had all the appearance of being an unprecedented economic possibility (in some cases actually turning out to be one).
Today, partly in connection with the spread of ‘financial education, people generally have begun to use Bitcoin as an alternative investment, helping to diversify their portfolios. You can also use Bitcoin to make purchases, but there are some vendors who do not yet accept that payment method.
Large companies that accept Bitcoin in America include Microsoft, PayPal and Whole Foods, to name a few. In italy, it is necessary to use an exchange to purchase Bitcoin, which are special sites where we exchange traditional currencies for cryptocurrencies. Today there are also several small local retailers that have recently sprung up or some websites that accept Bitcoin payments.
You can also use a service that allows you to link a debit card to your crypto account, which means you can use Bitcoin in the same way you would use a credit card. This also generally involves a financial provider instantly converting your Bitcoins to dollars or euros.
In other countries, particularly those with less stable and therefore more inflation-prone currencies, citizens are increasingly beginning to use cryptocurrency instead of their own currency. Bitcoin offers people the opportunity to store value without relying on a government-backed currency. For example, in countries such as Venezuela, Argentina, and Zimbabwe (heavily indebted countries) Bitcoin has been very successful.
Bitcoins: how to buy them?
Most people buy Bitcoin through platforms dedicated specifically to cryptocurrency exchanges. Exchanges allow you to buy, sell and hold cryptocurrencies. Setting up an account is similar to opening a brokerage account: you will need to verify your identity and provide a source of funding, such as a bank account or debit card.
Our bitcoins are then stored within a virtual wallet, saved within a specific bitcoin address (wallet, or wallet) consisting of a private key and public key: the public key is used to share it with everyone and make sure that a user knows where to pour bitcoin; the private key, on the other hand, is used to make it possible to access that specific wallet, and to manage transactions within it
Regardless of where you buy your Bitcoins, the wallet we have been discussing can be called a “hot wallet” or a “cold wallet.” A hot wallet (also called an online wallet) is held by an exchange or provider in the cloud. Popular online wallet providers include Binance, Exodus, Electrum, and Mycelium. A cold wall et (or mobile wallet) is an offline device used to store Bitcoin and is not connected to the Internet.
Of course, although 1 single Bitcoin is very expensive today, it is possible to buy percentages of 1 BTC . You have to pay attention to the fees, which are generally small percentages of the amount of your crypto transaction. Finally, Bitcoin purchases are not as instantaneous as many other stock purchases. Because miners must verify Bitcoin transactions, it may take 5 to 20 minutes to see your Bitcoin purchase in your account.
Bitcoin: how to invest?
Similar to what happens with an action, you can buy and hold Bitcoin as an investment. Regardless of where one chooses to hold Bitcoins, people’s philosophies on how to design the investment are many and varied: some buy and hold for the long term, some buy and aim to sell after a sudden or exponential increase in value, and still others bet on its falling price.
We will not go into the merits of such thinking styles here, but we can limit ourselves to pointing out the extreme volatility of cryptocurrencies. It is crucial to be as informed and knowledgeable as possible before jumping into this industry. The price of Bitcoin over time has fluctuated greatly, rising from about $8,000 to about $20,000 in 2020 alone.
“I think in some places people might use Bitcoin to pay for things, but the truth is that it’s an asset that seems likely to increase in value relatively quickly for a while,” Marquez says. “Then why would you sell something that will be worth much more next year than it is today? Most of the people who hold it are long-term investors.”
Consumers can also invest in a Bitcoin mutual fund by purchasing shares in the Grayscale Bitcoin Trust (GBTC). However, in America for example, the minimum investment requirement is as much as $50,000. Although cryptocurrency mutual funds can add diversification to the fund in which participants invest while slightly reducing risk, they still carry substantially more risk in terms of the value of the initial investment and charge much higher fees than broad-based index funds with a consistent history of returns.
Should you invest in bitcoin?
In the final part of this article we will draw conclusions by trying to To understand whether it makes sense to invest in Bitcoin and if so, in what cases. As mentioned above Extreme volatility in cryptocurrencies is a double-edged sword, so it is best not to join too rashly, better to acquire at least a base of economic-financial knowledge first.
Many financial experts support their clients’ desire to buy cryptocurrencies, but do not recommend it unless clients express interest. “The biggest concern for us is if someone wants to invest in cryptocurrencies and the investment they choose doesn’t work out, and then suddenly they can’t send their kids to college,” says Ian Harvey, a certified financial planner in New York City. “Then it wasn’t worth the risk.”
The speculative nature of cryptocurrency leads some planners to recommend it for clients’ “sideways” investments. “Let’s keep it away from our true long-term perspective,” says Scott Hammel, a CFP (Certified financial planner) in Dallas. The most important thoughtfulness seems to be the Make sure that Bitcoin or any other cryptocurrency does not become too large a part of your wallet, seeking rather to exploit its contribution from the perspective of the portfolio diversification, thus avoiding keeping all the money “stuck” in a bank.
Bitcoin is like a single security, a single stock, and financial advisors certainly would not recommend putting a substantial portion of your portfolio into a single company. At most, planners suggest investing anywhere from 1 percent to 10 percent in Bitcoin if you are passionate about it. “If it were a stock, you would never allocate a significant portion of your portfolio to it,” Hammel says.