Not only is Bitcoin the first cryptocurrency, but it is also the most well-known of the more than 5,000 cryptocurrencies that exist today. Financial media eagerly covers every new dramatic high and stomach-churning decline, making Bitcoin an inevitable part of the landscape.
While the wild volatility may make good headlines, it is unlikely to make Bitcoin the best choice for beginners or people looking for a stable value store. It can be difficult to understand the ins and outs – let’s take a closer look at how Bitcoin works.
What is Bitcoin?
Bitcoin is a decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin creator Satoshi Nakamoto originally described the need for “an electronic payment system based on cryptographic proof instead of trust.”
Every single Bitcoin transaction that has ever been made is in a public ledger that is accessible to everyone, making transactions difficult to reverse and difficult to counterfeit. It is by design: the core of their decentralized nature, Bitcoins are not supported by the government or any issuing institution, and there is nothing that guarantees their value except the proof baked into the heart of the system.
“The reason it’s worth money is simply because we, as humans, decided it had value – the same as gold,” said Anton Mozgovoy, co-founder and CEO of the digital finance company Holyheld.
Since its public launch in 2009, Bitcoin has risen dramatically in value. Although it once sold for less than $ 150 USD per coin, as of October 26, 2021, a Bitcoin is now selling for almost $ 38,000 CAD from May 2022. Because the offer is limited to 21 million coins, many expect the price to only continue to rise as time passes, especially as more large institutional investors begin to treat it as a kind of digital gold to hedge against market volatility and inflation.
How does Bitcoin work?
Bitcoin is built on a distributed digital record called a blockchain. As the name implies, blockchain is a linked set of data, consisting of devices called blocks that contain information about each transaction, including date and time, total value, buyer and seller, and a unique identification code for each exchange. Entries are put together in chronological order, creating a digital chain of blocks.
“Once a block is added to the blockchain, it becomes available to anyone who wants to see it, and acts as a public ledger of cryptocurrency transactions,” said Stacey Harris, a consultant for Pelicoin, a network of cryptocurrency ATMs.
Blockchain is decentralized, which means that it is not controlled by any organization. “It’s like a Google document that anyone can work with,” said Buchi Okoro, CEO and co-founder of the African cryptocurrency exchange Quidax. “Nobody owns it, but anyone who has a link can contribute to it. And as different people update it, your copy will also be updated. “
While the idea that anyone can edit the blockchain may sound risky, it is actually what makes Bitcoin reliable and secure. For a transaction block to be added to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must match the correct encryption pattern.
These codes are long, random numbers, making them incredibly difficult to produce. In fact, a scammer who guesses the key code of your Bitcoin wallet has about the same odds as someone who wins a Powerball lottery nine times in a row, according to Bryan Lotti of Crypto Aquarium. This level of statistical randomness blockchain verification codes, which is required for each transaction, reduces the risk of someone making fraudulent Bitcoin transactions.
How does Bitcoin Mining work?
Bitcoin mining is the process of adding new transactions to the Bitcoin blockchain. It’s a tough job. People who choose to extract Bitcoin use a process called proof of work, and distribute computers in a race to solve mathematical puzzles that confirm transactions.
To entice miners to continue racing to solve puzzles and support the overall system, the Bitcoin Code rewards miners with new Bitcoins. “This is how new coins are created” and new transactions are added to the blockchain, says Okoro.
In the early days, it was possible for the average person to extract Bitcoin, but that is no longer the case. The Bitcoin code is written to make it more and more challenging to solve puzzles over time, and requires more and more computer resources. Today, Bitcoin mining requires powerful computers and access to huge amounts of cheap power to succeed.
Bitcoin mining also pays less than before, making it even more difficult to recoup the rising computational and electrical costs. “In 2009, when this technology first came out, every time you got a stamp, you got a much larger amount of Bitcoin than you do today,” said Flori Marquez, co-founder of BlockFi, a cryptocurrency management company. “There are more and more transactions [now, so] the amount you get paid for each stamp is getting smaller and smaller. ” By 2140, it is estimated that all Bitcoins will have come into circulation, which means that mining will not release new coins, and miners may instead have to rely on transaction fees.
How to use Bitcoin
In Canada, people typically use Bitcoin as an alternative investment, helping to diversify a portfolio apart from stocks and bonds. You can also use Bitcoin to make purchases, but the number of providers that accept the cryptocurrency is still limited.
Major companies that accept Bitcoin include Microsoft, Newegg and Overstock, which are US-based but ship to Canada. You may also find that some small local retailers or certain sites take Bitcoin, but you need to dig a little deeper.
You can also use a service that allows you to connect a debit card to your crypto account, such as the Shakepay Visa card, which acts as a Visa card wherever Visa is accepted, but converts cryptocurrencies held in your account on the Shakepay cryptocurrency exchange to Canadian dollars at the merchant side. There are other prepaid credit and debit cards available in Canada that do the same.
In other countries – especially those with less stable currencies – people sometimes use cryptocurrency instead of their own currency.
“Bitcoin provides an opportunity for people to store valuables without relying on a government-backed currency,” says Montgomery. “It gives people an opportunity to secure themselves for a worst case. You already see people in countries like Venezuela, Argentina, Zimbabwe – in countries that are heavily in force, Bitcoin is gaining enormous traction.”
That said, when using Bitcoin as a currency, not an investment, in Canada, you need to be aware of certain tax implications.
How to buy Bitcoin
Most people buy Bitcoin through cryptocurrency exchanges. Stock exchanges allow you to buy, sell and hold cryptocurrencies, and setting up an account is similar to opening a brokerage account – you need to verify your identity and provide some form of funding source, such as a bank account or debit card.
Major Canadian exchanges include Netcoins, Coinberry, Coinsmart, Bitbuy, Shakepay and Newton. You can also buy Bitcoin from an online broker like Wealthsimple.
Wherever you buy Bitcoin, you need a Bitcoin wallet that you can store it in. This can be what is called a hot wallet or a cold wallet. A hot wallet (also called an online wallet) is stored by a stock exchange or provider in the cloud. Suppliers of online wallets include Exodus, Electrum and Mycelium. A cold wallet (or mobile wallet) is an offline device used to store Bitcoin and is not connected to the Internet. Some mobile wallet options include Trezor and Ledger.
Some important notes on buying Bitcoin: Although Bitcoin is expensive, you can buy parts of Bitcoin from some vendors. You also need to look for fees, which are usually small percentages of your crypto transaction amount, but which can really increase with purchases for small dollars. Finally, be aware that Bitcoin purchases are not instantaneous as many other stock purchases apparently are. Because Bitcoin transactions need to be verified by miners, it can take you at least 10-20 minutes to see your Bitcoin purchase in your account.
How to invest in Bitcoin
As a stock, you can buy and hold Bitcoin as an investment. If you do not want to invest in Bitcoin directly, but profit from the volatility, you can invest in a Bitcoin ETF. There are several Bitcoin ETFs you can invest in right now on the Toronto Stock Exchange (TSX), including Purpose Bitcoin ETF (BTCC), 3iQ CoinShares Bitcoin ETF (BTCQ), Ninepoint Bitcoin ETF (BITC) and Evolve Bitcoin ETF (BITC).
No matter where you choose to keep your Bitcoin, people’s philosophies about how to invest it vary: Some buy and hold in the long run, some buy and aim to sell after a price increase, and others bet that the price goes down. Bitcoin’s price over time has experienced large price fluctuations, going as low as $ 5,165 USD and as high as $ 28,990 USD in 2020 alone.
“I think in some places people can use Bitcoin to pay for things, but the truth is that it is an asset that seems to increase in value relatively quickly for some time,” says Marquez. “So why would you sell something that is going to be worth so much more next year than it is today? The majority of people who hold it are long-term investors. “
An important note, however: Although crypto-based funds can add diversification to cryptocurrencies and reduce risk a bit, they still have significantly more risk and charge much higher fees than broad-based index funds with a steady return history. Investors who want to increase their wealth steadily can choose index-based mutual funds and exchange-traded funds (ETFs).
Should You Buy Bitcoin?
In general, many financial experts support customers’ desire to buy cryptocurrency, but they do not recommend it unless customers express interest. “The biggest concern for us is if someone wants to invest in crypto and the investment they choose is not doing well, and then suddenly they can’t send their kids to college,” said Ian Harvey, a Certified Financial Planner (CFP) in New York. City. “Then it was not worth the risk.”
The speculative nature of cryptocurrency makes some planners recommend it for customers’ “side investments”. “Some call it a Vegas account,” said Scott Hammel, a CFP in Dallas. “Let’s keep this away from our real long-term perspective, make sure it does not become too large a part of your portfolio.”
In a very real sense, Bitcoin is like a single stock, and advisors would not recommend investing a significant portion of your portfolio in a company. At most, planners suggest not putting more than 1% to 10% in Bitcoin if you are passionate about it. “If there was one stock, you would never allocate any significant part of your portfolio to it,” says Hammel.
