Bitcoin: What it is and How Digital Currency Works (Everything You Need to Know)
Learn what Bitcoin is and how digital currency works
Record price gains in recent months have made bitcoin a hot topic in the investment field. Know everything you need before investing
Bitcoin (BTC) is the main and largest cryptocurrency in the world. Along with quotes, it is growing in popularity and is even called the currency of the future.
Bitcoin is one of the best investments of 2020, which is evident because it continues to accumulate high levels and win the confidence of institutional investors.
Those who have invested in cryptocurrencies over the past year have reason to rejoice.
Bitcoin recorded 300% growth in 2020, while Ibovespa ended the year with a 3% increase.
Despite the high volatility, the price of Bitcoin is constantly increasing and has already tripled compared to the price recorded in three months, when it was worth $20,000 (RO 111,000) in mid-December.
On Saturday (March 13), the most famous cryptocurrency in the world set a new record, reaching $60,000 for the first time, equivalent to 333,000 riyals.
Anyone who has seen Bitcoin's recent rally has no idea that it started with very little value. In fact, each coin was worth exactly $0.00 in the first year of its existence.
The first price increase occurred in 2010 when Bitcoin jumped from $0.0008 to a maximum value of $0.39.
The virtual currency, which has been famous for its rapid growth, also stands out for its potential to generate controversy.
It divides the market into those who find alternatives as a store of value and those who think this is a bubble about to burst.
Without a doubt, this is a riskier asset than investing in the stock exchange.
Is Bitcoin worth investing in? Or is it still worth it after such a hike?
Read to the end and find out what Bitcoin is and everything about the main cryptocurrency in the market.
What you will see in this article:
What is Bitcoin?
How does bitcoin work?
Is bitcoin safe?
Systemic risks
Risks of use
market risk
How to invest in bitcoin safely?
1. Know your profile
2. Define the goal
3. Have a diversified portfolio.
bitcoin quotes history
Bitcoin quote today
How do you buy bitcoin?
What is the minimum investment in bitcoin?
What can i buy bitcoins?
Bitcoin Critics and Lovers
Is Bitcoin worth investing in?
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What is Bitcoin?
Bitcoin is the first and major digital currency used as an alternative to electronic commerce transactions and primarily as a store of value.
The big difference to any other money is that it does not actually exist and is not printed by governments or traditional banks.
Bitcoin is a digital file created by a complex computational process known as "mining".
All coins and transactions with them on the network are recorded in a space known as a “blockchain,” a type of database that uses cryptography to record transactions.
Bitcoin came up with the idea of replacing physical money and eliminating the need for banks to mediate financial transactions.
It was created by the mysterious Satoshi Nakamoto, who has never appeared in public. Therefore, it is not clear whether this is a person or a group of programmers.
Satoshi Nakamoto published the document that made the Bitcoin concept popular in 2008.
The following year, in 2009, he applied the code and mined the first digital currencies.
This was the beginning of Bitcoin.
Like other cryptocurrencies, Bitcoin is priced according to the law of supply and demand.
It is the investors who decide how much they are willing to pay for it. Hence, it is a highly volatile asset.
Thus, the main features of Bitcoin are:
decentralization
safely
private (keeps the identity of the owners confidential);
Limited (Bitcoin token allows you to generate only 21 million coins);
Global (the whole world buys, sells and uses bitcoins 24 hours a day, 7 days a week).
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How does bitcoin work?
Bitcoin is a 100% decentralized digital currency based on the P2P (Peer-to-Peer) system.
Unlike regular money, which governments can issue whenever they feel the need, bitcoin is limited.
Because of this feature, it is often compared to gold.
Its code is designed in such a way that only 21 million coins can be produced. There are currently about 18.6 million bitcoins in circulation.
Bitcoin is created on a P2P network that allows the exchange of services and data without the need for a central server.
Transactions are verified and recorded on the blockchain, making it nearly impossible to fake bitcoins.
With no support or regulation from central banks, bitcoin is highly volatile.
Its price fluctuates and is determined by the participants themselves according to the law of supply and demand.
Is bitcoin safe?
Like any other type of investment, investing in bitcoin also carries risks.
However, since it is a decentralized digital asset with no regulation and high volatility, the risk of losing invested assets may be higher.
Therefore, before deciding to invest in this currency, it is important to know your risks and see if it matches your investor profile and goals.
We can distinguish 3 risk groups for cryptocurrencies:
systemic risk;
Usability Risks
market risk.
The number one risk in Bitcoin is the technological risk. Since it is 100% digital, any scenario that creates any difficulty with the security of the cryptocurrency could put your assets at risk.
However, experts are confident that the blockchain is secure and does not suffer from this risk.
If your system is practically tamper-proof, we can't say the same about the bitcoin market.
There is no authority that dictates the rules of the market or any other asset that indicates its price.
There is also no complete security when storing your bitcoins, which can be directly attacked by hackers who steal your wallet.
Thus, Bitcoin falls into the category of high-risk investment.
Systemic risks
Systemic risks relate to the technology required for the Bitcoin system to function.
If your technology is threatened by bugs or some other weakness, the entire asset market will be affected.
However, this appears to be the smallest issue with Bitcoin because their system is based on blockchain technology.
The blockchain acts like a journal that stores all transactions made around the world, indicating the amounts transferred, who transferred to whom, and what amount.
With each new transaction, a new token is generated, which is added to the bitcoin token already on the global computer network.
This encrypted link makes the system extremely secure. Hacking the blockchain is almost impossible.
To access information about the unit, it will be necessary to decrypt all the codes of all computers on the network at the same time, which is practically impossible.
Moreover, in order to hack this system, you will need a computer with a higher power than all the computers connected to this system.
In other words, this will be power inaccessible to current processors.
Risks of use
Vulnerabilities in the cryptocurrency market begin to manifest themselves when interacting with their user.
Since it is a digital asset, every time you buy bitcoin, these coins are almost automatically stored in some kind of wallet.
This wallet should be a secure environment, like any other file you store on your computer, the Bitcoin wallet is vulnerable to cyber attacks.
Thus, usage risk refers to the risk of holding bitcoin.
The first possibility is a hacker attack on your computer.
This way, someone else can gain access to the relevant information, such as your wallet address and password, and thus be able to steal your balance.
Another method is a hypothetical attack on currency brokers called exchanges.
Unfortunately, coin buying platforms are constantly hacked.
In some cases where an empty wallet is left for users of these companies:
Japanese exchange Coincheck suffered the largest cryptocurrency loss in history after it stole 500 million NEM tokens, equivalent to 1.6 billion riyals at the time.
But it may have been the case of Mt. Gox, the world's largest exchange, accounted for 70% of bitcoin transactions in 2013.
850,000 BTC, which was worth about $450 million at the time, was stolen. The theft is linked to suspicions of fraud from the Mount Gox company itself.
Bitfinex suffered the second largest bitcoin heist in history, with 120,000 BTC stolen in 2016, equivalent to $72 million.
The Ziv exchange confirmed the theft of the equivalent of $60 million in 2018.
5,966 Bitcoin (BTC) were stolen, along with the amounts in Bitcoin Cash (BCH) and Monacoin (MONA).
For example but not limited to.
In addition to cyberattacks, the Bitcoin market also records another type of fraud, Ponzi schemes, where fraudsters use a situation to steal funds from participants.
market risk
Market risk refers to the volatility of cryptocurrencies.
As with other variable income assets, bitcoin price fluctuations are subject to market fluctuations.
Since the cryptocurrency market operates 24 hours a day and is decentralized without the support of other assets, its price is determined solely on the basis of the law of supply and demand.
Thus, bitcoin and other cryptocurrencies are highly vulnerable to financial speculation.
This high volatility can cause the price of Bitcoin to drop by thousands of dollars in just a few hours.
For example, the exchange has a mechanism called Circuit Breaker that protects assets from excessive volatility. Something that is not bitcoin.
From 2013 to the present, Bitcoin experienced two drops, reaching about 80%, and the recovery time exceeded a thousand days.
Watch the graph of the biggest losses from the previous peak.
Biggest Bitcoin Falls Chart
Bitcoin biggest declines chart. Source: XP Investments.
And the recovery time graph:
Bitcoin crash recovery timeline
Chart: Time to recover Bitcoin after crash. Source: XP Investments
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How to invest in bitcoin safely?
To invest safely in Bitcoin, it is important to understand the dynamics of how the digital currency works, know your investor profile, and have a diversified portfolio.
In general, the recommendation is that if the amount of bitcoins does not exceed 5% of the investment share.
and that the investment time horizon is long enough to reduce the likelihood of having to exit during a downturn.
1. Know your profile
If your plans include investing in bitcoin, the first step is to know your risk tolerance, as these investments are very volatile.
To do this, take an investor profile test.
2. Define the goal
Why do you want to invest in Bitcoin?
Understanding why and how long it will take to buy back the money and how much you want to invest is important to properly allocate assets without compromising your capital.
3. Have a diversified portfolio.
The best advice to help make your Bitcoin investment safer is portfolio diversification.
Spread your money across different investment options and leave only a small part of the cryptocurrency.
bitcoin quotes history
Anyone who has invested in Bitcoin in the past 10 years has seen a bumpy road.
In addition to the daily fluctuations, there have been periods of significant price increases for the cryptocurrency, resulting in the potential for an overall rally. On the other hand, there were moments of sharp decline in the price of crypto assets.
The first of these spikes came in 2011, when the bitcoin price jumped from $1 in April of that year to a peak of $32 in June, a 3,200% rally in three short months.
This growth was followed by a sharp decline in the crypto markets when the bitcoin price reached $2 in November 2011.
The following year, the price rose from $4.80 in May to $13.20 in August.
2013 was a defining year for the price of bitcoin. The digital currency started trading at $13.40 this year and experienced two price bubbles in the same year.
The first occurred when the price rose to $220 in early April 2013, followed by a similar rapid slowdown when the price dropped to $70 in mid-April.
Another up and down occurred in early October, when the cryptocurrency was trading at $123.20. In December, it actually rose to $1,156.10, but after three days it fell to around $760.
In subsequent years, the price of bitcoin plummeted, reaching $315 in early 2015.
The next price bubble occurred in 2017, when the cryptocurrency price was hovering around $1,000 earlier that year.
After a short-lived decline in March, the price recorded a noticeable increase and reached $20,089 in December 2017, putting Bitcoin in the spotlight.
During this period, the price continued to fluctuate strongly, as you can see in the chart below.
Bitcoin price over the past five years
It wasn't until 2020, when the economy came to a halt due to the coronavirus pandemic, that the price of Bitcoin exploded again.
The cryptocurrency started the year at $7,200 and dropped to $5,000 in March, but then rose 321%, bringing the price close to $30,000.
Bitcoin price in 2020
In early January 2021, it took Bitcoin less than a month to break the previous price record above $40,000.
Even after strong fluctuations and dips in February and March, the price of Bitcoin (BTC) reached an all-time high on the weekend of March 13, surpassing $60,000 for the first time.
Bitcoin price last year
The current market capitalization of the Bitcoin network is $1 trillion, which is more than the sum of all the companies in B3.
Internationally, only four US companies are worth more than the bitcoin market: Apple (AAPL34), Amazon (AMZO34), Microsoft (MSFT34), and Google (GOGL34).
However, the capitalization time was much longer than that of bitcoin.
Bitcoin quote today
Check out today's bitcoin quote.
How do you buy bitcoin?
Bitcoin and other cryptocurrencies are bought and sold online.
This asset allows you to freely trade between its users on a form known as p2p or, if you prefer, through certain platforms, also called exchanges.
Although these platforms charge for brokerage and settlement services, this is the safest type of trading.
The first step to buying bitcoin is to open an account on a trusted platform.
Then make a transfer (TED or PIX) to your Exchange account.
The next step is to access the platform using your username and password and place a buy or sell order in the same way as on a home stock broker.
Registration in the stock exchange.
Transfer money to your exchange account;
Use the broker's platform to buy bitcoin or a piece of cryptocurrency;
Store your bitcoins in some virtual wallet system.
Every time you buy a bitcoin or part of it, you receive a bitcoin address (up to 34 letters and numbers), which acts as a kind of mailbox through which the coins are sent.
Addresses exceeding this number are not logged, allowing users to protect their anonymity.
Since it is a digital asset, it is necessary to store these addresses in virtual wallets.
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What is the minimum investment in bitcoin?
There is no minimum to start investing in Bitcoin.
Bitcoins can be bought as fractions up to the eighth decimal place.
The smallest part (0.00000001btc) is called a satoshi, after the creator of bitcoin, Satoshi Nakamoto.
However, every cryptocurrency broker usually sets a minimum deposit amount and a minimum amount to place an order.
This amount is usually around R$50, so check with the broker first.
What can i buy bitcoins?
Bitcoin is not a widely accepted currency yet. It's more of a valuable store these days.
However, there are actually many digital stores and virtual wallets that accept Bitcoin payments.
It's not sector specific yet, mostly international organizations, but PayPal's release (PYPL34) promises to expand the daily use of bitcoin.
Electric car maker Tesla (TSLA34) also announced that it plans to accept Bitcoin payments in the future.
Bitcoin Critics and Lovers
Bitcoin is surrounded by controversy, value fluctuations, enthusiasts and critics.
Cryptocurrency advocates say there is still room for a higher valuation and that bitcoin is the new gold.
The currency appreciation in 2020 can be partially attributed to the entry of many institutional investors into the market.
Tesla's company, Elon Musk, has invested $1.5 billion in digital currency.
For the billionaire, Bitcoin is “on the cusp” of gaining wider acceptance among investors. He even made some comments about the cryptocurrency on his Twitter profile.
Square, the payment company affiliated with Twitter founder Jack Dorsey, also invested about $50 million in bitcoin in October of last year.
Also last year, payment company PayPal made good on its long-standing promise to accept transactions using bitcoin and other cryptocurrencies in the United States.
Another giant, Fidelity Investments, has also announced the creation of an institutional investment fund focused on digital assets.
Even ex-Bitcoin critic Michael Sailor has regained his position and, as CEO of MicroStrategy, has created a $1.1 billion stake in Bitcoin.
Even Bridgewater Associates founder Ray Dalio said that “Bitcoin is a real invention” and would be an “interesting” alternative to investor wallets because it has “gold-like” scarcity characteristics.
CVM recently agreed to trade B3 as the first cryptocurrency ETF.
Another part fears that Bitcoin is in a speculative bubble about to burst, as pointed out by Michael Perry.
For Goldman Sachs, Bitcoin is a poor investment.
The same is the opinion of mega investor Warren Buffett and Berkshire partner Charlie Munger.
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Is Bitcoin worth investing in?
Bitcoin is a highly speculative and volatile investment. On the other hand, if you can make high profits, losses can be in the same proportion.
What is so attractive to one type of investor is not accepted by others.
Thus, there are a number of considerations that must be taken into account before making an investment decision.
If it's worth it, the answer will be the same for any other type of investment: It depends on the circumstances.
Choosing or not to invest in bitcoin depends on several factors such as your investor profile, the amount of money available to invest, the purpose and time to maintain the investment.
In general, investing in bitcoin is recommended for investors who are risk averse, aware of volatility, and see investments over a longer period of time.
Do you have doubts?
Take the investor profile test here and find the investment that suits you best.
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