Trading Education

What is Bitcoin? A Simple Explanation

Bitcoin or not to be

The new era of Cryptocurrencies guided by Bitcoin and the influence of the derivatives market on bubbles.

Bitcoin is the number one cryptocurrency, or digital coin, by market cap. Since the beginning of commerce and the existence of humanity, we have been using objects to retain value and enable trade. Nowadays, the HiTech world creates new and more complex transactions between different parties and individuals. In this article, we will simplify the universe of digital coins. Digital coins are innovative and futuristic but at times they are also complex and confusing. We will also explain how cryptocurrencies could become a good opportunity for investors, businesses and customers.

A cryptocurrency is a digital asset used as a medium of exchange secured by two main elements: Cryptography and the Blockchain.

Cryptography is used to guarantee secure transactions and creation of additional units.

The Blockchain is basically the data structure used to aggregate and register transactions. It is a distributed ledger, meaning many computers hold the data seperately making sure it is unchanged.

Now that we have defined the basic and essential items of digital currencies we can highlight Bitcoin, the main and by far most popular cryptocurrency.

Bitcoin as a payment system

Bitcoin is a payment system used worldwide without a central bank or single administrator mediation. 1 BTC (Bitcoin) was worth less than $0.01 in 2010 and is now worth around $11,700 (As of July 2019). Bitcoin, in theory, is entirely decentralized and enables direct transactions, instantaneously with almost zero cost. It is gaining popularity as a method of payment in stores, hotels, restaurants, and many others. While it is true that no financial or governmental authority can interfere or manipulate the creation of new Bitcoins, the claim that no governmental authority can exert influence over the price of Bitcoin is utterly ridiculous. We saw for example how the decision of 24 percent tax by the South Korean government had a tremendous impact on Bitcoin. The mere speculation that the South Korean government would outlaw Bitcoin had an even stronger impact than the final decision. Speculative movements of offer and demand influence the continued volatility of its market value, which is constantly being predetermined.

Even though it seems almost perfect it has disadvantages as well . A relatively small user basis gathered with significant risky and volatile behavior tends to avert some people from using and investing in bitcoin. Another criticism is the anonymity of the transactions that open doors for illegal markets and crime.

Because the growth of Bitcoin has been so remarkable, people have been asking themselves how to buy and how to invest in it. We will answer these questions in the following lines.

The Wallet

First, you will need to create a “wallet” that will be able to store your bitcoins.

Then you link the “wallet” to your bank account. Most of the times you can buy Bitcoin right from your account as the provider verifies the data you filled.

The process is very simple and the investment strategy is not very different from the standard strategy. You buy the bitcoins and as the value rises you sell them in order to obtain profit. But how can we bet against any given Cryptocurrency? As the Cryptocurrency category grows and becomes more popular financial products are being created for them, they are known as ‘derivatives’ or ‘futures contracts’.

The whole concept of derivatives involves contracts that reflect the performance of an underlying entity. CME and CBOE have begun Bitcoin derivative futures trading contracts on the NASDAQ, which is the second largest stock exchange in the world. Derivatives allow investors to bet on bitcoin without buying the currency, increasing the quantity of financial leverage to the asset.

There are many who think that the possibility to bet on the future trajectory of Bitcoin’s value with derivatives has affected its price negatively. This is similar to how the Tulip Bubble burst shortly after tulip futures were introduced.

Even the strong Bitcoin naysayers, including Central Bank authorities and investing legend Warren Buffet, agree that Cryptocurrency is truly a great innovation that will likely change the way business and trade is done. For this reason, many governments around the world are looking at launching their own cryptocurrencies. This is why any investor and any trader with their wits about them should keep an open eye for the Cryptocurrency space.  

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