Bitcoin 101: A Step By Step Guide

Written by Julie Brownlee on January 30th, 2017

Bitcoin 101: A Step By Step Guide

Have you ever heard of Bitcoin and wondered what exactly it was?

This digital currency has had its fair share of publicity, good and bad, over the years.

But the fact is that Bitcoin was 2016’s best performing currency!

And investors from across the globe are flocking to it like never before.

But what exactly is Bitcoin?

How can you invest in it?

And what are its pros and cons?

To find out the answers to these questions and lots more, read on…

 

What Is Bitcoin?

 

Bitcoin is a digital currency or a cryptocurrency.

Unlike rands, dollars, pounds and other paper currencies, it’s completely electronic.

Bitcoin miners create the currency and it’s totally electronic.

Not one central bank or government controls it. In other words, it’s decentralised.

And it’s this very fact that appeals to many fans of Bitcoin.

 

 

Where Bitcoins Comes From

 

Unlike paper money, producing Bitcoin are a whole host of miners. They do this by using computers.

Bitcoin miners use an open-source mathematical formula.

This is available for anyone to verify.

The network behind this also process Bitcoin transactions.

But what makes Bitcoin special is that miners can only produce a finite number. This is 21 million.

Yet, that shouldn’t stand in Bitcoin’s way if its value continues to climb. You can essentially divide one bitcoin into 100 millionths.

 

How To Become A Bitcoin Millionaire

 

So how can you get your cyber hands on some Bitcoin?

You have two options when it comes to buying this digital currency…

  1. Buy them directly from a Bitcoin exchange
  2. Buy them directly from other Bitcoin users

You can use cash, debit cards, credit cards and transfers to buy them.

You Need A Wallet

But before you buy, you’ll need to get yourself a Bitcoin wallet.

A Bitcoin wallet is essentially a form of bank account to hold your Bitcoins in.

There are different types of wallet. The main variation is the level of security they offer.

The main types of wallet are…

  • A software wallet: You store this on your computer’s hard drive
  • An online wallet: This is web-based
  • A vault wallet: Your wallet is offline and highly protected

To ensure that you take care of your wallet, you need to regularly back your wallet up.

Opt for a wallet which has robust security, including authentication processes.

Don’t opt for a simple login and password. This is the most risky route.

You’ll need to shop around for an exchange. Have a look at online reviews and customer feedback before making a decision.

You may remember the Mt Gox fiasco. This exchange went out of business in 2014, leaving its Bitcoin customers out of pocket.

There’s also the threat of hackers to exchanges, so security is key.

Once you have bitcoins in your wallet, you can hold onto them as an investment or use them to buy goods.

In the US, there are a couple of funds that give you exposure to Bitcoin that may be right up your street if you don’t want the hassle of doing it yourself.

Examples include the Winklevoss ETF (exchange traded fund) and the Bitcoin Investment Trust.

 

Investing In Bitcoin In SA

 

If you want to know more about spending your Bitcoin in SA and to get started, visit BitcoinZar.

You’ll find out more about Bitcoin and its spread in SA.

And, most importantly, where you can spend them in the country.

 

The Rollercoaster Journey of The Bitcoin Price

 

Have a look at the chart below…

Bitcoin’s History In One Chart

Bitcoin’s History In One Chart

Source: BitcoinCharts.com

This shows you the price of Bitcoin since its inception in US dollars.

As you can see, the price soared leading into 2014 before falling hard.

But over the past couple of years, there’s been a much more gradual climb higher.

However, either side of 2014 Bitcoin was in fact the best performing currency for 2013, 2015 and even 2016.

How Bitcoin Has Dominated In Recent Times

How Bitcoin Has Dominated In Recent Times

Just last year alone Bitcoin more than doubled in value!

Take a look at the chart…

Bitcoin More Than Doubled In Value In 2016

Bitcoin More Than Doubled In Value In 2016

Of course, the price you buy into Bitcoin is important.

As with buying stocks, the lower the price you can get, the better.

If you’re planning to hold onto Bitcoin as a long-term investment, you want to see appreciation of its value over time.

 

The Pros of Bitcoin

 

There are numerous reasons why Bitcoin appeals to its users…

Bitcoin Pro #1: It’s A Decentralised Currency

As we looked at above, governments don’t control Bitcoin.

This means that it’s free from their interference.

Bitcoin Pro #2: It’s Easy To Use

Once you’ve got a Bitcoin wallet, it’s easy to buy Bitcoins and use them.

Bitcoin Pro #3: It’s Totally Transparent

All transactions involving Bitcoin are stored on blockchain, the massive ledger detailing Bitcoin transactions.

Bitcoin Pro #4: Bye, Bye Fees

Unlike making international payments through your bank, the fees attached to Bitcoin are negligible in comparison.

Bitcoin Pro #5: It’s Almost Instant

With no clearing to go through, unlike transaction through your bank, transactions happen almost instantaneously.

 

The Downsides of Bitcoin

 

Of course, Bitcoin does have its disadvantages…

Bitcoin Con #1: Valuation Fluctuations

Like stocks, the value of Bitcoin changes according to demand.

This means that its value can change dramatically.

Bitcoin Con #2: You Can’t Spend Them Everywhere

Unlike using Visa or MasterCard, you may struggle to spend your Bitcoins.

Bitcoin Con #3: There’s A Threat of Loss

As you store your Bitcoins in a Bitcoin wallet, there are risks with this.

If the computer storing your wallet crashes or ends up with a virus, your wallet and its contents could be gone forever.

Bitcoin Con #4: The Risk of The Unknown

There’s no certainty that some technical advancement or wizardry in the future won’t threaten Bitcoin in its current form.

 

Should You Invest In Bitcoin?

 

Investing in Bitcoin is like any other investment, there are advantages and there are risks.

I wouldn’t advocate selling out your entire investment portfolio and buying Bitcoin instead.

But as part of a diversified portfolio, investing a small portion of your capital could be a wise long-term investment decision.

You could buy with a buy and hold outlook.

Your hope is that as the popularity of Bitcoin rises over the years, your investment will increase in value.

Of course, you shouldn’t invest any money into Bitcoin that you’re not prepared to lose. But this advice goes for all investments.

There are risks and you need to weigh those up.

If you were one of the early adopters, you will have seen massive profits from your outlay.

As there are no costs apart from buying the actual Bitcoins, think about investing a small sum into it.

You can base this amount on its outlook.

You never know, in ten years’ time, you may be very glad you did.

Until then, here’s to profitable Bitcoin trading and investing.

Julie Brownlee | The Money Lab

Julie Brownlee
Editorial Contributor
The Money Lab