Cryptomania Part3 - How does it work?
Bitcoin, how does it work? The simplest explanation is that Bitcoin is a digital file or ledger that contains names and balances and people exchanging money by changing this file. When Dave is selling a golf club to Bob and Bob is paying in Bitcoin, the ledger will increase Dave’s file and decrease Bob’s file. That part is like our common banking system where Central Banks maintain this ledger. So, who is maintaining the Bitcoin ledger and keeps it honest? Bitcoin is decentralized, meaning that there is no ‘Central Bank’. Transactions are updated directly and automatically and everyone can see everyone’s transactions and balances. It’s an open system of recording information but in a way that makes it difficult or impossible to change, hack, or cheat the system. It’s called Blockchain. The system uses account numbers instead of real names which creates a level of anonymity. But everyone has access to the ledger and all transactions are transparent. If you use Bitcoin, you are part of the ledger and that makes it very hard to hack since it involves thousands of computers. If you want to get more into detail, here is a 5min video: https://youtu.be/l9jOJk30eQs.
How to invest in Bitcoin. You can register at a reputable Crypto Exchange like Binance, Kraken, Coinbase, or Bitbuy. Then you deposit money directly from your bank account and buy Bitcoin. You can store your Bitcoin at the exchange or transfer it to a ‘wallet’. There are web based wallets (hot wallets) and hardware wallets (cold wallets). If you are planning to buy and hold Bitcoin, a cold wallet is the best and safest option. While it’s almost impossible to hack Bitcoin itself because of it’s nature, a crypto exchange and a digital wallet can be vulnerable to cyberattacks. It is important to understand that difference. It’s like a swiss bank account used to be, whoever has the number has access to the money, except with Bitcoin, you are the account holder and the banker. Safe storage of that number (Bitcoin Key) is crucial. With a cold wallet, your only risk is, to lose the stick and have no backup. It’s ok to get help and guidance from people you trust to obtain Bitcoin but stay away from shady brokers. Cryptocurrency has gained a lot of attention lately which always attracts fraudulent activity as well. If you want to own some Bitcoin, you can do this all by yourself.
The Rise.Let’s look at what caused the recent hype. There are 3 key reasons why Bitcoin had a tremendous run lately. 1. Institutional adoption, 2. High inflation, 3. Supply-Demand
The arrival of qualified custodians and other key infrastructure has facilitated the influx of significant institutional capital in a way that was unthinkable just a few years ago. The fact that we are experiencing higher than usual inflation and the price of gold is not moving at all, has confirmed the theory that many have replaced gold as a hedge for inflation with Cryptocurrency. Finally, Bitcoin inventor Satoshi Nakamoto capped the number of Bitcoin at 21 million, meaning there will only ever be 21 million bitcoins in existence. By August 2021, 18.7 million bitcoins were available, leaving 2.3 million to be mined. This limited supply makes it very different from Fiat Currency which has been deflated by printing more and makes many people believe that Bitcoin will be going to $100,000 or even $500,000 in the near future.
The Risks.The risk is that the growing appetite in Bitcoin could stop and reverse. Governments and big banks, especially in the US could go to great lengths to prevent Bitcoin from becoming too popular. Transactions may not become illegal like in China but increased regulations could fuel this lack of interest. Congress has already started this process and I think the efforts will increase if there is a realization that Bitcoin can’t be used for their kind of monetary policies. Bitcoin and other Crypto Currencies are not for the risk averse investor. Looking at past returns is one thing but analyzing how we got here is another. It’s very volatile and it takes discipline and a solid strategy to prevail through these violent swings. There is still great potential but nothing is ever a sure thing, Bitcoin is no exception to that. I always recommend keeping your Crypto assets around 10% or less of your overall assets and if you are a Crypto investor, make sure you look at Staking your Crypto. Crypto staking is the process of locking up crypto holdings in order to obtain rewards or earn interest. It’s easy to do and rewards can be very generous, sometimes between 5%-20%. Crypto is not for everyone but some of it, especially Bitcoin deserves a look as a credible asset class.
Disclaimer: I do not buy or sell any Crypto for clients. I personally hold Bitcoin, Solana, Cardano and Kava.
