By now, most of us will have heard the term Bitcoin flying around the internet. In fact, according to a recent Finder study, Bitcoin pops up in a new post on social media every 3 seconds. If you’re curious to know more, this video will cover what Bitcoin is and how it works, why it’s so popular and how you can get in on the action. Simply put, Bitcoin is a digital currency. Established in 2008, it has become the world’s most well-known crypto currency (of which there are thousands). If crypto currencies were TV streaming services, Bitcoin would be Netflix.
To understand why Bitcoin was created and how it works, you first need to understand how “regular” money, known as Fiat money, works. Fiat money is issued and regulated by governments and banks, and has value, essentially, because they say so. When you go to buy something on your debit or credit card, your bank or credit card provider acts as a middleman between you and the seller, to vouch for you that you are who you are and you have the money you say you have. And they take a cut for doing so. Every time we spend on our cards we put a lot of implicit trust in one centralised institution our banks and card providers. The brainchild of an anonymous developer known as Satoshi Nakamoto, Bitcoin was initially created as a way to cut out the middleman and create a quicker, easier and cheaper way to make payments, with no single bank or credit card provider in control.
So, how does it work? Instead of being regulated by a bank or government body, Bitcoin’s “accounts” are recorded on a distributed ledger, which takes the form of a massive decentralised network of computers around the world. If you make a payment using Bitcoin, instead of it being recorded by your bank in one private accounts log, every computer in the Bitcoin network will make a record of your transaction. In this way, Bitcoin payments are super secure. If someone were to try and tamper with the data on this record, thousands of computers worldwide would flag the inconsistency and it would be blocked. Bitcoin ledger or record is called a blockchain. It’s called that because the data can be pictured like a series of blocks that have been chained together. Bitcoin block chain can’t be censored or manipulated and, in theory, everyone can see every transaction made. Every time a new block is created the network analyses the content, processes any payments and makes a record of those transactions. To create a new block, one of the computers or computer systems on the Bitcoin network must solve a complex puzzle from the last block. As a reward for solving the puzzle and keeping the system ticking over, whoever is in charge of that computer system gets a chunk of Bitcoin as a reward.
This is what’s known as Bitcoin mining. Solve the puzzle from the last block, create a new block of data, get some Bitcoin. Today, a new block is created roughly every 10 minutes thanks to savvy people setting up massive Bitcoin mining systems. You can give it a go, but it’s unlikely you’ll get far just crunching numbers on your personal computer. Initially Bitcoin was intended to be used as everyday currency. But a huge boom in demand, and subsequently its prices, has meant you could pay much higher transaction fees; as well as the fact that Bitcoin transactions can take, on average, around 10 minutes to complete sometimes longer. Not ideal for everyday spending. So these days, with prices for 1 Bitcoin tipping past the £40,000 mark, most people buy Bitcoin as a speculative investment. It can be helpful to think about Bitcoin as digital gold. Back in the day when someone first went to pay for something with gold, people must have thought they were mad. I mean who pays for something with a shiny rock?
However, when people start to cotton on to its value there is a gold rush as people scrabble to mine as much as possible. And because there is a finite amount of it, prices skyrocket. The same thing happened with Bitcoin. In the beginning it was only taken seriously by super nerds and on the dark web. But in 2017, it underwent a gold rush of sorts. And, like gold, because it has a finite amount Nakamoto set a limit on the amount of Bitcoin available to be mined at 21 million - it’s prices have soared. Other reasons people buy Bitcoin are as a means of potentially getting higher returns on their savings when compared to the paltry savings rates in the UK. As well as the fact that, thanks to dedicated investing apps and platforms, crypto currencies are more accessible than ever. And for some, it’s a case of plain old FOMO or fear of missing out, as roughly a fifth of Brits are now owners of some form of crypto currency. If you don’t happen to have a spare 40K lying around, never fear, because you can actually invest in a fraction of Bitcoin to suit your budget.
Follow, these steps to buy your first bit of Bitcoin
1. Compare platforms that trade Bitcoin. You can buy Bitcoin from some share trading platforms, crypto exchanges and apps like Revolut. Make sure you shop around to make sure all its services and any potential fees suit your circumstances and trading expertise.2. Choose a platform and open an account.3. Load your account with funds.4. Start buying!
While the process of buying Bitcoin is fairly straightforward, no investment is without risk and you should carefully weigh up the pros and cons before parting with your cash. And remember, if you make money from any crypto currency, capital gains and income are fully taxed. This guide is just the tip of the iceberg when it comes to Bitcoin and crypto currencies.
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