Bitcoin is a type of cryptocurrency or digital currency not controlled by the banking sector or governments. This makes it a cheap and fast trading investment option. The fact that it is not centralized makes it a volatile investment and a favorite amongst high-risk, high-stakes investors looking for an investment with a big pay-off potential.
If you are considering investing in bitcoin, here is everything you need to know before investing.
What is bitcoin?
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Bitcoin can be defined as a tradable commodity or a digital currency. It is software designed to allow people to exchange value directly. It was unveiled in 2008 and launched in 2009. What makes this program unique is that the software runs through a series of linked computers. This makes it impossible for one party to control the network, making it impossible to dictate the value of the currency.
All bitcoin transactions are recorded in a ledger referred to as ‘the blockchain.’ The technology that runs bitcoin is trusted because of its high-security level against counterfeiting or hacking. Since it went live in 2009, the bitcoin database has not been hacked even once.
Since bitcoin is simply digits running on a computer program, it does not have an intrinsic value. Therefore, the price is solely dependent on what traders are willing to pay for the currency.
What kind of investment is bitcoin?
Bitcoin is a speculative investment option. Before investing, there are several considerations to weigh to determine whether it is the best investment for you. The main consideration to make it what your investment goal is.
Since it started trading in 2009, it has been promoted as the new version of gold, making it an inflation hedge. However, bitcoin has no history of operating as an inflation hedge. Therefore, there is a lot of uncertainty about its effectiveness if it was to be traded as a high asset class, like gold.
Bitcoin is highly volatile, which is enticing to some types of investors. Based on the price history of the currency, it can be termed as a winning investment. When it started in 2009, it had no value, and in February 2021, it surpassed the $50,000 mark per bitcoin for the first time.
However, the volatile nature of the bitcoin means that the price can drop drastically, and unlike traditional stock market trading, there are no closing bells or circuit breakers to stop trading.
At the start of 2020, the price of a bitcoin was up by 350% and soon dropped by 64% in February and March of the same year, showing how volatile it can be.
While this drop was mainly due to the economic collapse of the time, the fall was twice that of the plunge in stocks in the exchange.
Where to buy bitcoin
If you are an investor looking to purchase bitcoin, you can choose one of a few regulated credible bitcoin exchanges such as Coinbase, popular in the U.S., Kraken popularly used in Europe, and BitFlyer, commonly used in Japan. You can easily sign up for an account on these platforms where you need to produce proof of ID to start buying bitcoin.
There are also some mainstream services now allowing bitcoin-exchange on their platform. PayPal, Cash App, and Robinhood allow their users to sell or buy bitcoin from their accounts directly.
If you prefer to trade anonymously, bitcoin has an attractive feature where investors can buy and sell in unregulated exchanges. It is also possible to download the bitcoin OS directly or the free or sold hardware and software for digital wallets where you can store your bitcoins. Before you make this choice, ensure you have the technical skill to store your bitcoin safely.
Crucial bitcoin trends to look out for
At the begging of 2020, bitcoin was trading at $4000. Since then, the prices have surged, which made 2020 a year for bitcoin maturity. Here are some of the main trends to expect in the near future with the bitcoin cryptocurrency.
Bitcoin will be more accepted in the mainstream.
The year 2020 was a year for the bitcoin evolution and adaptation. Prominent companies like Square invested $50 million in the currency, and PayPal finally allowed its customers to trade bitcoin from the platform. These moves gave bitcoin a stamp of approval.
In the months following up to 2022, bitcoin will continue to be accepted in the mainstream sectors, including banking. These sectors are likely to come up with a system that will allow clients to store digital assets or purchase bitcoin.
Competition from the banking sector
Recently, a statement issued by the Bank for International Settlements indicated that at least 80% of the central banks around the world are considering creating a type of digital currency.
China is currently moving towards a national adaptation of a digital Yuan in an effort to undercut the demand for bitcoin and other cryptocurrencies. This trend is likely to be seen in other countries in the coming months.
Fierce completion from Big Tech
Over the last decade, bitcoin has accomplished far more than predicted when it first started in 2009. This has forced many tech companies to consider going into the business of digital currencies. Today, all companies involved with payment services have discovered a market for digital payments involving different currency markets.
Bitcoin has shown that embracing a globally accepted digital currency can streamline the payment process that sometimes takes days to resolve and included hefty fees.
While tech ideas such as Diem by Facebook are new to the market, they have the potential to catch on and enjoy part of the market share dominated by bitcoin.
Introduction of a regulatory playing field
The new U.S. administration is expected to come up with more stringent regulations for cryptocurrencies. One of the concerns about digital currency is its use in fraud, and thus these regulations are meant to try to curb the use of these currencies for fraudulent deals. It is expected that the government will try to develop rational ways of regulating cryptocurrency in general, not just bitcoin.
Bitcoin will continue to be volatile.
Since the value of bitcoin is not determined by a monetary or fiscal policy, it is expected to continue appreciating and depreciating in unexpected or predictable ways.
As an investment option, the currency is currently expected to steadily surpass the $50,000 mark by 2022, especially after big players like Elon Musk showed interest in the currency.
It is also possible that the price will plunge. The only sure thing about the bitcoin market is that the ups and down of the currency are to be expected going forward.
Risks associated with storing and trading Bitcoin
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To successfully trade and invest in bitcoin, you require a certain level of technical knowledge and an understanding of how blockchains operate. To safely trade bitcoin, you need to be aware of the most common risks associated with trading and storing bitcoin.
Destruction or loss of your private key
When you buy bitcoins, they are stored in a digital wallet. To control this wallet, you need to be in control of the digital wallet’s private key. In the event that this key is destroyed, compromised, or lost, you may not be able to access your bitcoins, meaning the digital wallet is lost.
If this digital key gets into the hands of a third party, they will have access to your digital wallet and essentially your bitcoins.
All third-party providers or trading platforms are vulnerable to malicious online activity, including hacking. In August 2016, almost 120,000 crypto units, equal to $72 million in bitcoins, were lost from Bitfinex, a Hong Kong-based digital currency exchange. This causes a 23% drop in the price of bitcoin. In 2015 September, BitPay has recorded a loss of at least $1.8 million in bitcoins through a phishing attack.
A blockchain can be altered if a hacker makes alternations or gains control of enough consensus nodes in the bitcoin network. Even though bitcoin is a decentralized network, there has been an increase in attempts to create mining pools that have the potential of allowing an entity to control the network and other crypto blockchains.
Miners and malware risks
Whenever a blockchain computer processes a transaction, information is added about the PC in one of the blocks. As a reward, the person issuing the cryptograph currency gives tokens to the PC owner. The process of transacting and getting tokens for payment is referred to as mining.
Most mining operations are not legal. In these illegal mining processes, malware programs are used to access user computers, where they take up to 65% of the video card and CPU power. In 2017, the Adylkuzz malware used a computer vulnerability known as EternalBlue to turn more than 200,000 computers into mining machines.
With this malware, the PC owners unknowingly paid for the processing power required for blockchain transactions while the hackers made money from the mining activity. In the end, hackers received at least 1million euros in cryptocurrencies.
In the period between July and December 2017, 1 in 5 companies was a victim of illegal crypto mining. In December alone, at least 55% of companies globally were victims of crypt mining hacking. During this time, ten variants of the malware were listed in the list of 100 most active cybersecurity threats, with the CoinHive malware listed as the most active.
Peer-to-peer transaction risks
Bitcoin digital currency can be traded online through multiple third-party providers and peer-to-peer transactions. Most of these marketplaces bring traders together without offering intermediary or clearing services, and most of them are unregulated.
On these platforms, all risks like double selling is between the parties taking part in the transaction. In the event of fraud, the peer-to-peer platform cannot be held liable for the loss of bitcoins.
Risks related to trading exchanges and platforms
All platforms for digital currency trading are highly unregulated and offer limited transparency in how they operate. This has led to a lot of scrutinies because these platforms are largely used for fraud and security breaches. Investors are not compensated for any losses suffered when trading on these platforms.
While you may be safer by not relying on these platforms to trade bitcoin, these platforms are important when you want to change a currency to cryptocurrency or exchange one crypt for another.
Bitcoin wallet security
A bitcoin wallet is software that contains your public and secret bitcoin encryption keys. This is the software used to communicate with the blockchain where they are used to transact and track tokens in a blockchain.
Bitcoin wallets are solely protected by the owner. This means that a cryptocurrency wallet application on a computer or smart device can be compromised if your login data lands in the hands of cybercriminals. These criminals use malicious applications, phishing attempts, and spyware to gain access to your login credentials.
Digital currency taxation
There is a lot of uncertainty around tax guidelines on digital currency investments when it comes to bitcoin investments or any other cryptocurrency investment. In some jurisdictions, bitcoins can be considered as assets while they are currencies in others. For this reason, there may be value-added tax additions in purchases made using these digital currencies.
As an investor, you may need to regularly seek tax advice to know the latest tax guidelines in your jurisdiction for bitcoin and other cryptocurrencies.
8 Ways to secure your bitcoin
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The upward trend in bitcoin prices has led to an increase in bitcoin account hacking. Here are eight ways to protect your bitcoin wallet.
Use hardware wallets
Hardware wallets are a type of cold storage option for bitcoins believed to be the most secure when it comes to storing your private keys. These are physical security vaults meant to protect bitcoin from an array of possible attacks while ensuring the bitcoins are accessible to the owner with ease.
Hardware wallets come in different functions, forms, and prices, with the cost ranging from around $50 to $200 depending on the brand you go for. Hardware wallets make use of a mnemonic phrase required to recover the wallet in case the device is lost.
Since hardware wallets are not connected to the internet, they keep your bitcoins safe from cyber threats.
Have multiple wallets
If you still need to make daily bitcoins trades, consider creating a separate wallet for these transactions. You can top up this wallet from your main wallet whenever you want to trade. The good thing is that there is no limit to the number of wallets one can create. Sorting your bitcoin transactions improves the safety of your portfolio.
Keeping your private key offline
Keeping your private key offline is one of the best ways to protect your wallet. Instead of saving your private key password on an electronic device, you can write it on a piece of paper and store it in a safety deposit box or somewhere far from human interference. This is referred to as cold storage.
Ensure the paper you write your private key on is kept in a dry place away from direct sunlight and heat to prevent deterioration of the paper. Remember, private keys should be for your eyes only. Never share the key with anyone, and never ask people to transact on your behalf.
Any email, proposal, idea, or service that requires you to share your private key with a third party is always a fraud scheme.
Always ensures your internet connection is secured.
Whenever you need to access your bitcoin account, it is important to do so over a protected internet network. Most public networks come with numerous security flaws and vulnerabilities. If you must access your bitcoin wallet over a public network, ensure you invest in the best VPN service.
Using a VPN for security creates a safe tunnel between your device and the network. This ensures all data transmitted through the network is encrypted and hidden from hackers on the public network. This is the only sure way of keeping your bitcoin wallet credentials private.
Use updated antivirus programs.
Regardless of the operating system you use, any of them can be hacked into using malicious programs. Always check that the computer you use to access your bitcoin wallet has an updated antivirus program. Most cybercriminals, including bitcoin hackers, use malware programs to access your device and your bitcoin wallet.
Always run a thorough device scan on all devices before installing your wallet and run a scan regularly to check for vulnerabilities and address them before they become a problem. Also, ensure your operating system is always up to date. This is one of the best ways to keep you safe from potential malware attacks.
Apart from sending or receiving malicious links and programs, some mobile applications come with hidden programs that log user keystrokes and spy on the screen activity without the user’s knowledge. This is why antivirus programs have become a must-have for mobile devices too.
Do not fall for phishing scams.
When online, always check the site link to ensure it is legitimate for the website you are visiting. Internet scammers use phishing scams to access bitcoin wallets by cloning a legitimate website and using almost similar URL addresses.
Phishing scams can be sent on any service on a mobile device, including social media, texts, messaging platforms, and emails.
If you often use an online bitcoin wallet or service that requires you to enter your private key, ensure you verify the website before availing any information. You can do this by checking for the HTTPS security check at the beginning of the URL address. You can also click on the padlock sign to check the address that was awarded the security certificate. This address should match the site’s URL address.
Also, be on the lookout for scam emails about bitcoin. These have become increasingly common in recent times, where bitcoin traders are tricked into visiting scam sites and availing their details.
Secure your wallet using a strong password
According to statistics, at least 52% of internet users use the same passwords for different services. If you store your bitcoins on an online wallet, you need to ensure you choose the strongest password. Do not use birth dates, phone numbers, movie titles, or names for passwords. Always choose alphanumerical combinations you can easily remember. Having a strong password is one of the best ways to keep bitcoins fraudsters away.
As an additional layer of security, you should consider using 2FA authentication for your online wallets. This security measure requires you to enter a coder after your password to be able to access your wallet. This code is generated on request and sent to your mobile device, email, or authenticator app.
Consider using password managers to guarantee the safety of your passwords for every bitcoin platform you trade on.
Only work with reputable exchanges, mobile apps, and brokerages
Before you decide on the best platform to trade bitcoins from, take time to get to know the security protocols used on the site, including data safety. The best sites should have the best security practices, including multifactor authentication, offline air-gripped devices for storing bitcoins, and SSL/TLS encryption.
It is often safer to use more than one cryptocurrency platform as long as you remember to use unique passwords for each of the platforms.
It is also advisable to avoid using wallets hosted by a service provider. These types of wallets authorize the provider to store user private keys on servers, which is out of the control of the wallet owner. While this method requires the least technical effort to secure your key, it also poses a serious threat to your wallet if there is a security breach on a server.
Once you decide to invest in cryptocurrency, you become the sole guardian of your bitcoin wallet. The world of trading digital currencies like bitcoin is fast-changing, and security systems are constantly updated to improve the safety of wallets. Always take the required precautions and ensure you are always on the-know with security improvements and market changes to ensure your wallet is always safe from fraudsters.
Credit: Chris Jones