Here's A Crash Course on Bitcoin

To say that bitcoin fever has afflicted wide swaths of American society— including unforeseen demographics, such as grandmothers and taxi drivers— would be no misdiagnosis.

Bitcoin (BTC), the transformative currency that may have seemed a quixotic experiment upon its release a decade ago, has since been techies’ best kept secret— until recently.

In 2017, bitcoin saw its price increase nearly fourteenfold, spurred by the entrance of a diverse tidal wave of investors— some playing the long game, but many others driven by a get-rich quick mentality.

Designed with immeasurable complexity and having few clear precedents in history, bitcoin is chronically misunderstood by the general public. Ironically, its perception has become even further muddled by the internet, which allows anyone to broadcast his or her hastily-formed views.

Some starry-eyed devotees expect the currency to skyrocket to seven figures, while numerous economists and bankers believe it to be inherently worthless. Still others fall somewhere in between. The question is: who to believe?

Hopefully this article lets you tune out the noise, helping you make the right decision on when— and whether— to invest.

Bitcoin 101

In late 2008, the pseudonymous Satoshi Nakamoto published a whitepaper online that explained his vision for Bitcoin, the world’s first cryptocurrency.

Nakamoto, whose identity remains a mystery, ultimately released the platform early the following year, aided by a handful of fellow visionary technocrats.

The technology behind the platform was groundbreaking, in that it relied on decentralization— the processing power of each and every user’s computer served as its engine. Early adopters were rewarded for powering the system with newly-minted bitcoin, through a complicated process known as “mining.”

Bitcoin’s invention and pioneering use of the “blockchain,” however, would become its defining trait, lately co-opted by both finance and tech firms at what feels like breakneck speed.

Unsurprisingly, the blockchain also happens to be one of bitcoin’s more confusing concepts. Perhaps the simplest way to think of it is as a public and transparent ledger, allowing users to view every transaction processed throughout the network.

For reasons only open to speculation, Nakamoto’s creation put a hard cap on the number of bitcoins that could ever be mined: 21 million. This ceiling is one of the key differentiating factors between the original cryptocurrency and its copycats.

The currency’s upper limit is also important to consider in another sense; as the number of bitcoins in circulation approaches 21 million, it will be harder to strike gold by mining. In context, some analysts argue that newer investors may have already missed the boat.

Many of you are probably just skimming, and rightfully so— you just want to get your (digital) hands on some bitcoin! I’ll let you in on a secret: the best place to get your feet wet is through a cryptocurrency exchange.

Coinbase, which also operates the GDAX exchange, is the world’s largest cryptocurrency exchange by a large margin. Kraken, which is based in San Francisco, is another big player.

While bitcoin can be stored on an exchange, you may want to consider safeguarding it the traditional way via a digital or paper “wallet.” Bitcoin wallets contain alphanumeric “keys” that let you spend— or cash out— your savings as you please.

No matter how you store them, the platform is vulnerable to hacking and transactions are irreversible. This means that you have to adequately protect your digital gold, whether through setting difficult passwords, encryption, and/or regular wallet backups.

Offline storage, whether on a hard drive or paper wallet, may also serve as a viable option.

Lastly, it would be remiss not to mention the ways in which you can actually spend bitcoin as you would a regular currency. Although few retailers accept it as a form of payment, some sites that do, such as Purse, actually provide significant discounts to consumers.

Chatter aside, bitcoin is something in which anyone— from the Raspberry Pi-building teen to the technophobic octogenarian— can participate.

In The Midst Of Change

Although still rehabilitating its early image— a haven for druggies, money launderers, and tax evaders— bitcoin is no longer an unrecognized commodity, even if its value and utility remain somewhat unknown.

Put plainly, bitcoin, having caught the world’s attention, will almost certainly have an active, if not transformative, year in 2018.

What an abundance of activity will mean in terms of bitcoin’s year-end price is anyone’s guess. If you take stock in its ability to gain mainstream acceptance, perhaps it may make sense to closely monitor cryptocurrency-based futures, which many traditional financial institutions have begun offering investors.

CME and CBOE, two of the most prominent American futures exchanges, began offering these contracts in December, which could aid in legitimizing the currency.

Cantor Fitzgerald and NASDAQ are also said to be preparing related derivatives products, while cryptocurrency ETFs are also expected to become legal securities in the coming months.

On the legal front, it’s also very likely that reporting requirements, including to the IRS, will become more stringent for investors.

Proposed bills in Congress, for example, could force exchanges to report both large and suspicious transactions to authorities. Meanwhile, low-value transactions would likely be exempted from tax reporting.

Since bitcoin is a global phenomenon, it would behoove the serious investor to follow geopolitical decisions around the world, whether they appear to directly or indirectly affect the currency itself.

For example, bitcoin is already banned in six nations, and restricted in many more— including China, which had once been its largest market. North Korea, which has been known to hoard the currency to bypass international sanctions, could be seen as a less direct currency manipulator.

Color me intrigued, you say? But yet, you long for the stability and security of traditional markets? Coinbase has strongly hinted at an IPO, likely later this year. It seems more a matter of when than where.

A final consideration is potential bitcoin forks, which create derivative currencies that branch out from the blockchain’s framework.

Anytime a new bitcoin fork is implemented, you are usually entitled to receive an equivalent amount in the newly-created digital currency.

If a year from now, experts still hail bitcoin as being the greatest innovation since the internet, and talking heads continue to discuss it over the airwaves, bitcoin has done at least something right.

HODL or Die?

If you’ve made it this far, it’s probably safe to assume that bitcoin is— or could become— more than a fleeting interest. This section may help you better understand what the future has in store.

Those tracking the currency’s rise may want to become familiar with the backronym “HODL.”

Derived from an online misspelling of “hold,” the phrase has since taken on a second meaning: “hold on for dear life.”

HODLRs, as they’re called, have reason to believe that bitcoin will continue shooting higher. One rationale is a well-known survey, pegging $196,165.79 per coin as the threshold at which average users would fully cash out.

Because bitcoin is still plagued by unfixed issues, detractors have only become outspoken over its rise.

For example, despite its apparent adequacy as a store of value, bitcoin is still inefficient and expensive as a medium of exchange; inconvenient to purchase and store; and too multifaceted for the layman.

Environmentalists have an even bigger bone to pick, as studies show the currency’s network consumes gigantic amounts of energy. Currently, miners burn energy comparable to that used by Denmark— and this figure continues to grow exponentially.

In fact, Grist, an online environmental publication, projected that the network alone will suck more power from the grid than the entire United States by July of next year, should adoption continue at current rates.

A more existential threat is bitcoin’s long-term viability, which may not salvageable, even if the cryptocurrency boasts a first-mover advantage.

One much-discussed theoretical crisis revolves around the network’s longevity once all 21 million bitcoins have been mined.

In lieu of mineable treasure, the act of lending processing power could be incentivized through the payment of transaction fees, which would flow from the transactor to the “miner.”

Albeit, there is no way to predict whether it would be worthwhile lending your computer or rig’s processing power for minimal gain.

It’s entirely possible that bitcoin is a modern-day equivalent to Myspace. The programmers behind the leading cryptocurrency of the future, which would almost certainly solve concerns related to stability and sustainability, may still be in high school.

Word to the wise: if you’re looking to invest, strongly consider diversification. It’s tempting to look at cryptocurrencies as some intangible investment that doesn’t follow conventional wisdom. This view would be misguided.

Many experts recommend investing in Bitcoin and Ethereum, alongside smaller digital currencies.

ICOs, or initial coin offerings, may offer the greatest return, but they’re also the riskiest. Steer clear from suspicious listings; look for ICOs from established companies, such Kodak and app-based messaging service Telegram, each of which recently announced ICOs.

Finally, don’t invest more than you’re willing to lose. However, if you do make a fortune, stay humble.

Even if no one’s able to track you down, the world has enough braggadocios.

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