Things You Need to Know Before Investing in Bitcoin

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Bitcoin continues to gain momentum among investors globally,  despite the fact that the warnings signs keep getting louder. 

What is Bitcoin?

Bitcoin, trading as BTC, is the first decentralized currency, built with digital coins that you can send through the internet. Decentralized means that there are no middlemen i.e. banks or governments, the coin isn’t subject to any regulation or tied to any specific country.

Bitcoin was introduced back in 2009 by the mysterious Satoshi Nakamoto. Since then, its value has been rising and now has a current market capitalization exceeding $100 Billion.

How Bitcoin Works (Under the Hood)

At the forefront, bitcoin is merely like a computer program or mobile app that provides a personal digital wallet that enables users to send and receive bitcoins. Under the hood, bitcoin is a digital currency and hence exists only in a cyberspace network, made up of users and miners. Users can make various transactions online while miners verify and protect the integrity of the system.  The bitcoin network is essentially the sharing of public ledgers called “Block Chain”. These ledgers contain all the transactions ever made, allowing all miners to verify the validity of the transactions made by the users. The authenticity of these transactions is protected by a digital signature made from a cryptographic function in your wallet.

Once the transaction orders are sent out, they are places in a blockchain in chronological order to be confirmed/verified. This process of verification of the authenticity of the transactions entails checking whether the transaction order fits the strict conformity of the cryptographic rules of the bitcoin system. The verification is basically distributed to all miners and a consensus must be made to confirm awaiting transaction orders/instructions in within the blockchain. Therefore, the integrity of the entire blockchain is protected enforced by cryptography.

Source: Quora

Bitcoins are created by Miners, who use computers to solve mathematical functions (bitcoin transaction orders). Using computer power of specialized hardware miners are able to process transactions and secure the network in exchange for new bitcoins.

 These new bitcoins are created at a fixed rate making, the bitcoin mining business very competitive.

Bitcoin is owned by bitcoin users and hence the entire bitcoin network has no specific owner.

Is Bitcoin a Good Investment?

Before we delve into whether bitcoin is a good investment or not, first let’s understand what constitutes a good investment and see how bitcoin measures up against these standards:

Long-term viability. An invest has to appreciate and remain valuable over time to be considered viable in the present day. Most investors do not buy assets that do not have a long-term viability as most of the money made in investments comes from value appreciation. Bitcoin is no different. However, the jury is still out to determine the future of bitcoin; even so, bitcoin has made it 9 years strong amidst speculation of its collapse. The future still seems bright but be wary.

Market Capitalization is just a complex way to say the total dollar value of the coin in the market. It is used to compare the true value of one asset against another within a large market. Bitcoin has a very high market capitalization, without any comparison, we can only conclude that there is a lot of invested interest in bitcoin –  over 100 billion worth.

Good Statistics. Do price trends and other statistics of the bitcoin look promising? Just like the way we can invest in companies with great branding and vision but, if they are not profitable, the price isn’t right or management isn’t at its best – then, you would literally be throwing your money into a sink-hole. Market transparency is important to ensure good statistics are available to traders. The one thing that bitcoin prides in, is transparency.

Easy to understand the business model. Businesses and investment products run simple. This means that they are stable and have a good growth curve behind them as they do not require a lot of learning to grow. In investments, complex models are a sign of fraud, to obscure the investor from the false foundation on which they are built. Bitcoin model is different from traditional investments but it’s simple to understand….you get the idea.

How to Acquire Bitcoins

There are only three ways to acquire bitcoins: mining, buying on an exchange or having someone transfer them to you.

Mining

Miners acquire new bitcoin in exchange for their services of processing transactions and securing the bitcoin network. Mining entails the use of the computing power of specialized hardware which can be quite expensive. As more miners enter the business, the mining business becomes more competitive as miners need to reduce their operating costs to make a profit.

Unfortunately, the expected number of bitcoins to exist is limited to 21 million. This number hasn’t been achieved yet but the creation of bitcoins has been decreasing at a predictable rate – each year the number produced has been halved. In the future, since miners cannot acquire new bitcoins for their service, miners will then exclusively be supported by small transaction fees for their services.

Buy on an Exchange

You can buy bitcoin from an exchange, in the same manner, you can buy any other currency. To pick an exchange, here are some of the factors you will need to consider:

  • Trustworthiness of the exchange. You will need an exchange that does what it says and provides transparent data of coins in cold storage.
  • Compatibility in exchange. What do you have to exchange for bitcoins i.e. KSH, USD, Euro or any other fiat currencies will determine what exchange you choose to use.
  • Security of exchange. Although the bitcoin network has remained secure, many peripheral bitcoin businesses have been hacked. Therefore you need to find a secure exchange to deal with. A good role of thumb is never to leave more coin online than you are prepared to lose because anything can happen.

Below are the top best exchanges of 2017 where you can buy bitcoin and other cryptocurrencies:

  • Coinbase (Since 2012) – This US-based firm offers mobile wallet, offline storage and insurance protection for currency stores on its servers. They have bitcoin, Ethereum, and Litecoin for trade. Coinbase has 1% flat fee for each purchase while all deposits and withdrawals are done without a fee.
  • LocalBitcoins – This is an amazing site that allows people from different countries to trade in local currency. Yes, even in Kenyan shillings. 
  • Coinmama (Since 2013)- Allows money deposits through MoneyGram and the Western Union. This exchange sadly has very high exchange rates.
  • CEX.IO (Since 2013) – Another amazing platform that accepts various forms of payment such as card payments, bank transfers, and crypto capital.
  • Changelly (Since 2016) – Changelly has a wide variety of cryptocurrencies including Monero, Dash, ByteCoin and many more. It also has a mining platform MinerGate, that provides merged mining pools for Windows, Mac, Android and Linus operating systems.  Exchange fees are at 0.5% on transactions.
  • Cryptopia (Since 2014) – Cryptopia has a very low transaction fee of 0.2% per transaction.
  • Bittrex – If you are looking for very fast execution of orders, great security, and stable wallets – this is the website for you.

A few more mentions:

Transfers

You can have someone transfer bitcoins to you as a gift or a payment for service or product.

How to Buy Bitcoin in Kenya

Here is a short summary of the process you will go through to buy and store your bitcoins:

  1. Load your MasterCard/Visa Card/M-Pesa (depending on the platform you are using) with the amount that you want to invest.
  2. Open an account with an exchange of your choice – select the most reliable and secure exchange.
  3. Verify – using ID or any other document requirement the exchange might ask for.
  4. Deposit money into the account you have created with your exchange.
  5. Buy the bitcoin units corresponding to the amount you have in your account.
  6. Get a digital wallet to store your bitcoins.
  7. Transfer your bitcoins from your exchange account to your wallet for storage.

Owing Bitcoin

Bitcoins need to be stored in a “digital wallet” which exists in a cloud or on your computer. It works like a bank account that allows you to send or receive bitcoins, pay for goods or save your coins. It comes with a mathematic key which allows you to create a signature like the one you use on your bankers’ cheques. Each time you make a transaction, the transaction message is fed into a cryptographic function (mathematical key) that creates a unique signature. This signature cannot be copied or reversed because it’s a product of a mathematical function i.e. f(12345)= ?, cannot be reversed to f(?) = 48951.  The receiver of the funds will check the authenticity of the signature to verify the sender.  This system is built on numbers hence the anonymity.

Is Bitcoin Investment Guaranteed?

Just like life, there are no guaranteed investments unless you have serious backing for your investments. There is no such thing as quick money either. Everything is a true test of patience and therefore if you want to start, better start now.

The factors of demand and supply dictate the price of bitcoin and as such, market violability will affect it. Bitcoin has the potential to reach $100,000 in a few years.

Bitcoin (USD) Price

Source: Coindesk

As you can see, bitcoin currently trades a little under $8,000, from about $800, a year ago.

So the real question is, can bitcoin become worthless?

The answer is a big YES! Looking back into history, there have been instances where currencies have failed and no longer been used. For instance, we now have the Zimbabwean dollar and previously there was the German Mark. As you know, these currencies failed because of hyperinflation, which is an impossible problem for bitcoin since the amount of bitcoin in the digital world cannot surpass 21 million bitcoins. However, there is a risk of technical failure, competing currencies, political issues, economic failure and much more.

A Word of Advice

  1. Get data first. Understand bitcoin or any other cryptocurrency before investing and know how it works.
  2. Avoid participating in Initial Coin Offerings (ICOs), particularly the much-publicized ones. They are follies.
  3. Open your account at an exchange and buy your coin of choice such as bitcoin, Ethereum, Neo, Ripple, Litecoin, EOS – whatever tickles your fancy.
  4. Don’t join scam outfits like BitClub Network, BitClub Advantage, Yota etc. These groups advocate that you go through a sponsor or referral. Don’t buy into their bullshit – they capitalize on your ignorance.
  5. Never give money to anyone to buy bitcoin for you through any so-called affiliate.
  6. Beware of collapsing cryptocurrencies such as Ethererum. “Collapse” here means, plunging 50% within a short time and Ethereum has collapsed 52% in four weeks, in the recent past.

Cryptocurrency Tsunami Sirens

The enormous swings in the cryptocurrency world by all indication is a bad sign but not all too different from the other over-hyped investments. The only difference here is that many of us are ignoring the tsunami-sized danger sirens that should make us rethink investing in some of these coins, if at all any of them.

The cryptocurrency market is different from other markets as there are no market makers and liquidity evaporates when selling starts. Therefore, this translates to large amounts of wealth being created every day and disappearing the next. All this happening in the shortest time frame at much higher percentages than other much-hyped traditional investments.

The hope that drives this market as investors seek to recover previous losses puts into question, what will the future of cryptocurrency be like!

Final Words

The price of bitcoin is rising rapidly every day, making it a great investment option for young investors. The average investor usually holds their bitcoin until the value is 30x its initial before selling. Therefore, it is important to buy bitcoin with great understanding and purpose to get the most out it just like you do with any other investment.

Most bitcoin owners are waiting for the day that bitcoin will become mainstream but the older generation remain skeptical of it and believe it will collapse. There is no currency in the world backed or not, that is 100% safe from failure or the effects of hard times. Therefore, it is hard to predict the future of bitcoin but there is always the possibility of the crush of the technology that created bitcoin, provided that big banks and big governments do not crush first.

As for now, bitcoin remains and continues to grow every day attracting millions of investors. Enthusiasts continue to champion it as the future of money, while seasoned investors continue to maintain a healthy dose of skepticism. The bottom line here is the decision lies with you – whether or not it’s worth the wager.

How badly do you want in on a piece of this action?


Further Reading:

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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