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Insights on money, career and trading

Investing in Bitcoin

Posted on October 4, 2017 by Daniel at 5:36 pm

Bitcoin is a cryptocurrency payment system that has been available to the public as open source software only since 2009. It is a decentralized currency that is software-based and was designed by Satoshi Nakamoto. There are no banks involved and no intermediaries involved in buying and selling. The definition of cryptocurrency is that it is a digital currency that employs encryption methods to regulate the units of currency and to verify when funds are transferred. The Bitcoin Foundation helps developers make improvements, upgrades and updates to the currency system, but the basics today are the same as they were in 2009.

Fluctuations in Bitcoin

There is a lot to understand about bitcoin (BTC) before investing in them. To say that the market is volatile and unpredictable would be an understatement. Looking back, we can see that it has been quite active. Between the years 2011 and 2013 the cryptocurrency gained more than 300% in value. After that, it kept the ball rolling and got up to 400%. Although it is not reaching those highs today, it became valuable enough to get hot attention from international investors and venture capital firms. In the first half of 2014, investments by venture capital firms doubled from the previous year. But for the average trader, investing in bitcoin is a unique experience.

Bitcoin Investments

There are online bitcoin exchanges that anyone can join to buy the virtual currency. Each service has its own set of rules, but the bottom line is that you buy the currency and it goes into your virtual wallet. There are also offline services that connect potential buyers with people who are selling. In this case, when you buy BTC, the coins are secured in escrow until the seller can release them to the buyer. However, a high degree of caution and discernment must be used when buying from private dealers. Like other precautions you would take when meeting a stranger, set up the meeting in a well-lit public venue and take a friend with you.

SEC Regulation

The US Securities and Exchange Commission (SEC) ruled that a bitcoin-based exchange-traded fund (ETF) could not be approved because the currency is not regulated. But of course, that’s the whole point with the bitcoin concept. Bitcoin-based ETFs were never intended to be traded on a regulated market. Later, when the SEC announced that it would review its ruling, the currency gained 163% in only four months.

Recording Bitcoin Transactions

When you buy bitcoin, every aspect of that sale is recorded using the blockchain technology. It is actually a type of ledger that is used for certain types of financial transactions. The ledger, which includes every transaction that has ever been made, is publically distributed. At the completion of every transaction, a record is made on a new “block.” After that block has been filled with multiple trades, it goes onto the end of the “chain” and a new block is created to take its place. Those completed blocks remain as a permanent database in the blockchain. Nodes, which are computers connected to the network to verify transactions, automatically has downloaded copies of everything happening in the blockchain.

Buying Direct

Although the concept of dealing in bitcoins was to avoid fees charged by financial institutions, there are still a number of middlemen who handle the transaction and then keep a percentage. There can be charges involved with working with payment networks, payment processors, acquiring banks and issuing banks. Since the system is based on blockchain technology, users were supposed to be able to avoid service charges. You can also buy them from an ATM. Usually this transaction can be done with a credit card, but sometimes only banknotes can be exchanged.

Reducing Risk

When buying bitcoins, the trader or investor needs to understand that the money handed over is not regulated or backed by a government member. This boils down to the fact that it is not regulated or backed by the government. They can’t be traded through Wall Street nor with a brokerage. The way it works is with a bitcoin “wallet,” which ban be an app on your smartphone, or via an email. If through an ATM, it will sometimes print a “paper wallet,” so you can scan it. However you buy the bitcoins, the digital currency goes into your wallet. When the wallet-type account is set up, then you can link it to a regular bank account. Those funds will then be available to you as local currency, through which you can trade bitcoins.

When trading bitcoins, it’s important to keep in mind that the market is not liquid in nature. This can add to the tendency for the market to experience wild swings. With such a new market, it has not been around enough to truly establish itself.

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