10 Questions You Need to Ask Before Investing in Bitcoin
The only way you couldn’t have heard about Bitcoin by now is if you’ve been holed up in a mountain cabin in the middle of nowhere without cell phone reception, without TV, without internet, and without any news programming. It’s the talk of the town, mainly because of its insane trading price.
However, even though most people have become familiar with the term Bitcoin, they still don’t understand what it is and why it has become so huge. This is because it’s a totally new and complicated industry. That’s why I’ve put together a list of 10 questions that will help you understand what bitcoin is, and why millions of people all over the world are getting involved with cryptocurrency investing.
1) What is Bitcoin?
Bitcoins are a form of digital currency, also known as cryptocurrency. There is no physical coin – it can only be found on the internet. It’s based on a new technology called “blockchain” technology, which many people are calling the best invention since the internet.
Blockchains (originally block chains) are basically ledgers that keep track of transactions, such as bitcoin transactions. They do not need to involve financial institutions such as banks, and are therefore decentralized. They allow parties to transfer money digitally faster and cheaper using encryption for security.
Bitcoin is an application or program that utilizes blockchain technology to transfer value from one party to another. You can actually buy goods and services now using Bitcoin. Major corporations such as Microsoft, Overstock.com, and Expedia allow people to pay with Bitcoins instead of using credit cards.
2) What is Bitcoin Mining?
Bitcoin mining serves two purposes. It’s a decentralized computational process that verifies transactions and adds these transactions to a public ledger (blockchain). It’s also the means through which new bitcoins are released. A total of only 21 million bitcoins will ever be released. However, due to computer and human error, some have been lost, so there will actually be less than 21 million.
Anyone can participate in the mining process, but it is unsuitable for most people. The process involves the compilation of recent transactions into blocks and then solving a very difficult computational puzzle. Whoever solves the puzzle first can place the next block on the blockchain and receive newly released bitcoin as well as transaction fees associated with the transactions that are compiled on the block. This process continues until all bitcoin has been released.
3) How Much is Bitcoin Worth?
On December 15, 2017 the value of one bitcoin reached $17,900. Since the price of bitcoin was less than a penny in 2010 – yes, you heard right, less than one cent – you can see why there is such a frenzy in this market right now. If you had invested $100 when the price was just a penny, it could have bought you 10,000 bitcoin. Once the price reached $17,900 your investment would have grown to 179 million dollars. So you can understand why so many investors are chomping at the bit to get in, while there’s still a lot of upside potential.
4) How High Can Bitcoin Go?
Some people are saying it could go to a million dollars per coin (also called altcoin) due to the limited number of bitcoins being mined (added to the circulation through bitcoin mining). Others say that sooner or later the bubble will burst and it will be worth nothing. As with most things, it all comes down to supply and demand. The more people are willing to pay, the more it will be worth. Plus, the fact that major companies such as Subway, Newegg.com, and Microsoft are now accepting bitcoin as a payment option can only add to its longevity.
Another factor in bitcoin pricing could be its cryptocurrency competition. There are over 1000 cryptocurrencies that are trying to get noticed in the cryptocurrency market, some of which have risen dramatically as of late. If investors think they can make more money buying lower-priced cryptocurrencies, they may sell their bitcoin and buy the cheaper digital currencies as a replacement.
5) Why is Ripple (XRP) Beating Bitcoin of Late?
Is Ripple (XRP) the new darling of the cryptocurrency market? It has recently shot up from almost nowhere to become the second largest cryptocurrency by value, behind only bitcoin. Ripple’s cryptocurrency has been adopted by many financial institutions and banks. The reason for this is because they believe Ripple is more secure and less expensive than other digital currencies, and that includes bitcoin. In addition, as Ripple CEO Brad Garlinghouse has said: “Bitcoin takes four hours to settle a transaction. XRP (Ripple) takes 3.6 seconds.”
Ripple allows users to send, receive, and hold any currency (US dollars, Euros, Pounds, Yen, Bitcoins, etc.) through the Ripple network. Their goal is to enable people to break free of credit cards, banks, and other institutions that have long processing delays and hefty transaction fees. It wants to do for money what the internet did for other forms of information. One of the co-founders of Ripple, Chris Larsen, previously co-founded E-LOAN, an online financial company, and is well-grounded in the financial industry.
More and more investors are deciding to put their money into Ripple (which at the date of this writing is approximately $2.00) instead of bitcoin, thinking there’s a lot more upside potential with a cheaper, faster cryptocurrency. After all, if investors want to double their money on bitcoin, the price will have to double from say $15,000 to $30,000. On the other hand, if Ripple is selling for $2.00, all it has to do to double in value is increase to $4.00, which seems a lot more realistic for many investors. If you’re looking for some excitement and want to buy one of the lower-priced, but highly active cryptocurrencies, you’ll want to read our easy step-by-step guide about how to buy Ripple with Bitcoin.
6) How Do You Hold/Store/Save Your Coins?
Cryptocurrency exchanges are online digital marketplaces where investors can buy or sell cryptocurrencies. The most popular exchange is Coinbase, but there are many others including Binance and Bittrex to name a couple. But once you have purchased cryptocurrency on an exchange, is it safe to keep it there? Or should you store your altcoins somewhere else for safety?
A digital wallet is a software program where cryptocurrency coins are stored. Most cryptocurrency is stored in wallets located on the various cryptocurrency exchanges. Each wallet has a unique private key (secret number), which is why you never want to let anyone else know what it is. However, as long as your wallet is online, it’s accessible to hackers. Keeping this in mind, there are several ways to store your bitcoins that may be safer than others.
No matter where you happen to be in the world, online wallets are certainly easier to access. However, they are also more vulnerable to hacking attempts. Desktop wallets, on the other hand, are only accessed on your personal computer, using your own personal security keys, which are stored only on your personal computer. This decreases the exposure of your security keys, but it doesn’t mean there’s no risk at all. You’re still susceptible to hacking attempts if your computer gets infected with malware that’s specifically designed to find your keys and steal your bitcoin.
Paper wallets require a more thorough understanding of how digital currencies work, and can be safe way to store cryptocurrencies as long as very strict security precautions are taken during the initial setup. Generating paper wallets on a personal computer is not recommended because malware on that computer could allow thieves to steal your security keys. Also, paper wallets that are not encrypted can be stolen – they must be kept safe like cash or jewelry.
There are services coming into existence that allow investors to actually buy physical bitcoins. Each coin will have a tamper-proof sticker that covers a specific amount of bitcoin. You will usually need to pay a small premium above the current bitcoin value due to the cost of manufacturing and shipping the altcoin.
Hardware wallets are perhaps the safest way to store bitcoins, so if you’re serious about cryptocurrency investing, a hardware wallet may be your most important purchase. They are external devices, most commonly USB drives, and are more secure than desktop wallets because they aren’t connected to the internet and therefore can’t be hacked. They don’t contain any personal or identifying information that can be leaked. They are impervious to malware, and if you lose the wallet, you can still recover the altcoins using a seed phrase.
The Ledger Nano S and TREZOR hardware wallets are two of the most popular. TREZOR is the oldest on the market and perhaps the most reputable. One of TREZOR’s founders also created the first mining pool for Bitcoin. The Ledger Nano S hasn’t been around as long, but it has been around long enough to develop a considerable reputation. Both are excellent hardware wallets, with the Ledger Nano S priced at less than $70 (USD) and the TREZOR priced just under $100 (USD).
They both use two-factor authentication (2FA) in order to make sure that not just anybody can access the wallet. Accessing the physical wallet requires a PIN code, which only you know. They support many popular cryptocurrencies, but check to make sure the wallet you buy supports the type of cryptocurrency you want to store. Not all hardware wallets store all cryptocurrencies. For example, at the time of this writing, the Ledger Nano S supports Ripple, but TREZOR does not. However, when specific cryptocurrencies become more popular, and their prices shoot upward, hardware wallets will undoubtedly add support for them as well. So check before buying.
7) Is Bitcoin Worth Investing In?
As with any type of investment, you should never invest what you can’t afford to lose. Cryptocurrencies are extremely volatile markets and are not backed by any government entities, banks, or financial institutions. Some analysts are saying that cryptocurrencies are just a fad and that they will all come crashing down at some point in the future.
On the other hand, many people have made millions and even billions of dollars over a very short period of time. Blockchain technology makes it easy, cheap, and fast to transfer money all over the world, and many major companies are using this technology to do business. More and more businesses are now accepting bitcoin as payment for products and services. If you’re interested in investing in this exciting financial market, check out our in-depth, step by step article about how to buy bitcoin. The article also explains how to buy Ethereum and Litecoin as well.
Some say that in the not-too-distant future people will be able to use a “bitcoin credit card” instead of MasterCard or Visa due to the fact that the transaction fees will be far less. So the bottom line is this: cryptocurrencies may boom and bust or they may forever change the way we perform online financial transactions, transfer money, or buy goods and services.
8) What Can You Buy with Bitcoin?
In addition to buying and selling bitcoins as an investment, you can also buy products and services with bitcoin. There are more than 100,000 retailers and businesses worldwide that accept bitcoin as payment for just about anything you can imagine. Microsoft, Expedia, CheapAir, Dell, Overstock.com, DISH Network, Newegg, TigerDirect, and many thousands of others are all accepting cryptocurrency as payment for various products and services. You can also purchase Amazon gift cards that will allow you to buy almost anything. There’s a long list of merchants that accept Bitcoin as payment.
If you’re not sure where to find merchants that accept bitcoin, a good way is to visit aggregator sites and marketplaces that list large numbers of merchants and supporting businesses all in one place. Locating stores in a geographical area is easy on CoinMap.org. They offer a visual way to locate bitcoin stores and are adding new businesses all the time. As cryptocurrencies become more widely accepted as a form of payment, it can only increase the stability of the altcoin market.
9) Is there a Downside to Bitcoin?
The main concern about bitcoin is uncertainty. It has been compared to gold because gold only has value if we give it a value, if we put a price on it. The big difference between bitcoin and gold is that gold is a physical product that you can hold in your hand, while bitcoin only exists on the internet.
In addition to the uncertainty of price volatility, security is also an issue. If your wallet is online, or if you make some kind of error, someone could potentially steal your coins. There are precautions that can be taken to decrease risk, such has using hardware wallets, but there is always risk in any investment.
10) Advantages of Bitcoin
Being able to transfer value from one party to another, anywhere in the world, without loads of paperwork, is one benefit. Transactions for sending or receiving money are cheaper than bank wire transfers, and without banking controls. Plus, the transactions are much faster. With Ripple, a transaction can take less than 4 seconds. Have you ever heard of a 4-second bank wire transfer?
Anyone can use altcoins or accept it as payment for products and services. And since banks are now looking at the idea of improving the speed of financial transactions and lowering transaction fees for their customers, it’s not out of the realm of possibility that this blockchain technology becomes more mainstream in the very near future.
As far as the financial world is concerned, bitcoin specifically, and cryptocurrencies generally, are a whole new frontier. Like the Wild West it’s exciting and volatile, but with that excitement and volatility comes risk. Whether cryptocurrencies and blockchains change the world of finance and take us into a digital money future, or disappear into oblivion is anyone’s guess.
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