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Bitcoin For Beginners
11 August 2017 | Natalie Mayer
 


What is bitcoin?

Bitcoin is essentially a type of digital currency. Specifically, it’s a cryptocurrency - a digital asset that works like currency (as a medium of exchange), but which uses cryptography to secure transactions and to control the creation of more units of the currency.

In this way it is different to normal currencies, whose value can be controlled by the will of a country’s government (e.g. printing more bank notes, which deflates the value of a currency). In fact, bitcoin supply is mathematically limited to 21 million bitcoins - this number will be reached in 2140, and can never be altered.

Bitcoin was created by an anonymous programmer (or possibly group of programmers) under the pseudonym Satoshi Nakamoto, and released as open-source software in 2009. It does not belong to one country, nor does it have a single administrator, but is a decentralised cryptocurrency.

Perhaps the greatest advantage of the bitcoin system is that it allows anyone to send or receive any amount of money to or from anyone else, anywhere in the world, easily and without restriction.

How does it work?

Transactions take place directly between users, there is no middle man. They are verified and then recorded in a public distributed ledger (basically an accounts book stored across multiple computers) called a blockchain. The fact that the ledger is public and distributed helps to achieve independent verification.

How do I get bitcoin?

You can buy bitcoin, be paid in bitcoin, exchange other currencies for bitcoin, or mine bitcoin.

At time of writing (August 2017) one bitcoin costs USD 2,736.92, or about R38,890.00. Bitcoin is received, stored and sent using software you can download for free, called a bitcoin wallet.

A growing number of sellers and online merchants accept payment in bitcoin (in 2015 there were already over 100,000 sellers accepting bitcoin), and in 2017 there are about 5.8 million unique users with a cryptocurrency wallet, most of them bitcoin.

Bitcoin mining is the adding of more bitcoins to the digital currency system. Anyone is allowed to mine for bitcoin, but it now requires significant investment into expensive computer hardware, and most people now join mining pools in order to have the best chance of success. Mining is done by getting computers to calculate complex mathematical equations, which get more difficult and require more resources as time goes by and the supply of bitcoin increases. The calculations are in fact the processing of transactions on the bitcoin network and securing them into the blockchain (in other words, adding them to the public ledger). You are then rewarded for your computer’s efforts with bitcoin, as the calculations make your computer part of the bitcoin network, and help to secure it. Each set of transactions processed is referred to as a block. The blocks are added to one another to create the public ledger - hence the term blockchain.  The current mining reward is 12.5 bitcoins per block. The mining reward is linked to a difficulty rating: when more computational power joins the bitcoin network, the difficulty rating goes up - and vice versa.

What about privacy and the black market?

Although all transactions are public, bitcoins are not tied to real people or organisations, but rather to bitcoin addresses. This is to keep the financial information of bitcoin users private. In this way, bitcoin resembles the anonymity of cash, while still retaining some of the traceability of credit card transactions.

The problem with this privacy, of course, is that it can hide criminal activity. Criminals can use bitcoin to purchase illegal goods. In 2014, Wilson and Yelowitz, researchers at the University of Kentucky, found "robust evidence that computer programming enthusiasts and illegal activity drive interest in bitcoin, and find limited or no support for political and investment motives." Bitcoin companies have also struggled to open traditional bank accounts because banks are concerned about the connection between bitcoin and illegal activity. However this is changing slowly; there is a growing interest in investment in bitcoin, and more and more banks are beginning to allow bitcoin companies to open accounts.

Why should I care about Bitcoin?

Although suffering from rather extreme levels of volatility (seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the US dollar, according to Mark T. Williams, presenting at a World Bank conference in 2014) bitcoin is proving to be a lucrative investment for those with the ability to hold fast through turbulence.

SA researcher, trader and author Dwaine van Vuuren comments: "Bitcoin can easily move 20% up/down in a single day. So it’s far more volatile on a day-to-day basis, and as we saw in [May 2017], moves of 50% per week can be common."

Bitcoin prices and volume from inception to present:

image1

Source: Bitcoincharts.com

Yet the returns could be well worth the stress. Since January 2017, bitcoin has provided a whopping 190% on investment, while the JSE only offered an 11.57% return:

Bitcoin returns vs. JSE returns: January 2017 to present

image2

Source: Sharenet Analytics

Read next:

Bitcoin Mining: An SA Perspective

Bitcoin Brings Out Better Investor Behaviour

Watch:

Video explaining Bitcoin in 3 minutes:

https://upload.wikimedia.org/wikipedia/commons/1/12/Bitcoin_explained_in_3_minutes.webm

Useful links:

Sharenet’s cryptocurrency page: http://www.sharenet.co.za/v3/crypto.php

Official Bitcoin site: www.bitcoin.com

Wikipedia: https://en.wikipedia.org/wiki/Bitcoin

cta


natalie

Natalie Mayer
Editor

Natalie Mayer is an independent writer and editor with 12 years’ experience. She has a B.Com in Economics (UCT) and a Master’s in Sustainable Development (University of Stellenbosch) and has worked for a number of high-profile clients, such as the United Nations Educational, Scientific and Cultural Organization (UNESCO), Nedbank, the Sustainability Institute, Counterpoint Asset Management, Pearson Education, and of course, Sharenet - to name a few. Natalie has written and edited research papers, textbooks, print and online articles, and website content on a vast array of topics, including finance and money matters, education, property, social and environmental issues. She is passionate about communication that meets the needs of the audience, and her particular strength is to bring clarity to text.


Disclaimer:
The information contained in this article is for informational purposes only and must not be regarded as a prospectus for any security, financial product or transaction. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial issue. Investors should consider this research/article as only a single factor in making their investment decision. We recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs.

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