What IS Bitcoin?

What is Bitcoin?

You’re likely here to learn about investing in cryptocurrencies. I’m not a financial advisor. I’m not recommending you invest. In fact, cryptos are "new-ish"; not insured; and not backed by a tangible asset in most cases (like the dollar bill). I’m simply sharing my experience.

You have to have read my article "What is the Blockchain?" BEFORE you read this - or you will not completely understand where Bitcoin came from and why it's not going away. Please go no further here if you haven't.

Here are two rules I live by when thinking about an investment....

Rule #1. Don’t invest more than you are willing - and can afford - to lose!!
Rule #2. See Rule #1.

In summary, Bitcoin (BTC) is a worldwide, decentralized (no direct government control) currency - or "trading medium". There are many valid concerns and strong skepticism that could keep you from getting into Bitcoin or any other cryptocurrency or token. Since Bitcoin is a currency, I'm going to draw parallels and comparisons to traditional currency and trading mediums to make it easier to understand for those who don't know anything about it.

Q. From an investment perspective, why would anyone want to get into something that's very new, not government regulated, and isn't proven as stable?
A. BTC has been around for 7 years. Those who had shares in the beginning and held them for a few years are multi-millionaires at least. So, it's only new to some of us. I've only known about it for less than a year. Those who were aware of the technological brilliance of the Blockchain got into Bitcoin - since there was no way to invest directly in the Blockchain. I did my due diligence and learned about the Blockchain. Now, I'm a believer in the Blockchain. Not being government regulated is actually a good thing - when you think about how much control the governments have over our currencies. They manipulate the dollar - thus making it "not a free market". Do you think stocks are "stable"? No, so the stability concern is not valid. As an investor, one has to protect themselves against instability or take advantage of it. If you don't have good systems of protection, strategy, or are carelessly investing in things you know nothing about - then you will suffer losses more than someone who does their due diligence. Remember my "Rule #1" above? One of the beauties of investments that fluctuate is that one can invest smaller amounts with greater returns.

Q. What makes Bitcoin a valid currency?
A. Ask yourself what makes gold, silver, or the dollar a currency? Ultimately, the answer is "whatever the majority of the consensus of people accept as currency." It is agreed upon that a certain medium shall be deemed worthy to trade with. Before gold, people traded goods (food, colored beads, furs). Hauling all that around was cumbersome. Also, you had to find someone with a specific need for your item. It would be kind of like going to a foreign country with your US dollar and trying to find someone who was interested or had the ability to trade with you - only worse. When gold (or other coins) were starting to be used as currency, people could just go to one place (a market), buy what they needed - and leave. It was a lot easier. But what if you wanted to buy something really expensive - like a home or property? You'd be carrying a heavy load of gold - and be at great risk. That's when different denominations of small, portable currency (both coins and paper) - were introduced. A government produced them, distributed AND TAXED them. It was a solution in portability. Fast forwarding to the 1800's, the US government (and other countries) started issuing paper dollars - which used to be called a gold note or silver certificate. You could trade your paper in for gold or silver. However, the paper money was backed by that amount of precious metal. At some point, the US government outlawed the ability to own physical gold. WHAT? Yes, you were required to turn it in. That is no longer the case today. Also, the US government needed more dollars than it had gold or silver - so it removed the "silver certificate" from the paper dollar. So, you cannot redeem your dollar bill for that because the dollar is not backed by anything of value. It's just paper. You can burn it to keep warm. But if things go catastrophic, it's worthless. For now, we can buy anything with it. Your cash is in the bank? Yes, but only on a ledger that they keep. A bank does not actually have all the cash that their customers "own". So, it doesn't exist. Bitcoin exists only on an electronic ledger. It's not backed by anything other than demand. It's only accepted as currency because so many people agree it should be. Sound like a dollar? Maybe, but here's the BTC advantage: It's the most widely accepted currency on earth now. No government can take it from you - unless you live somewhere they can see the records that you allow the transactions to be tied your name or bank account.

Q. Can it be taxed?
A. The IRS and SEC are scrambling to tax your gains on Bitcoin. Early millionaires flew under the radar, but not anymore. Coinbase (the exchange) is now required to perform KYC (know your customer) procedures and keep records. Other BTC exchanges either refuse to do business in the US, or are forced to comply and apply for approval. I was surprised a couple weeks ago when Coinbase required my last four social and what I did for a living! This is the case when you use a US based exchange (Coinbase, Gemini) and use your bank account or credit card to buy and sell it. You have a choice not to tie to your account or name. That's NOT easy, which would kill a lot of the "convenience factor" for most. BTC and your wallet exists on the Blockchain as a number. Like cash, if you hand it to someone, nobody would know - unless you allow the trail of transactions. There are many articles out there on how to avoid tracking. However, the IRS and SEC are keeping tabs. Ultimately, I figure the possible gains from this new "thing" are worth paying some tax on. I also think that even if you went to all the trouble to cover everything - but got audited - there'd be some flags you'd bet the Feds would notice. See Rule #1... and be prepared to pay if you don't report gains.

Q. What if the Internet goes down?
A. If the internet goes down in the US temporarily- all transactions and "wallets" are already stored on the Blockchain worldwide. In that case, as soon as it came back, you'd be restored. If the entire world loses the internet- we will lose all of our traditional currencies located on bank ledgers anyway and that would be the end of modern civilization as we know it. Your 401k would be gone. Nothing is held in paper notes for stocks, etc. ATMs would not function and airlines could not operate. At that point, you'd better have gold, silver, fuel, water and food stockpiled. If you're not a prepper, then you've got no business worrying about the internet going down. Not a valid argument, unless you're a prepper. However, an example of a valid reason to ALWAYS have some cash is exemplified by the hurricanes that devastated Puerto Rico and the Southeast recently. They found themselves without power, internet and cell phones. So, you still need a backup "fiat" currency (dollars). "Temporary" can mean months - depending on where you live.

Q. What if the government doesn't allow BTC to be held or traded?
A. This will not happen. There's too much potential tax revenue to be gained and already being gained. Also, look at the legalization of marijuana. Why did the states legalize it? Because they can tax it! Don't fool yourself into believing they did it because they feel sorry for those who use it for medicine. It's legal for recreational use in many places too. While it's still not legal federally- pot will be at some point. To track all the transactions of BTC isn't possible for the IRS or SEC. So, the best they can do is impose rules, try to classify it as an asset and tax it. We already know it's going to be officially accepted because there are already hedge funds and ETFs on track for introduction.

**Investment Note: Both Russia and China have been playing this game with BTC and coin ICOs (initial coin offerings). They will release a statement about how they are going to disallow ICOs, exchanges, or regulate BTC - then turn around and say they think it's "ok". This creates a very predictable cycle. For example, China did it at the first of September, 2017. In a couple weeks, BTC went from about $4800 per coin, down to about $3500. Two weeks later it rose back up to $4800 again. Now, it's hovering around $6000. The Russians did it earlier in the year. I have taken advantage of this. I'm not saying you should. I'm pretty sure the people at the top in many governments are pulling these stunts. This resilience has solidified my understanding of the currency. Patterns cannot be ignored.

Q. What if Bitcoin crashes?
A. Rule #1. Don’t invest more than you are willing and can afford to lose!!
Ask yourself: What if the stocks collapse? As an investor, common sense dictates not to have all your eggs in one basket. Every financial cliché applies. Diversification is the key to limiting MY losses. But it's up to you - since I'm not giving financial advice one way or another. I don't have more than 4% in any sector. I consider cryptocurrencies a sector and stick to my plan. If you've held any stock from a company that has gone bankrupt, then you know they are not impervious to disappearing into thin air either. So, no - BTC isn't any more likely to disappear than a stock and is as likely to crash. In fact, my personal opinion is that the BTC will crash along with the stock market next time the market tanks. That's just due to fear though. I believe people are so hyped up on emotion and greed with the market right now, that they will react the same when things get worse.

Q. What if Bitcoin is hacked?
A. BTC cannot be hacked. If you read my Blockchain article, you know that the transactions are all independently verified and encrypted by separate nodes around the world running the same algorithm. If a "malicious" block that was entered to chain the "chain" - these nodes would detect that block and reject its processing. You also can't counterfeit BTC. BTC is created through proof of work and "hashing". The hashing produces multiple strings of numbers that are verified to never have existed among the Blockchain network. It's a trail that cannot be corrupted without detection and rejection.
HOWEVER, your "wallet" can be hacked if it's online. A phone or computer based wallet CAN be hacked through keystrokes or screen capture. An online exchange can be hacked (and some have). Your offline hardware wallet can be stolen (but can't be used unless you left it with your code). The hardware wallet (Trezor or Ledger Nano S) CAN be replaced and restored with a key of words you stash in a safe place OFFLINE. Lots of info our there on "wallets" and security. Bottom line is don't keep a significant amount of coins or tokens on an exchange like Coinbase, Gemini, or Bittrex. Best to use a hardware wallet. Ultimately, you're responsible to keep your BTC safe just like anything else you own. Also, always use two-factor authentication if a website offers it. BTC is no more exposed than any other asset if you fail to protect it.

Q. How is Bitcoin created?
A. This is the hardest thing of all to explain. If you're not a computer programmer- then don't stress over the mechanics of it. Just realize BTCs value as a currency, its security, and that you can use it like money. A special computer, called a "miner" runs a mathematical algorithm to hash out and verify transactions. Together, miners have to solve equations and verify them within the Blockchain network. Usually many miners are working together (a mining pool) on a block. They have to produce a certain amount of computational "work" - then they get "rewarded" for the work in the form of a Bitcoin. Yes, a Bitcoin is just an bunch of numbers on a computer, on a computer, residing on the Blockchain - just like the dollars in your bank account on their computer. Remember, the Bitcoin was the first useful product of the Blockchain that could be shared among people all over the world. Just like email and websites were the first to be shared from the internet. The Blockchain is the "Internet 2.0" and is just getting started. BTC is a way to get a piece of this "new thing".

Q. Why can't more Bitcoin be arbitrarily created, like the dollar?
A. When Bitcoin was launched, "the group" of people agreed to limit BTC to 21 million coins. The code used was an open source so that no one person could manipulate it. The algorithm used to create BTC contains a set of rules. The BTC Blockchain allows only 21 million coins to be created. Other coins don't have this same cap. This helps BTCs value. Since the Blockchain isn't run by a specific group, it can't be changed. Only about 16 million have been created this far. The software on the nodes have already been distributed and will not change in regards to the cap. You've possibly heard of "forks" taking place (or not), resulting in new "protocols" or security changes. These forks didn't create BTC 2.0, they created a totally different coin (I.e. Bitcoin Cash - BCC; and soon Bitcoin Gold). But the original doesn't change. Unlike the dollar, BTC doesn't have some government printing more at their whim. Countries have destroyed their own currencies, discontinued and revoked them. Zimbabwe walked away from its currency and picked up the dollar. Venezuela's currency is worthless- causing most to turn to BTC. India announced that their currency was going to have to be turned in for a new currency. BTC is not subject to one government or country's failures. Japan has decided to accept BTC as a valid form of payment.

As a currency, if you look at BTC, compare it's advantages to all other currency in a modern view - it is superior. There is value in that. If a meteor hits earth- of course BTC is going to fail. That's one thing about the dollar bill - at least you can burn it to keep warm!

As an investment for me, I consider it to be as good as any. It's possible that it will bubble just like stock. It's possible to lose value just like any asset. It's possible to make me wealthy like a penny stock. But ultimately, I'll stay diversified.

Hope this helps!!!

Coinbase - buy & sell Bitcoin:
https://www.coinbase.com/join/58ca0680a0df0701e213780b

NiceHash - Bitcoin mining:
https://www.nicehash.com/?refby=472276

All of my articles on SteemIt:
https://steemit.com/@sporte77