Bitcoin is a digital currency that is changing the way people think about money. Well, it’s changing the way people who understand it think about money. Bitcoin is a bit confusing, and getting started trading bitcoin can be a daunting task.
In this article, we will dive into the world of bitcoin and blockchain. We’ll explain these topics, and show you how to get started trading in digital currencies. Finally, we’ll get to some frequently asked questions. By the end of the article, you should be ready to confidently enter the world of bitcoin.
Understanding Bitcoin and Blockchain
Bitcoin is a digital currency. It functions much like traditional currencies, in that it can be used to buy goods or services and has a value assigned to it.
Unlike traditional currencies, bitcoin exists only in the digital realm. While some “coins” have been created (you’ll see one in the photograph at the top), they’re purely symbolic and do not carry value like traditional coins.
Bitcoin refers to two different things. There is the actual digital coin itself, which is referred to as the bitcoin digital asset, or BTC for short. There is also the bitcoin network, which is what powers bitcoin, creates new coins, and gives the coin its value. This network is a blockchain.
A blockchain is a way of organizing online transactions. It’s called a blockchain because that’s how it’s helpful to visualize it: a connected chain of “blocks,” or packets of digital information, all connected to each other in a row. Each one of those blocks has information about transactions that have occurred in the bitcoin currency. These blocks are secured using high-powered cryptography. (This is why digital currencies are often called cryptocurrencies.)
A Simpler Explanation
The most helpful way we’ve found to understand blockchain is to compare it to the way traditional banks work. Say you’re using a traditional bank, and you want to transfer money to your landlord to pay rent. You’d write her a check, then the bank would take that money, deplete it from your account, then, eventually deposit it into your landlord’s account. This would happen over the course of a business day or two.
In blockchain, there is no banking middle man. New blocks in the chain are sent out every 10 minutes, and the transactions are instantly processed, directly, from account to account.
Bitcoin was first conceived by someone who used the name Satoshi Nakamoto — there are still doubts about his or her real identity — who wrote a whitepaper that described the basic theory behind bitcoin and blockchain technology.
How the Bitcoin Market Works
The bitcoin market is a blockchain network (and most likely the first blockchain network).
The market carries bitcoin transactions, allowing people to buy things, or trade currency, right in the network. It also tracks all bitcoin transactions and keeps them recorded in a digital ledger.
This all sounds like traditional markets, right? You might be asking: What separates the bitcoin market from, say, trading forex?
The big differentiator is the fact that no people control the bitcoin market. There are no business hours, no market closing. The blockchain is designed and protected by cryptography to make sure that no one can ever change it or hide transactions. It’s totally autonomous.
The bitcoin market is designed to create exactly 21 million bitcoins (it hasn’t reached that mark yet), carry transactions, and keep a record of every transaction. That’s it.
For believers in blockchain, this is a more democratic approach. The blockchain can’t discriminate against certain people or suspend trading to help stabilize the market. It’s on its own. This makes it exciting but also risky.
How to Start Trading
You’ve learned about digital currencies and now you want to get in on the fun. Here’s how you start trading.
1. Learn About Different Currencies
Bitcoin is just one of many virtual currencies available to trade. There are thousands of other coins, or “altcoins,” with their own markets and values. Many of these cryptocurrencies have relatively stable markets and trade at over $1 USD. But plenty more function more like penny stocks. These smaller coins have extremely volatile markets and carry a high risk. We’d recommend sticking with bitcoin or a more established altcoin, like Ethereum and Litecoin, to start.
2. Open an Account on a Brokerage Site
Brokerage sites function as trading platforms, which give you access to different cryptocurrency markets.
Coinbase is a popular and trusted cryptocurrency exchange and is especially popular with beginners who are just getting into trading. It’s available on iOS and Android devices. (Here’s a sign-up link to get a free $10 in bitcoin once you trade at least $100 with the platform.)
Coinbase at once acts like a digital wallet, keeping your currency in one place, but also gives you access to a digital marketplace. In this marketplace, you can buy and sell bitcoin or other popular cryptocurrencies.
Another platform is the Global Digital Asset Exchange (GDAX), which used to be called the Bitcoin Exchange. The GDAX is a more powerful platform that allows more advanced trading. There are also plenty of other brokerage apps, though, including Blockchain Wallet, Gemini, HiWallet, and more. Some traditional investing apps let you buy and sell bitcoin as well.
3. Fund Your Account
Once you’ve created a trading account, it’s time to fund it. Most platforms allow you to deposit money either through a bank account or a debit or credit card. Bank accounts tend to have higher limits than debit and credit cards. Many apps also give you the ability to get money deposited into your PayPal account.
4. Buy and Sell Bitcoin
It’s time to buy bitcoin. Trading cryptocurrency is as simple as purchasing digital coins and then following the market. Many apps allow you to enable real-time updates and alerts to let you know when a value fluctuates in a major way.
While exchanging digital currencies on the blockchain is free, Coinbase and other apps will usually charge a small fee to transfer money in or out of the digital realm.
5. Be Patient
It might take a little time, but soon you’ll develop your own bitcoin trading strategy. One piece of advice: Be patient in the short term. Digital currencies are volatile, which means they can be exciting in the world of day trading. But that also comes with serious risks, and as an emerging marketplace, it’s sensitive to regulations, changes, etc.
For example, in 2017, the price of bitcoin went from $2,983 to $1,992, then back up to $4,764 … in the span of four months. And that’s the most established digital currency.
To start, be patient. Take your time. Don’t fall into the trap of trying to ride every wave.
Frequently Asked Questions
We’ve covered bitcoin, the blockchain, and how to get started trading bitcoin, as well as other digital currencies. Let’s get to some frequently asked questions.
1. Why does anyone buy bitcoin?
Bitcoin has two functions for people who want to invest in it. For one, it can function much like traditional money can — you can store bitcoin cash in a bitcoin wallet, and use it to pay for things online. Not too many retailers accept it yet, but plenty of places online take bitcoin.
2. What is bitcoin mining?
Bitcoin mining is bitcoin’s way of incentivizing the power needed to keep the network going. While the blockchain is an autonomous thing, it does need network space to run, and electricity to keep computers running the lines of code that protect each block.
To make this possible, bitcoin invented the concept of “mining” — much like you would mine for gold or silver back in the day. Instead of digging, however, people are rewarded in bitcoin for giving up their computer space to help run the network and for generating the massive lines of code needed to run the advanced cryptography that protects the blockchain from hackers.
3. What are limit orders?
Limit orders are a helpful tool on digital trading platforms that let you automatically set a sell order whenever a currency rises or drops below a certain level. People can’t monitor these markets 24/7, so limit orders let them set parameters where you feel comfortable, and let you get out of (or into) a market exactly when you want.
Trading in the Digital Currency Marketplace
Bitcoin takes a traditional concept — currency — and gives it an update for the 21st century. Some people believe it will replace all currency eventually. Others view it more as a fun way to diversify a portfolio and try to grow their wealth in an interesting new market.
Either way, cryptocurrencies are here and established. To start trading in these markets, it helps to understand how it all works. Having read this article, you should have a solid foundation to get started. Have fun out there.