Bitcoin is currently on everyone's lips. The popular cryptocurrency is recording constant growth on average, despite all the negative forecasts. But what is the reason for the remarkable success of the digital currency and what exactly is Bitcoin? With these basic questions, this article is aimed at interested parties and users who are planning to acquire Bitcoin themselves. Whether you are planning a large or small investment in the cryptocurrency, our relevant guide will provide you with the most important basic knowledge.
First, we will answer the question of how a cryptocurrency like Bitcoin works. After that, you will learn how you can get your hands on Bitcoin. Finally, we will show the advantages that make up the special quality of Bitcoin and set the cryptocurrency apart from traditional fiat currencies. In particular, the high security standards are brought to the fore.
Why invest in Bitcoin?
Before we get into the details, though, we'll ask why Bitcoin might be of interest to you in the first place.
The question is quickly answered: Basically, two types of Bitcoin users can be identified. The first group appreciates the cryptocurrency due to its practical properties as a means of payment. Particularly in the digital field, Bitcoin stands out as a fast transaction option with high security standards and thus enables flexible and unhesitating shopping on the Internet.
The second group is less interested in the practical benefits of the cryptocurrency, but rather in its value. Thus, Bitcoin records an extremely high market capitalization and has proven to be a solid value investment with great growth potential. For this reason, trading with Bitcoin also enjoys great popularity.
No matter which group you belong to, the basics in dealing with Bitcoin are interesting for both, which is why this article is worthwhile for you anyway. To give you a quick overview, here is a small overview with the most important advantages of Bitcoin:
- Fast Transactions
- Secure payment on the Internet
- High anonymity
- Potent value investment
How does Bitcoin work?
The way Bitcoin works, like most other cryptocurrencies, is based on blockchain technology.
Basically, a blockchain represents a shared data registry that is immutable. Each individual transaction represents a "block" in the chain that contains all the data of the movement. This block of data is linked to the previously chained blocks.
When further transactions are made by other users, they are also added as further links in the chain.
On this basis, a shared and common data network is created, which has an exceptionally high level of security . The security standard is based on the fact that each individual data block is irreversibly linked to the surrounding blocks. This makes each individual block impossible to tamper with, as the entire data structure grants for the correctness of the data set.
How to buy bitcoin?
However, in addition to the underlying blockchain technology, there are many other elements that shape how cryptocurrency is used.
One of these aspects is the purchase of Bitcoin, the important first step into the world of cryptocurrencies. The path to your first own coins usually leads to a cryptocurrency exchange (e.g. Bitpanda) or a broker, where you can buy units of cryptocurrency for your fiat currencies. However, you should make sure that the exchange rate is as cheap as possible. Conveniently, most exchanges provide you with a large selection of transaction options with which you can make your deposit. For example, online payment service providers such as Paypal can often be used for transactions. Alternatively, it is recommended to have your credit card ready for the purchase. Credit cards also guarantee fast and secure transactions.
Secure storage options for Bitcoin
But not only the purchase of Bitcoin follows specific patterns. The custody of the purchased coins also requires a certain service. This is the use of a crypto wallet - a digital wallet where your received Bitcoin are stored and kept safe for you.
There are many different providers for wallets with different service offerings. Sometimes crypto exchanges also offer their own wallet, which is particularly convenient.
The basic principle of a wallet is based on the generation of keys. There are two types of keys, public and private. A public key is similar in function to the IBAN of a bank account and identifies the user's wallet. A private key, on the other hand, is the access authorization for your wallet. It works similar to a PIN, with which you can access your cryptocurrencies.
More modern wallets make additional use of innovative key generators, which create a large number of different keys as needed. This feature considerably increases the security level of wallets because each key can only be used once and is then invalid. This mode of operation is reminiscent of the TAN procedure, which also provides temporary PINs.
Regardless of this basic mode of operation, a wallet can take very different forms, all of which have their own advantages:
A software wallet is a specially developed application that must be installed on your device.
With an online wallet, your data is secured on the provider's website. An example of this variant are the wallets offered by cryptocurrency exchanges.
Hardware wallets are a very interesting solution for Bitcoin storage. As the name suggests, it is not a purely digital application. Instead, you receive a physical device from the provider that generates keys offline. This variant is particularly secure, as hackers cannot gain access to the offline wallet in this way.
The only problem, although very rare, would be technical failure and damage to the key generator.
Paper wallets are generally considered the most secure option. The provider prints both the public and the private key on paper, often in the form of a QR code, and makes it available to you. This variant of Bitcoin security is not only protected from hackers, but also from technical failure. The only important thing here is that the paper is kept safe. If you plan to keep the key papers for large Bitcoin assets safe, even buying a small safe would be advisable.
Bitcoin offers high anonymity
In addition to the numerous security measures, anonymity is another factor why Bitcoin has proven to be a popular digital payment method.
The anonymity is also related to the way the crypto wallet works. Since transactions are processed exclusively with the generated public keys, outsiders cannot deduce the real address and other personal data of the user.
This is an enormous advantage compared to conventional payment methods, such as bank transfers. With these, the IBAN is directly linked to the name of the account holder, which also makes it possible to find out the user's address.
Bitcoin as an investment
The previously discussed aspects mainly focused on the use and functionality of Bitcoin as a digital means of payment. However, the second major area of application of the cryptocurrency should also be discussed at this point.
We are talking about trading and investing in Bitcoin for the long term. After Bitcoin was considered an exotic development in 2009, the cryptocurrency has turned out to be a real stock market miracle in the last 14 years. In the meantime, Bitcoin, as the pioneer of cryptocurrency, has become an indispensable part of daily economic life.
It is noteworthy that the price of Bitcoin has always grown on average despite some price drops. For example, the cryptocurrency reached a value of over USD 29,000 at the beginning of the year.
The two price drops in 2014 and 2018 are striking. One mistake that many investors made at these times is to react hastily to the price change and sell their coins.
The error becomes apparent when you take a look at the respective following year (2014 and 2018, respectively). As you can see, by the end of the following year, the bitcoin price had already recovered to a level that was even stronger than before the price collapse.
The development of the share price can also be seen very clearly in the following chart:
The aforementioned slumps in 2014 and 2018 are clearly recognizable. However, the rapid recovery of the price is just as clearly recognizable. Accordingly, investors who hastily or reactively liquidated their Bitcoin portfolio are likely to be annoyed.
All investors who have held on to their Bitcoins should have seen lucrative gains from the price recovery.
Conclusion: Bitcoin as a future-oriented transaction method and value investment
So, taking all the information together, Bitcoin offers strong advantages for different types of users. If you want to use Bitcoin as a payment method, you will benefit from fast transactions, a high degree of anonymity and a generally extremely secure payment system.
This way, you are well prepared to shop on the Internet without always having to worry about sensitive data loss.
In its second function as a store of value, Bitcoin has already convinced in the past with its potent growth and fast recovery from price drops. So, if you want to start trading on the stock market, the famous cryptocurrency is a lucrative part of your portfolio.
Fortunately, entering the world of cryptocurrencies is also quick and uncomplicated. Basically, you first need to set up a budget and clarify the question of how much you want to invest.
It is then important to choose the right wallet. You should ask yourself how important it is for you to physically store your keys. On the other hand, it could also be a practical advantage to use a wallet that is offered directly by a cryptocurrency exchange.