Since being released in 2009 as an open-source online payment system, bitcoin has emerged as a disruptive digital technology that forms a new type of digital currency – cryptocurrency – interloping into the area of finance, currency, and exchange. It is one of several in this category termed a cryptocurrency wallet (Ethereum is another). Relative to the bitcoin cryptocurrency, Satoshi (named for the inventor of Bitcoin, Satoshi Nakamoto) is the smallest unit of bitcoin; one bitcoin contains 100 million satoshi.
As described by Bitcoin itself, it is ‘a peer-to-peer digital payment system.’ It is not administered by a central banking group or institution and unlike hard currency – with some attachment to a variation of the gold standard, a currency that is convertible into gold, or U.S. dollar – it is decentralized.
It is unlikely, due to the volatility of value fluctuations (as well as security issues) inherent in bitcoin and cryptocurrencies, that it could ever really be suited as a workaday currency. And as UBS has opined, ‘cryptocurrencies like bitcoin are in a “speculative bubble” and are unlikely to become mainstream currencies.’ So given these influencing factors, according to institutional thinking, evolving practice would be to either speculate on the asset value of bitcoin or use them to shield transactions from others.
Drawing upon the speculative aspect of bitcoin price and emerging cryptocurrencies, and looking to capitalize on it, the U.S. Commodity Futures Trading Commission (CFTC) announced in December 2017 that the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for bitcoin futures products, and the Cantor Exchange (Cantor) self-certified a new contract for bitcoin binary options. Futures, of course, is where the profits and losses of a futures contract depend on the daily movements of the market for the specified contract, and are calculated on a daily basis.
Set-Up the Bitcoin Account
Following below is an outline of the basic steps to set up a bitcoin account and get started with transactions. Following that more detail will be given to aspects of the bitcoin process and ecosystem.
1. Download and/or set up a cryptocurrency wallet. Also known as a digital currency wallet, it can be a downloadable app, or a hardware set up such as a USB drive or other device that enables the trading of bitcoin, keeps track of bitcoin balance and checks the history of the bitcoin price transactions. Cryptocurrency wallets can be obtained from a number of sources, including Amazon if they are hardware setups. Sites to obtain and set up a cryptocurrency wallet are Coinbase, Bitstamp and Bitfinex, and BlockGeeks offers FAQs and guidance on where to get wallets and types of wallets available. Wallets can vary in capability so a thoughtful study may be needed before making a selection.
A really important aspect of a cryptocurrency wallet is the secure digital keys provided by the wallet and used to access a users bitcoin addresses to enable transactions. Two-factor authentication will be part of the setup and it is advisable to use a tool like Google Authenticator rather than just relying on text-based authentication, which can be more vulnerable to cyber theft. Banks and wallets store bitcoins for users either online or on storage devices not connected to the Internet which may be referred to as “cold storage.” Bitcoin wallets come in a variety of forms. There are five main types of wallet: desktop, mobile, web, paper, and hardware.
2. Choose a bitcoin exchange. The place from step one that provided the wallet may also be an exchange, though not all exchanges provide wallets. This is where to set up an account and where to buy bitcoins with funds from a (linked) bank account, debit or credit card. Naturally, there will be fees imposed for transactions. Setting up an account with an exchange in one’s home country is recommended as laws and regulations can vary country to country. Also, selecting an exchange with adequate security protocols is highly advised. Exchanges to do transactions of bitcoin and other cryptocurrencies are numerous. Best Bitcoin Exchange is one, CryptoCoinCharts is another.
3. Be aware that bitcoin is not deposited in a bank but on the transaction device (laptop, tablet, mobile phone) the wallet is used from. An important step and an aspect of securing the bitcoin investment is to keep the private key(s) that is provided through the cryptocurrency wallet, secret and secure and to backup the wallet’s private key and any other credentials for offline storage (refer back to step one). Failing to back-up wallet data could result in the loss of acquired bitcoin holdings if the device on which the wallet is installed is lost or badly damaged (e.g. mobile phones are easily lost or dropped).
4. Proceed with transactions to send (as in making a purchase of something) and receive bitcoin (delivered to your wallet address) using the bitcoin wallet. The transactions are likely to be conducted over the exchange selected in step 2.
A Currency for the Digital Economy?
One very distinctive characteristic about bitcoin currency, in contrast to government or centralized banking, issued currency, is that bitcoin cannot be inflated at will since the supply of bitcoin is mathematically limited to 21 million bitcoins with no provision to be changed.
This cap is expected to be reached in the year 2140. Users must have an Internet connection and bitcoin software to transact or make payments to another public account/address. It is worth a constant reminder for new users if bitcoins end up being lost or stolen, there is almost certainly nothing that can be done to get them back, so backup and safekeeping of the cryptographic keys that accompany a wallet is paramount.
Assuring the underlying bitcoin accuracy, legitimacy, security, and integrity is the peer-to-peer computing process known as blockchain. The blockchain is a distributed database forming a public ledger that records bitcoin transactions as they are completed. Network nodes – usually made up of thousands of computers run by individuals all over the world working on the blockchain – validate transactions, add them to their copy of the ledger, and signal these updates to other blockchain nodes to complete the updating, as each network node stores its own copy of the blockchain.
In other words, a constantly updated copy of the block is given to everyone who participates so that they know what is going on. The goal is to come up with a synchronized account of the chain of ownership of any and every bitcoin amount. From this process bitcoin software determines when a particular bitcoin amount has been spent, which is essential to deter double-spending in a transactional system that is without central oversight, where identities are encrypted, and no personal information is transferred from one to the other. A full transaction record of every bitcoin and every Bitcoin user’s encrypted identity is maintained on the public ledger.
Staying Abreast of Bitcoin and Cryptocurrency News
Finding and reading news about bitcoin or other cryptocurrency is one of the ways to keep abreast of price movements and other trends needed to make buy or sell decisions. Due to its volatility as a disruptive digital technology, and the features of its type of currency platform, bitcoin pricing might be an issue for skittish investors. The sites in the listing below offer current news and live bitcoin price data that cover the emerging field of bitcoin and other cryptocurrencies as well.
- cryptocoins news
- INDEPENDENT – Indy/Tech
- The Cointelegraph – future of money
Redeeming Bitcoins for Goods and Services
Merchants accepting bitcoin ordinarily use the services of bitcoin payment service providers such as BitPay or Coinbase. When a customer pays in bitcoin, the payment service provider accepts the bitcoin on behalf of the merchant, converts it to the local currency, and sends the obtained amount to merchant’s bank account, charging a fee for the service. Yet another aspect of the market in cryptocurrencies is that they only aren’t used only as currency. Bitcoin is also widely used for speculation and can also be used for nonmonetary uses such as timestamping.
Terminology Used in Bitcoin Transactions
Here are some rudimentary terms that help get you started with what you need to know when looking to set up a Bitcoin (or other cryptocurrencies) account, buy or sell your bitcoins or keep them secure.
The Blockchain. The heart of bitcoin is the open or public ledger, called the “block chain.” It is a record of every transaction ever processed since the first bitcoin was “minted.” The Blockchain is a database that allows the transfer of value within computer networks. It is a distributed database that acts as an open, shared and trusted public ledger that nobody can tamper with and that everyone can inspect and add to. The technology facilitates a shared understanding of value attached to specific data and thus allows transactions to be carried out. Miners, which are members of the general public using their computers to help validate and timestamp transactions, then adding them to the ledger, are the backbone of the Blockchain system. Miners have a financial incentive to maintain the security of a cryptocurrency ledger as they accrue stakes in bitcoins in return for their services.
Cryptocurrency. Cryptocurrency or virtual currency is a means of payment that is electronically created and stored, or more specifically an unregulated electronic medium of exchange that operates like a currency but is created and controlled by computer software. It can also be termed digital currency. One unique aspect of cryptocurrencies is that they are designed to gradually decrease the production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. Virtual currencies generally are not backed by a national government and are not considered a legal tender, although they may be gaining increased acceptance by merchants (most notably Microsoft) and banks and society as a whole.
In some intellectual quarters overseeing monetary policy, cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. Bitcoin, created in 2009, was the first decentralized cryptocurrency, and at the time of this writing the leading cryptocurrency in circulation. There are bitcoin ATMs installed throughout the world with more being added each day. Other cryptocurrencies that have emerged since bitcoin can be referred to as altcoins. Other altcoins that were inspired by Bitcoin and now compete with it include, Litecoin, Ethereum, Zcash, Dash, Ripple, and Monero, to name a few.
Digital Currency Exchange. Also known as cryptocurrency exchange or bitcoin exchange, the exchanges that handle cryptocurrency (as opposed to stock and bond trading) are websites where you can buy, sell or exchange cryptocurrencies for other digital currency or traditional currency like US dollars or Euro. They are known to come in certain specialty – Trading Platforms, Direct Trading, Brokers. When shopping for an exchange, consumers need to ask questions regarding reputation, fees, payment methods, verification requirements, geographical restrictions, exchange rate. Some exchanges (Coinbase for example) have a feature to acquire and set up the cryptocurrency wallet, but most do not.
Some exchanges don’t act as an intermediary between traders and instead only allow users to buy and sell Bitcoin and other digital assets at a fixed price from the exchange itself. To store bitcoins and other digital assets, exchanges use a combination of hot and cold storage systems. A hot wallet is a storage system connected directly to the internet, which includes all the keys required to sign transactions. Hot wallets are convenient and necessary for real-time withdrawals and transactions but can be vulnerable if the server upon which they reside is subject to attack by hackers. Normally, security rating and reputation are one of the features customers searching for an exchange to conduct transactions on will want to inquire about.
Wallet. A wallet stores the information necessary to transact bitcoins or other cryptocurrencies also known as “keys.” Since what really happens with a wallet is that it stores the digital credentials for the bitcoin holdings, it can also be referred to as a digital currency wallet. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated.
Although there are several types of wallets, a quick categorization includes software wallets which are further split into Full Clients and Lightweight Clients. Aside from Software Wallets, Physical Wallets can include a hardware wallet that takes credentials offline while facilitating transactions, and Paper Wallets that are simply paper printouts.
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