Questions

1. Why are Bitcoin transactions difficult to fake?

2. What is the reason many people think the price of Bitcoin will continue to go up?

3. How are Bitcoins used?

4. What is a blockchain?

5. Anyone can edit the blockchain. Isnt it risky? Explain what makes blockchain so secure despite the fact that anyone can edit the blockchain.

6. What is Bitcoin mining? How are new coins created?

7. Is Bitcoin an investment or a speculation? Explain your answer. If someone really wants to buy Bitcoins, how much should he put in?

ARTICLE BELOW (use for questions above)

What is Bitcoin and How Does it work?

Kate Ashford and Benjamin Curry [Forbes | April 19, 2021]

Not only is Bitcoin the first cryptocurrency, but its also the best known of the more than 5,000 cryptocurrencies in existence today. Financial media eagerly covers each new dramatic high and stomach-churning decline, making Bitcoin an inescapable part of the landscape. While the wild volatility might produce great headlines, it hardly makes Bitcoin the best choice for novice investors or people looking for a stable store of value. Understanding the ins and outs can be trickylets take a closer look at how Bitcoin works.

What Is Bitcoin?

Bitcoin is a decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoins creator, Satoshi Nakamoto, originally described the need for an electronic payment system based on cryptographic proof instead of trust. Each and every Bitcoin transaction thats ever been made exists on a public ledger accessible to everyone, making transactions hard to reverse and difficult to fake. Thats by design: Core to their decentralized nature, Bitcoins arent backed by the government or any issuing institution, and theres nothing to guarantee their value besides the proof baked in the heart of the system. The reason why its worth money is simply because we, as people, decided it has valuesame as gold, says Anton Mozgovoy, co-founder & CEO of digital financial service company Holyheld. Since its public launch in 2009, Bitcoin has risen dramatically in value. Although it once sold for under $150 per coin, as of March 1, 2021, one Bitcoin now sells for almost $50,000. Because its supply is limited to 21 million coins, many expect its price to only keep rising as time goes on, especially as more large, institutional investors begin treating it as a sort of digital gold to hedge against market volatility and inflation.

How Does Bitcoin Work?

Bitcoin is built on a distributed digital record called a blockchain. As the name implies, blockchain is a linked body of data, made up of units called blocks that contain information about each and every transaction, including date and time, total value, buyer and seller, and a unique identifying code for each exchange. Entries are strung together in chronological order, creating a digital chain of blocks. Once a block is added to the blockchain, it becomes accessible to anyone who wishes to view it, acting as a public ledger of cryptocurrency transactions, says Stacey Harris, consultant for Pelicoin, a network of cryptocurrency ATMs. Blockchain is decentralized, which means its not controlled by any one organization. Its like a Google Doc that anyone can work on, says Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax. Nobody owns it, but anyone who has a link can contribute to it. And as different people update it, your copy also gets updated. While the idea that anyone can edit the blockchain might sound risky, its actually what makes Bitcoin trustworthy and secure. In order for a transaction block to be added to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users wallets and transactions must conform to the right encryption pattern. These codes are long, random numbers, making them incredibly difficult to fraudulently produce. In fact, a fraudster guessing the key code to your Bitcoin wallet has roughly the same odds as someone winning a Powerball lottery nine times in a row, according to Bryan Lotti of Crypto Aquarium. This level of statistical randomness blockchain verification codes, which are needed for every transaction, greatly reduces the risk anyone can make fraudulent Bitcoin transactions.

How Does Bitcoin Mining Work?

Bitcoin mining is the process of adding new transactions to the Bitcoin blockchain. Its a tough job. People who choose to mine Bitcoin use a process called proof of work, deploying computers in a race to solve mathematical puzzles that verify transactions. To entice miners to keep racing to solve the puzzles and support the overall system, the Bitcoin code rewards miners with new Bitcoins. This is how new coins are created and new transactions are added to the blockchain, says Okoro. In the early days, it was possible for the average person to mine Bitcoin, but thats no longer the case. The Bitcoin code is written to make solving its puzzles more and more challenging over time, requiring more and more computing resources. Today, Bitcoin mining requires powerful computers and access to massive amounts of cheap electricity to be successful. Bitcoin mining also pays less than it used to, making it even harder to recoup the rising computational and electrical costs. In 2009, when this technology first came out, every time you got a stamp, you got a much larger amount of Bitcoin than you do today, says Flori Marquez, co-founder of BlockFi, a crypto wealth management company. There are more and more transactions [now, so] the amount you get paid for each stamp is less and less. By 2140, its estimated all Bitcoins will have entered circulation, meaning mining will release no new coins, and miners may instead have to rely on transaction fees.

How to Use Bitcoin?

In the U.S. people generally use Bitcoin as an alternative investment, helping diversify a portfolio apart from stocks and bonds. You can also use Bitcoin to make purchases, but the number of vendors that accept the cryptocurrency is still limited. Big companies that accept Bitcoin include Overstock, AT&T and Twitch. You may also find that some small local retailers or certain websites take Bitcoin, but youll have to do some digging. That said, PayPal has announced that it will enable cryptocurrency as a funding source for purchases this year, financing purchases by automatically converting crypto holdings to fiat currency for users. They have 346 million users and theyre connected to 26 million merchants, says Spencer Montgomery, founder of Uinta Crypto Consulting. Its huge. You can also use a service that allows you to connect a debit card to your crypto account, meaning you can use Bitcoin the same way youd use a credit card. This also generally involves a financial provider instantly converting your Bitcoin into dollars. Crypto.com and CoinZoom are two services that have regulation in the U.S., Montgomery says. In other countriesparticularly those with less stable currenciespeople sometimes use cryptocurrency instead of their own currency. Bitcoin provides an opportunity for people to store value without relying on a currency that is backed by a government, Montgomery says. It gives people an option to hedge for a worst-case scenario. Youre already seeing people in countries like Venezuela, Argentina, Zimbabwein countries heavily in debt, Bitcoin is getting tremendous traction. That said, when you use Bitcoin as a currency, not an investment, in the U.S., you do have to be aware of certain tax implications.

How to Buy Bitcoin?

Most people buy Bitcoin via exchanges, such as Coinbase. Exchanges allow you to buy, sell and hold cryptocurrency, and setting up an account is similar to opening a brokerage accountyoull need to verify your identity and provide some kind of funding source, such as a bank account or debit card. Major exchanges include Coinbase, Kraken, and Gemini. You can also buy Bitcoin at a broker like Robinhood. Regardless of where you buy your Bitcoin, youll need a digital wallet in which to store it. This might be whats called a hot wallet or a cold wallet. A hot wallet (also called an online wallet) is stored by an exchange or a provider in the cloud. Providers of online wallets include Exodus, Electrum and Mycelium. A cold wallet (or mobile wallet) is an offline device used to store Bitcoin and is not connected to the Internet. Some mobile wallet options include Trezor and Ledger. A few important notes about buying Bitcoin: While Bitcoin is expensive, you can buy fractional Bitcoin from some vendors. Youll also need to look out for fees, which are generally small percentages of your crypto transaction amount but can really add up on small-dollar purchases. Finally, be aware that Bitcoin purchases are not instantaneous like many other equity purchases seemingly are. Because Bitcoin transactions must be verified by miners, it may take you at least 10-20 minutes to see your Bitcoin purchase in your account.

How to Invest in Bitcoin?

Like a stock, you can buy and hold Bitcoin as an investment. You can even now do so in special retirement accounts called Bitcoin IRAs. No matter where you choose to hold your Bitcoin, peoples philosophies on how to invest it vary: Some buy and hold long term, some buy and aim to sell after a price rally, and others bet on its price decreasing. Bitcoins price over time has experienced big price swings, going as low as $5,165 and as high as $28,990 in 2020 alone. I think in some places, people might be using Bitcoin to pay for things, but the truth is that its an asset that looks like its going to be increasing in value relatively quickly for some time, Marquez says. So why would you sell something thats going to be worth so much more next year than it is today? The majority of people that hold it are long-term investors. Consumers can also invest in a Bitcoin mutual fund by buying shares of the Grayscale Bitcoin Trust (GBTC), though its currently only open to accredited investors who make at least $200,000 or have net worth of at least $1 million. This means the majority of Americans arent able to buy into it. In Canada, however, diversified Bitcoin investing is becoming more accessible. In February 2021, Purpose Bitcoin ETF (BTCC) started trading as the worlds first Bitcoin ETF, and the Evolve Bitcoin ETF (EBIT) has also been approved by the Ontario Securities Commission. American investors looking for Bitcoin or Bitcoin-like exposure may consider blockchain ETFs that invest in the technology underlying cryptocurrencies. An important note, though: While crypto-based funds may add diversification to crypto holdings and decrease risk slightly, they do still carry substantially more risk and charge much higher fees than broadbased index funds with histories of steady returns. Investors looking to grow wealth steadily may opt for index-based mutual and exchange-traded funds (ETFs).

Should You Buy Bitcoin?

In general, many financial experts support their clients desire to buy cryptocurrency, but they dont recommend it unless clients express interest. The biggest concern for us is if someone wants to invest in crypto and the investment they choose doesnt do well, and then all of a sudden they cant send their kids to college, says Ian Harvey, a certified financial planner (CFP) in New York City. Then it wasnt worth the risk. The speculative nature of cryptocurrency leads some planners to recommend it for clients side investments. Some call it a Vegas account, says Scott Hammel, a CFP in Dallas. Lets keep this away from our real long-term perspective, make sure it doesnt become too large a portion of your portfolio. In a very real sense, Bitcoin is like a single stock, and advisors wouldnt recommend putting a sizable part of your portfolio into any one company. At most, planners suggest putting no more than 1% to 10% into Bitcoin if youre passionate about it. If it was one stock, you would never allocate any significant portion of your portfolio to it, Hammel says.