A Quick Guide on Bitcoin Trading By James Sanders
Introduction You may have read this fact before, but it’s worth repeating. If you’d have bought £100 of Bitcoin in 2010, it would now be worth over £100m. One of the better trades you could have done in 2010. If you were late to the party (perhaps you were busy trading gold or CFD’s), lets say you finally caved in and bought £100 of bitcoin two years ago in Sept 2015. Your £100 would now be worth £3,000. Not a bad return. A good trade for sure. Now let’s say you really delayed and waited until the party appeared to be ending, but fearful that you’d be the only person without any bitcoin, you bought £100 a year ago against your better judgement. It would be worth £800 already.
BitCoin Explained – Really Simply
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Bitcoin is a form of digital currency, created and held electronically. No one controls it, and no banks or trading firms are involved. Bitcoins aren’t printed, like pounds, dollars or euros – they’re produced by people who run computers all around the world, using software that solves mathematical problems to mine bitcoin.
It’s the first example of a growing category of money known as cryptocurrency. Bitcoin can be used to buy things electronically. In that sense, it’s like a conventional currency, which are also traded digitally.
However, bitcoin’s most important characteristic, and what makes it different to conventional money, is that it is decentralised. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money.
Who Came Up With the Idea?
A software developer called Satoshi Nakamoto proposed bitcoin, which he described as ‘an electronic payment system based on mathematical proof’. The idea was to produce a currency independent of any central authority, which would be instantly transferable electronically, with very low transaction fees. You can see why banks might feel a little threatened. This is a currency that isn’t physically printed in the shadows by a central bank. Modern banks are largely unaccountable to their clients and make their own rules which can have devastating consequences for their clients (us). Those banks simply produce more money to cover the national debt, thus devaluing the currency. Bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network.
What is Bitcoin Based On? Conventional currency has been backed by gold or silver. You knew that if you handed over a pound at your bank, you could get some gold back (although this didn’t actually work in practice). This concept of having a physical asset ‘backing’ your money ended in the 1970’s when the gold standard ended. But bitcoin isn’t based on gold or silver; it’s based on mathematics. Around the world, people and businesses are using software programs that follow a mathematical formula to produce or ‘mine’ bitcoins. The mathematical formula is freely available, so that anyone can try it. The software is also ‘open source’, meaning that anyone can look at it to make sure that it does what it is supposed to.
Fast Facts What are its characteristics? Bitcoin has several important features that set it apart from governmentbacked currencies. Once you understand these facts, you can see why some traders have made life changing profits from trading bitcoin. •
It's decentralised
The bitcoin network isn’t controlled by one central authority. Every machine or computer that mines for bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank did in Cyprus in 2013. And if some part of the network goes offline for some reason, the money keeps on flowing with no need for Government intervention. • It's easy to set up Conventional banks don’t make it easy to open an account. Setting up merchant accounts for payment is another huge test of ones patience, beset by endless questions and red tape. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable.
Fast Facts • It's anonymous Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. • It's completely transparent Bitcoin stores details of every single transaction that ever occurs in the network in a huge version of a general ledger or report, called the blockchain. The blockchain holds all the data and I discuss blockchain in more detail here. If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address but won’t know who it belongs to. There are measures that people take to make their activities more opaque on the bitcoin network, such as not using the same bitcoin addresses consistently and not transferring lots of bitcoin to a single address.
Fast Facts • Transaction fees are miniscule Your bank may charge you a £10 fee for international transfers. Bitcoin is free. • It’s very, very fast You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment. • It’s non-returnable When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever. There is no insurance to protect you from an erroneous transfer, so mistakes can be expensive.
James Sanders is a London based Investor and Trader. He founded the UK’s largest independent derivatives brokerage in 2001 and has appeared on Bloomberg, CNBC and the BBC for his views on world markets.