The impressive price fluctuations of Bitcoin seem to get most of the attention of investors in the biggest cryptocurrency. However, understanding the technical underpinnings of Bitcoin is equally important to anyone who wants to understand and profit from Bitcoin investments or trading. Many have opted for Bitcoin ETFs as a way to invest in Bitcoin. Largely this is because they do not understand or know how to navigate the technical underpinnings of Bitcoin.
Bitcoin Is a Decentralized Digital Currency
The parts that make Bitcoin work include a peer-to-peer, decentralized network. Unlike with a bank or a stock market, there is no single person or business in control of things. The Bitcoin ledger is public, which guarantees both security and transparency. Each Bitcoin comes into being via a “mining” process which involves an extremely high degree of computation and this “proof of work” is what secures the Bitcoin network. The integrity of blockchain transactions are secured by cryptography so that issues like double spending are avoided.
Bitcoin As a Means of Buying and Selling Over the Internet
Bitcoin was invented in 2009 simply as a way to make monetary transactions over the internet. Not only did Bitcoin accomplish this goal but it also became a popular investment as its value soared far beyond a fraction of a cent to hundreds, thousands, tens of thousands, and not more than a hundred thousand dollar per Bitcoin.
Maintaining Data Secrecy Is Key to Safe Bitcoin Transactions
The security of Bitcoin transactions depends on owners of Bitcoin not divulging sensitive information regarding their assets. This prevents anyone in an open system from sending someone else’s Bitcoin for a transaction. This is a key feature that folks who have been wary of dealing directly in Bitcoin or other digital currencies need to be aware of. To buy or sell Bitcoin a person only needs to set up a Bitcoin wallet on their computer of smart phone. There are several to choose from ranging from Armory and Bitcoin Core to Spector and Wasabi. Simply choose the one you want to get started.
Bitcoin’s Private Transactions Are Not Always So Private
For many folks the most attractive aspect of Bitcoin or other digital currencies is that they do not have a bank or any other centralized institution looking at what they are buying, selling, or investing in. This fact has, unfortunately, made Bitcoin attractive for folks who wish to hide and move funds obtain via criminal activity, to finance terrorism, etc. This has attracted the attention of authorities world wide and has resulted in laws requiring Bitcoin markets to “know their customers” which takes away some of the sense of privacy that attracts many use Bitcoin.
Bitcoin and Avoidance of Taxes
Just like when you buy shares of a stock that rises greatly in price you do not owe any taxes until to sell your Bitcoin. Too many people did not believe that their Bitcoin proceeds would ever be taxed and had a rude awakening. In 2014 the IRS declared that Bitcoin is a property for tax purposes. Subsequently courts ruled that crypto exchanges need to report taxable transactions on all of their US customers. US Bitcoin owners have been paying their taxes but many have move to foreign exchanges where US laws do not apply.
Fees and Expenses of Direct Bitcoin Investing Versus Using an ETF
No matter how you buy and sell Bitcoin there are expenses with each transaction. A major difference with having a Bitcoin ETF is that you will be subject to annual “management fees.” If these are expensive and irritating enough an investor may choose to learn how to obtain a crypto wallet and then buy and sell Bitcoin with the “management fee.” For some the ease of buying and selling ETF shares like shares of stock may be convenient enough to offset the extra annual cost.