Cryptocurrencies - is it safe and how does bitcoin work?

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21 million bitcoin. No more, no less. That’s the pool we can exchange. All of us. If only the majority, not the minority, knew what cryptocurrencies are. And is all this bitcoin a currency or an investment? The future of money, or maybe a temporary trend? In what proportions safe and risky? One step at a time. Let’s explain what it’s all about!

What are cryptocurrencies?

It’s going to be about apples for a moment, because the well-known explanation of how bitcoin – the most popular cryptocurrency – works is based on them. Imagine sitting on a bench. I give you the only apple I had. Now you have one, and I have zero. I no longer have control over that apple, you, on the other hand, can do whatever you want with it – such as giving it to the next person.

The problem of digital transactions

Now I give you a digital apple. It seems to you that, again, you have one and I have zero, and that’s the end of it. However, what if I’ve already sent them to ten friends, and only gave you another copy? If you’re an economist, you’d say that’s a “duplicate transaction” – spending the same money at least twice. It would be useful, then, for someone to record each exchange in some sort of ledger. Digital, of course…

Solving the problem

This someone, however, could become biased or start profiting from our transactions themselves. Besides, it’s no longer the same as on that park bench. There, there was no third person looking over our shoulder and supervising us.

And what if this digital ledger had all the participants in the system on their computers? Without intermediaries or institutions. Then we enter the Bitcoin system. It’s a space like that bench – only in digital form. One bitcoin is, in our example, one apple.

How does bitcoin work?

In the Bitcoin network, the ledger is public. In it is recorded every transaction that has ever taken place. Everyone can see everything – it’s impossible to cheat – so we don’t need an intermediary.

We move within a pool of 21 million bitcoin. You can have a hundred, a thousand or even 0.0000001 part of one bitcoin. A click – and your transaction goes to someone on the other side of the world. It’s a peer-to-peer system.

Who is Satoshi Nakamoto?

Bitcoin was created in late 2008. It was born out of a manifesto for a digital financial system that would be independent of governments. Its creator hid under the pseudonym Satoshi Nakamoto, with which… he attracted even more media attention.

In 2015, the portals Wired and Gizmodo conducted a journalistic investigation and determined that Satoshi was Australian businessman Craig Steven Wright. This one actually confirmed and even provided evidence for it. The bitcoin community, however, did not believe it.

How to buy a cryptocurrency? Step by step

There are several ways – at a currency exchange, on an exchange, and even for cash! Let’s try them all out using bitcoin as an example.

How to buy bitcoin at a cryptocurrency exchange?

This is the simplest way – it is worth starting with it. A cryptocurrency exchange works just like a standard one. You can buy bitcoin there for pounds or dollars.

To use it, you need to set up an account and provide your data:

first and last name,
full address,
series and number of your identity card.

The exchange office will also need scans of documents that confirm this data. Seems like too much to begin with? That’s the law – the KYC (Know Your Customer) policy. The law forces banks and financial institutions to identify and verify their customers.

The purchase of cryptocurrency itself is already trivial. Choose a currency, enter the amount in GBP and confirm.

How to buy bitcoin on the exchange?

There are several cryptocurrency exchanges to choose from. In the latest 2023 rankings in the world, the leader is Binance. It is a relatively young platform (founded in 2017), but well thought out. It offers:

free account,
low commissions,
access to more than 350 cryptocurrencies,
a high level of security,
24/7 customer support

How to get started with Binance step by step?

Create an account and verify your information.
Transfer FIAT currency (e.g. Euro) or cryptocurrency to Binance.
Go to the interface. The classic view is simplified, the advanced one gives access to additional options.

Binance – how to play on the exchange?

1. Ordinary order

Standard buy/sell transaction – you see the price and decide what you do.

2. Limit order with a price limit

You determine at what rate you want to sell or buy a cryptocurrency, and the system will do it for you when such a rate appears. Until then, your funds are blocked in your account. This is a popular feature.

3. Stop-Loss order

As the name suggests – this order protects you from loss. If the price of the cryptocurrency you own falls below the designated level, the system will automatically sell it. You will not gain, but you will not lose everything.

How to buy bitcoin for cash?

Despite the fact that bitcoin is a digital currency, there are people who sell it for physical money. Those willing to make such a transaction can be found through the website localbitcoins.com.

What’s more, in recent years, there have even been bitcoins – machines that look like classic ATMs/deposit machines. How do they work? Scan the address of your bitcoin wallet with your phone with a QR code, then insert cash.

What are the most popular cryptocurrencies?

Bitcoin

The most popular cryptocurrency is bitcoin – one could say: the forerunner of the entire industry. Its name is often even used as a substitute to refer to cryptocurrencies per se. Its popularity can also be seen from cryptocurrency exchange rates. Bitcoin – currently worth around £25,000 – leaves its competitors far behind. Ethereum, second on the list, costs less than £1,500.

Ethereum

The second most popular coin with very high potential. Its creator – Vitalik Buterin – was a programmer developing Bitcoin. However, he believed that the cryptocurrency needed a scripting language more open to different functionalities.

Ethereum is therefore not just a digital currency – it is a platform based on peer-to-peer exchange and a wide range of features: Smart Contracts or Ethereum Virtual Machine.

What makes cryptocurrencies so popular among investors?

A currency not controlled by any bank or government – this was the main idea behind the creation of bitcoin. Over time, this call of peaceful anarchy turned into something very practical. Cryptocurrencies for a long time were independent of the stability of governments or banks. Nor were they affected by financial crises based on ordinary currencies.

How are governments and financial institutions reacting to the development of cryptocurrencies?

However, 2021 brought changes – the most popular cryptocurrencies, including bitcoin, entered the offerings of many banks. One of them was BNY Mellon – the largest trust bank in the world.

This shows how much interest there is in cryptocurrencies. Banks, when introducing such services, are afraid to overlook the trend. Does this mean that…

...investing in cryptocurrencies is safe?

The prices of digital currencies are growing rapidly – and this encourages more investors. At the same time, the speculative bubble is growing in this way. So, if interest wanes or people who bought cryptocurrencies some time ago want to sell them – the bubble could burst, so-called “market risk”.

Moreover, the fluctuations of cryptocurrencies are so huge that sometimes even bitcoin can lose half its value in a single day. It is also important to remember that digital currencies are not official means of payment – with the exception of El Salvador.

What are the risks of investing in cryptocurrencies and how to avoid them?

Suppose a celebrity pays with cryptocurrency or some country recognizes it as a full-fledged means of payment – its shares rise. Not much is needed. Unfortunately, it works the other way just as directly. If the cryptocurrency is criticized or some country blocks it – its shares fall.

Compared to traditional money, cryptocurrencies are more sensitive to the factors that surround them. However, if we have stock market experience, are able to keep a cool head and analyze residual data – we can come out of any situation successfully.

Are cryptocurrencies the future of the financial market?

For the time being, cryptocurrencies evoke conflicting emotions. Some countries want to ban them completely – China, for example. Others see digital currencies as the future – this group includes not only the aforementioned El Salvador, but also Germany, Portugal and Georgia.