It was 2013 when I was first introduced to Bitcoin. At that time, I had no idea what it was and how it can be used. Since then, I’ve never thought much about Bitcoin.

Recently, I’ve got to know Martin in a small gathering. He runs an online business. We had a small chat and I’ve learnt that he has received Bitcoin as payments for his products. Martin was delighted as he shared with me the price of one Bitcoin. As I write, it is priced at RM 11,220 per Bitcoin.

Is this a hype? I’m not sure. Thus, I’ve decided to learn about Bitcoin. I’ve started with some basic articles and have watched several tutorial videos on anything related to Bitcoin. With that, I’ll share five basic things that you need to know about Bitcoin before getting into it.

 

#1: What’s a Bitcoin?

 

Bitcoin is a digital currency. It is an alternative to government-issued currencies such as the Ringgit. It is not owned and controlled by any corporation, government bodies and nations around the world. It is a system of transferring and storing value from one to another worldwide.

 


#2: Who invented Bitcoin?

 

Bitcoin was started in 2009. It was invented by a person or a group of brilliant individuals under the name of ‘Satoshi Nakamoto’. Who then is Satoshi Nakamoto? Today, nobody really knows and thus, the true identity of Satoshi Nakamoto remains anonymous.

 


#3: How does Bitcoin work?

 

For a start, I can exchange Ringgits into Bitcoins from a Bitcoin Exchange. The process is somewhat similar to buying Singapore Dollars from a money exchange.

Then, I can store Bitcoins into my Bitcoin Wallet. Let us say, several days later, I would like to buy a product from Martin, the online merchant. Instead of cash, I can transfer my Bitcoin to Martin. First, I need a Private Key to get access to my Bitcoin Wallet. Second, I need to know Martin’s Bitcoin address so that I can transfer Bitcoins to him.

If I want my cash back, I would exchange my Bitcoins into Ringgits from a Bitcoin Exchange. The whole process of moving, transferring, storing and exchanging Bitcoins are executed conveniently online.

 

#4: What is Bitcoin Mining?

 

Today, millions are sending bitcoins to one another worldwide. These are known as transactions. Someone has to keep a record of these transactions and without it, nobody knows who had paid for what.

Hence, a Bitcoin Network collects these transactions made during a set of period, usually 10 minutes, into a Block. A Bitcoin Miner is one who confirms transactions in these blocks and write them into a Blockchain. In short, a Blockchain contains multiple blocks with each block containing millions of individual transactions in a certain period of time.

A Blockchain must not be tampered with to be trustworthy. Hence, a Bitcoin Miner processes information contained in the Block to produce Hash. This Hash is stored with the Block. Why is it produced? This is because a Hash is unique. A single change in information contained in the Block will change the Hash completely. If a Hash is detected to be different, the Block can be immediately spotted as a fake.

Thus, Bitcoin Mining is about Processing Bitcoin Transactions.

It requires a lot of energy and specialized processing equipment. They are not cheap. As such, Bitcoin Miners are compensated with new Bitcoins ‘minted’ for their processing efforts. Therefore, unlike government-issued currencies which can be printed limitlessly, the supply of Bitcoins is dependent on how quickly Bitcoin Miners can produce a new Bitcoin.

 

#5: Is Bitcoin a Good Investment?

 

Today, there are a lot of interests in Bitcoin as it has risen substantially in prices. The chart below is Bitcoins in US Dollars since its early days.

 

Screenshot of Google Finance!

 

Observations:

    1. At Point A, there was a spike in prices of Bitcoin. It went up from US$ 120 in September 2013 to US$ 1,130 in November 2013.

 

    1. Since then, Bitcoin has gradually dropped in prices. It went down to as low as US$ 240 in May 2015. It’s normal as more often, a downfall in prices would follow after a short spike. This happened countless of times in most, if not all, markets such as stocks, properties, currencies and commodities.

 

  1. Today, we are at Point C. Is this a repeat of Point A? Will prices climb further? Or, will prices drop? It’s ultimately your call.

 

More importantly, I believe, investing is not about ‘chasing the next high’. Before investing, there are several questions that you may ask first:

 

  1. What is your plan for investing?
  2. Is Bitcoin a suitable vehicle to achieve your goals?
  3. Do you have in-depth knowledge about Bitcoin?
  4. What is your investment strategy if Bitcoin goes up?
  5. What is your investment strategy if Bitcoin goes down?

 

I want to know more about Bitcoin

 

This article has covered the basics. If you are keen to learn about Bitcoin, there is more to discover. KCLau has brought in Mriganka Pattnaik from Luno, the largest Bitcoin Exchange in Asia and Africa which is based in Singapore to share his insights on Bitcoins.

 

Check it out:

Webinar – Basics of Bitcoin and Cryptocurrencies


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 450+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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