binance CEO

October was the worst month of the year for cryptocurrency volume. Now deep into a bear market, the amount of crypto changing hands on a daily basis has slumped.

However, CEO of the world’s largest cryptocurrency exchange, Binance, says the real volume is at least twice as big as reported.

Speaking to CNBC’s Ran Neuner, Changpeng Zhao pointed to the enormous over-the-counter (OTC) market for hidden volume:

“What I’ve heard is the OTC market is at least as large as the live recorded volumes. So that is at least 50 percent of volume that is not being reported on CoinMarketCap.”

Crypto volume, explained: “Volume” is the amount of cryptocurrency changing hands on a daily basis. It is typically measured on CoinMarketCap by combining data from cryptocurrency exchanges like Binance, Coinbase, Bitfinex, etc. 

OTC Markets: Where the Whales Trade

Traditionally, over the counter markets are those in which trades are made in secret, and not recorded on an order book.

In the case of bitcoin, investors are buying and selling millions of dollars of cryptocurrency directly between one another, avoiding an exchange like Binance completely.

They may also operate through crypto brokers (such as BitStocks or Circle) which require high trading minimums. It allows “whale” investors to move their cryptocurrency without shaking the markets.

bitcoin whales

As Large as the Exchange Market?

As mentioned above, Changpeng Zhao believes this crypto OTC market is at least as large as the recorded volumes across the major exchanges. 

This chimes with a report released earlier this year by research firm TABB. They concluded that the crypto OTC market is at least two to three times larger than reported.

CoinMarketCap is currently reporting a 24-hour volume of $12.5 billion. If Changpeng Zhao’s analysis is correct, the real trading volume across the crypto market is closer to $25 billion.

Why Do “Whales” Trade OTC?

The first reason is liquidity. Crypto whales and institutional investors often trade multi-million figures in bitcoin and altcoins on a daily basis. 

Even the largest exchanges don’t often have millions of dollars in liquidity to facilitate such trades. Only by making private trades can they access the necessary buyers.

Furthermore, if a whale suddenly offloaded tens of million in bitcoin on a crypto exchange, it would very likely crash the market.

“We Are Still a Very Healthy Business”

Elsewhere in the interview, Changpeng Zhao reaffirmed that Binance was a healthy business, despite a 90% drop in volume since January’s boom.

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bitcoin etf price

Bitcoin ETFs were all over the news during 2018. 

Many voices called them out as some kind of magical act that would lead the price of Bitcoin to its former glory and maybe even higher than that. 

While an approved ETF could be the catalyst that kicks off a new bitcoin bull run, there is still misunderstanding and misinformation among crypto enthusiasts. 

It’s time to answer some burning questions: what is a bitcoin ETF? What consequences will it have for the future bitcoin price? And, of course, how likely it that a bitcoin ETF is approved in the coming months?

What is an ETF? (A Simple Explanation)

To start with, let’s define an ETF itself.

ETF stands for Exchange-Traded Fund. It’s a fund that tracks and mirrors the price of an underlying asset (like gold, for example). An ETF might also track a basket of assets (like tech stocks).

Shares of an ETF are traded on real stock exchanges and generally do not differ from traditional stocks in terms of trading.

Some of the most popular ETFs include those for gold (GLD) and crude oil (USO).  

The main advantage of an ETF is simplicity and convenience. It is much easier to trade an ETF than it is to purchase gold or bitcoin or oil itself.

what's an etf
Credit: Stocks to Trade

Who Makes and Approves ETFs?

ETFs are created by asset management firms. The firm buys the underlying assets (i.e. bitcoin) and keeps them under custody before creating an ETF.

The US Securities and Exchange Commission (SEC) is responsible for approving an ETF. Once they are approved, investors can buy shares of the ETF from a stock exchange. 

An ETF share represents a certain percentage of the fund, but it does not represent ownership of the underlying asset. If you buy a bitcoin ETF, you are not buying bitcoin itself.

ETFs are popular investments for diversifying portfolios with minor monetary and timely expenditures. 

What is a Bitcoin ETF?

A bitcoin ETF is an investment tool that would track the price of bitcoin. If approved, it would introduce an easy way for investors to get exposure to bitcoin without having to buy or store it directly. Traders would be able to buy and sell shares of the bitcoin ETF on a regulated stock exchange.

Although Bitcoin is already one of the most liquid assets on earth, it still can’t be traded on a regular stock exchange.

As well as the added convenience, investors could buy the bitcoin ETF through their existing, familiar investment account.

bitcoin etf on the stock exchange

Why a Bitcoin ETF Could Lead to “Big Money” Institutional Investors

The most significant benefit of buying ETF shares instead of real bitcoins, apart from its availability on stock markets, is the fact that institutional investors don’t have to store it themselves. 

Therefore, there is no risk of the bitcoins getting stolen. 

Big institutions are currently prohibited from buying bitcoins directly, but an ETF would make their participation in the market a reality.

Regarding that, there are currently two different types of bitcoin ETFs proposed by multiple asset management firms: physical-backed ETFs and futures-backed ETFs.

What is a Physical-Backed Bitcoin ETF?

As you might have already suspected, a physical-backed bitcoin ETF gains its value through actual bitcoins. 

This means an asset management firm needs to buy bitcoins from the market and then store them in their own wallets or custody service. 

Price swings in the ETF should, therefore, be reflected by the price of an actual bitcoin. If bitcoin’s price increases by one percent, the price of a physical-backed ETF should rise by one percent as well.

What is a Futures-Backed ETF?

When trying to set up a futures-backed ETF, the issuing company does not have to buy actual bitcoins, but bitcoin “futures contracts”. Futures are financial instruments that are used to bet on the future price of that asset.

All futures contracts expire on a certain date, although there are different timeframes, e.g. weekly or quarterly. 

Futures traders are confronted with higher risks, but also higher rewards. Regarding the ETF, the issuing company has to update their future contracts every time the contracts expire.

Historic Bitcoin ETF Proposals and Rejections

Although Bitcoin ETFs received a lot of media attention in 2018, there have been dozens of attempts to push one through before. 

Two of the most popular applicants might be the Winklevoss twins, who have supported bitcoin for several years. As CoinDesk investigated in 2017, the brothers submitted their first ETF proposal in mid-2013, with numerous additional proposals in the following years. Unfortunately, the SEC was not satisfied with their offerings so far. 

Winklevoss Twins bitcoin ETF
Credit: Forbes

Besides Cameron and Tyler Winklevoss, many other players are heavily interested in issuing a Bitcoin ETF. As Block Explorer previously reported, the SEC rejected nine applications solely in August this year. This includes multiple proposals for a futures-backed ETF by ProShares, Direxion, and GraniteShares, in collaboration with the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE).

Often referred to as the most promising ETF is a proposal given by a collaboration of the investment firm VanEck, the blockchain company SolidX and the CBOE. 

In this case, the ensemble is proposing a physical-backed ETF. Experts think this particular group has a higher chance of approval, due to their past experience issuing ETFs. 

The date for a decision has already been postponed by the SEC for the second time. While the next date would be on December 29, it is very likely that it will be changed another time. 

What Does the SEC Need to See Before It Approves a Bitcoin ETF?

According to most experts, it probably seems more logical to introduce a physical-backed ETF than a futures-backed one. 

However, from the angle of an asset management firm, it’s actually quite the opposite. Roughly 85% of all Bitcoin ETF applications are futures-backed ETFs. 

A major reason for this trend is, without a doubt, the frequently discussed custody question. Securely storing large amounts of cryptocurrencies has been a great stumbling block for many big players, like exchanges, in the past and present. 

Additionally, bitcoin futures are already a financial instrument open to institutions and have been approved by the SEC before. Consequently, it appears like a smaller step to introduce a futures-backed ETF. 

However, a very critical development the SEC wants to see, before approving an ETF, is a steep reduction of market manipulation and fraud attempts.

When rejecting nine ETF proposals in August, the SEC stated that 

SEC“…the Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

 

Further reading: Bitcoin ETFs: Why Do They Keep Getting Rejected?

Bitcoin ETF Quotes and Predictions

Since ETFs are one of the hottest topics this year, there have been several voices expressing their opinions, about if and when an ETF could be on the cards.

For example, FIC Network Founder Arturs Ivanovs told Finance Magnates that:

“Volume from institutional investors would facilitate a significant regulated market that would reduce the scale of price manipulation thereby easing the SEC’s concerns. An ETF would also open up the market to more retail investors.” 

 

After being asked for a date, Ivanovs said, “2020 is my prediction.”

Income Locker CEO Csaba Csabai thinks that there might be other hurdles that need to be cleared. “There is still technological development needed to make Bitcoin exchange-tradable because when buying an ETF, someone has to actually purchase bitcoins,” he said in a conversation with Finance Magnates. Nevertheless, Csabai also sees a silver lining, as he went on with “if the rate of adoption continues to grow at the current pace, we will soon see an ETF, because it’s the only way institutions can access this asset class, so solving it as soon as possible is in their best interest.”

In an interview with ETF.com, Spencer Bogart, Needham & Co vice president of equity research said:

spencer bogart bitcoin etf quote“We have pegged the odds at less than 25 percent. That is because the very first thing the SEC lists in its own mission statement is protecting the investing public. When you think about the game theory aspect of this, if I work at the SEC and I approve this ETF. and it goes well, nobody is probably going to come around and pat me on the back and give me a promotion. But if I approve it and a lot of money flows into it, and something goes wrong, I am likely to lose my job.”

 

However, there are also parties that don’t believe in a Bitcoin ETF at all. Nouriel “Dr. Doom” Roubini believes that the crypto space has several issues, like fraud and manipulation, that will make an ETF not feasible in the near future. In a debate at CoinTelegraph’s BlockShow, Nouriel recently stated that “The academic evidence is, that this market is totally manipulated.” He later continued, “How do you expect anybody, who is an institutional investor, who has to be compliant with the rules and regulation, KYC/AML, to enter the space.” 

Could an ETF Influence Bitcoin’s Price?

To answer this question, one clearly needs to distinguish between a futures-backed and a physical-backed ETF. As already elaborated in the beginning, to create a physical-backed ETF the issuing firm needs to buy bitcoin from the market.

Although those deals wouldn’t be made on a regular crypto exchange, it would inevitably have an effect on bitcoin’s price, due to the immense amounts of bitcoin that would be needed for an ETF. 

In addition, an approved ETF would attract countless speculators, who would probably buy bitcoin right away.  So yes, a physical-backed ETF would, with almost full certainty, have a great impact on the price of bitcoin. 

In regard to a futures-backed ETF, the impact might not be as big as with the physical one. The issuer would only need to buy futures contracts, hence the price wouldn’t be directly affected. 

Futures would most probably help to spread adoption in institutional circles, but this would only be valid in the long term. In the worst case, it could even have a negative impact on bitcoin, as the past has already shown when bitcoin futures were introduced for the first time. 

Still, we can’t be sure about the impact before an ETF has even been officially approved.

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CNBC’s cryptocurrency analyst Ran NeuNer is no stranger to bold statements about bitcoin. Last month, he said bitcoin was about to “explode,” claiming he was loading up on the cryptocurrency for his parents.

But his most ambitious statement, made in February 2018, was that bitcoin would surge to more than double its all-time high by the end of the year.

He even pinned the tweet:

ran neuner bitcoin tweet

That pinned tweet has now been replaced with a new one backtracking the price prediction:

ran neuner tweet bitcoin

 

After phenomenal excitement at the beginning of the year, bitcoin has entered a deep bear market with the price sitting almost 70% down from its all-time high.

The bitcoin price is little changed this week, trading in a small range just above $6,300.

Time to Quit the Crazy Price Predictions?

Neuner wasn’t the only one with ambitious price targets for bitcoin. Infamous bitcoin bull Tom Lee still maintains his $20,000+ target for the end of the year. Lee’s fund, Fundstrat, has predicted that bitcoin will hit $64,000 at some point in 2019.

Venture Capitalist Tim Draper has predicted $250,000 by 2022, while John McAfee’s prediction is perhaps the most bizarre of all: $1 million by 2020.

As bitcoin continues its protracted cool-off period, NeuNer might not be the only one retracting his wild price predictions.

bitcoin cover

You’ve probably heard the stories about bitcoin…

The Norwegian student who bought 5,000 bitcoins for $26 in 2009. Four years later, he was a millionaire.

Or the early adopter who bought two pizzas for 10,000 bitcoins (worth $70 million at today’s prices).

But what is bitcoin, exactly? How does it work? How do you buy bitcoin? Where should you store it? And is it safe? This guide will take you through it step-by-step (without any confusing jargon).

Contents

PART 1: What Is Bitcoin, the Digital Currency?
PART 2: What Is Blockchain, the System That Makes It All Work?
PART 3: How to Buy, Store, and Spend Bitcoin
PART 4: Should I Be Worried about Hacks and Scams?
PART 5: What’s Next for Bitcoin?

PART 1: What Is Bitcoin, the Digital Currency?

Before we dive in, you need to know that bitcoin is actually two things:

1. bitcoin (with a small b)

This is the cryptocurrency; digital tokens sent back and forth to one another (or used to buy pizza). When people talk about bitcoin, this is what they’re usually talking about.

2. Bitcoin (with a capital B)

This is the revolutionary network on which the currency runs. It’s also known as the Bitcoin blockchain.

Let’s start with the cryptocurrency.

bitcoin infographic - what is bitcoin and who invented it?

Infographic courtesy of Kriptomat

Bitcoin Basics

 peter thiel bitcoin“I do think Bitcoin is the first [encrypted money] that has the potential to do something like change the world.” Peter Thiel, Co-Founder of Paypal

 

The basic concept of bitcoin is to make payments as easy as sending an email, without a central middleman getting in the way. Here’s how it works:

No banks

Bitcoin exists outside the traditional banking system. Anyone with a digital wallet can buy bitcoin and send it to anyone else in the world (so long as they, too, have a wallet). There is no middleman.

No government control

Most currencies around the world are controlled by their respective governments. For example, the US Federal Reserve controls the dollar’s interest rate and supply. Not bitcoin. No single person, bank or government owns the bitcoin system.

This is what we mean when we say bitcoin is ‘decentralized.’ Bitcoin and all its transactions are powered by its users. We’ll explain more in the ‘blockchain’ section below.

Securely locked with cryptography

Every bitcoin transaction is encrypted with public and private key encryption. Here’s a quick video to explain how that works:

‘Pseudonymous’

You might have heard that bitcoin is anonymous, but that’s not strictly true. Every bitcoin transaction is tagged with your public key address. It’s a long number that looks something like:

1GsOmhLr0FbBpNco1NDar6sSV8tsHaKF6kd

Although this transaction doesn’t contain your name, if someone knows your wallet address, they can see the payments you’ve made or received. In other words, it’s pseudonymous.

Irreversible

Bitcoin transactions absolutely cannot be reversed. If you make a payment by accident or send it to the wrong address, it can’t be retrieved. It’s a blessing and a curse. It means payments cannot be altered making it secure against fraud, but if you get it wrong, your money is lost forever.

Prefer to Read This Guide as an eBook?

If you’d like a hard-copy of this guide (or just want to come back to it later), download the free pdf version here, no email signup required.

bitcoin ebook

Who Created Bitcoin?

Bitcoin was created by the elusive Satoshi Nakamoto. His name, however, is a pseudonym. The real creator remains a complete mystery.

In October 2008, Nakamoto published the famous bitcoin white paper on a cryptography mailing list. It outlined the vision and technology for the Bitcoin system:

satoshi nakamoto“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

 

In January 2009, he created the first 50 bitcoins in a process called “bitcoin mining.”

Who Is Satoshi Nakamoto?

The identity of Satoshi Nakamoto is one of the tech world’s biggest secrets. Countless journalists have tried to reveal his identity by analyzing his writing style, his coding, and various other scattered clues.

He writes in British English, for example, and codes in C++.

Newsweek famously published a front-page splash outing the bitcoin founder as Dorian Satoshi Nakamoto – an elderly Japanese American. Despite his computer-engineering background, it was later revealed that Dorian Nakamoto had never even heard of the cryptocurrency. (He apparently referred to it as ‘Bitcom’ in a later interview!)

More likely theories point to the likes of Nick Szabo and Hal Finney, who were involved in Bitcoin’s development and have been active in the cryptography community for decades. Some have even pointed the finger at Elon Musk. All have denied it.

Further reading: 24 Clues About Satoshi Nakamoto’s Identity

One thing is for sure, Satoshi Nakamoto is a genius with meticulous attention to privacy and anonymity.

He’s also a billionaire.

By tracking Satoshi’s transactions, we can see that he never sold his original bitcoins (other than a few test transactions). He owns about one million coins. At the time of December’s record prices, he was the 44th richest person in the world, worth over $19 billion.

There Will Only Ever Be 21 Million Bitcoins

One of the most interesting features of bitcoin is that its supply is capped. There will only ever be 21 million coins. Unlike dollars, which are created at will by the Federal Reserve, the creation of bitcoins will steadily diminish until 2140, when it will stop entirely.

There are currently 16.7 million bitcoins out there, which leaves just 4.3 million bitcoins left to be created.

Read more: How Many Bitcoins Are There? (Hint: Not That Many)

In other words, the supply is incredibly limited.

Even the existing bitcoins are in short supply. As we’ve mentioned, Satoshi probably owns about one million. The Winklevoss Twins own roughly 1% of the bitcoins in circulation. And the FBI holds at least 144,000 bitcoins after seizing them from illegal activity.

It’s also guessed that up to 30% of bitcoins are lost forever (on broken hard drives and forgotten keys).

The 21 million bitcoin cap is partly why the price has skyrocketed. When there is a finite amount of something, the price tends to rise because everyone wants a piece (like gold or diamonds).

The finite supply is also why bitcoin is often likened to gold rather than traditional currency. There is only so much gold on the planet, just like there are only so many bitcoins.

chart depicting the bitcoin halving rate

Chart source

Luckily, each bitcoin can be split into smaller units denominations, right down to one hundred millionth of a bitcoin.

Bitcoin Price: Why Is It so Volatile?

When it was launched in 2009, the first exchange valued one bitcoin at eight-hundredths of a cent.

Flash forward to January 2018, and that price soared to $20,000.

Along the way, bitcoin has experienced some heart-stopping swings in value. Since January 2018, bitcoin has dropped 60%. Bitcoin is much more volatile than traditional investments like bonds or stocks. It’s why many investors are nervous about getting involved.

bitcoin price chart
Chart: CoinMarketCap

Why? The simple fact is that bitcoin is brand new. It’s still less than a decade old. Compare that to traditional markets like gold, oil or the stock market. It takes time for a new market to settle and find a stable price.

Bitcoin also goes through ‘hype cycles.’ Every so often, bitcoin attracts mainstream attention (usually when there’s a new technology breakthrough). Excited investors flood in, which pushes the price up. When the excitement dies down, we see big drops in price.

Investing in bitcoin means bracing yourself for big, volatile movements.

Don’t Confuse Bitcoin with ‘Bitcoin Cash’ or ‘Bitcoin Gold’

Bitcoin is altogether separate from other cryptocurrencies you might have heard of, like bitcoin cash (BCH) or bitcoin gold (BTG).

These alternative currencies were created when they split off from bitcoin (known as “forking”). This happened because there was a dispute in the bitcoin community about how to go forward.

Read more: What Is a Hard Fork in Cryptocurrency?

When users disagree about the technology or the ethos of a particular coin, they may split off and create a new cryptocurrency using different tech and ideals.

To understand why, we need to know how bitcoin works.

——————————————————————————————–



——————————————————————————————–

PART 2: What Is Blockchain, the System That Makes Bitcoin Work?

Satoshi’s most impressive feat is not actually bitcoin-the-currency. It’s the system on which it runs: blockchain.

Also known as the Bitcoin protocol, this is what makes bitcoin transactions possible.

An infographic explaining how the bitcoin blockchain works

What Is Blockchain?

In the simplest possible terms, blockchain is exactly what it sounds like: a chain of blocks.

When you make a transaction with bitcoin, it is bundled into a “block.” That block is processed, verified, and approved before being added to the long chain of blocks that came before it.

That’s the short version. In practice, it’s more complex than that.

Imagine an Excel spreadsheet that everyone in the world can access.

Every bitcoin transaction ever made is written down in this Excel spreadsheet.

Scroll right to the beginning, and you’ll see Satoshi’s very first entry (the ‘genesis block’), preserved forever. You can also see the most recent transactions, logged in real-time, and everything in between.

In simple terms, blockchain is a completely public, transparent way of logging payments and transactions.

This is why you often see blockchain referred to as a ‘digital ledger.’

Of course, it’s not really a spreadsheet; it’s a chain. Every time a bitcoin transaction is made, it’s logged in a 1MB ‘block’ of data. The block is then added to the one that came before it.

Hence, blockchain.

(FYI, you can look for transactions on the bitcoin blockchain using our block explorer).

Blockchain Is Not Stored in One Place

No single person or entity owns the blockchain. It exists on a network of millions of computers all at once.

Using the spreadsheet analogy again, it’s almost like a Google doc. With Google docs, anyone can log in and make edits to the same spreadsheet. The changes are public and everyone with access can see (and approve) those changes in real-time.

This is a huge change in the way we do things. In the past, for example, you’d write a spreadsheet in private, then send it to someone via email. The other person would save it to their computer, make their changes in private before sending it back.

Using this old method, there are two different spreadsheets on different servers. One person can claim theirs is the superior document or make fraudulent changes.

Or a hacker can steal one of the documents.

Now think about it in terms of banks. Banks keep their own private spreadsheets and log their own transactions, all stored in one central location. It’s less transparent, not to mention easier to hack.

With blockchain, everything is transparent. Bitcoin transactions are 100% visible, traceable and accountable.

(Note: the Google docs analogy isn’t 100% accurate since the Google document is still stored on Google’s servers. The bitcoin blockchain is not hosted by any one central server. Thousands of copies are stored on servers all around the world, all at once).

What Is Bitcoin Mining?

Bitcoin mining is how we create bitcoins.

It’s also how we keep the blockchain running.

In very simple terms, miners are rewarded in bitcoins for creating the blocks and validating the transactions.

It a self-regulating system. Miners maintain the blockchain. In return, they get bitcoins.

Anyone can mine bitcoins. However, due to the competition, it now requires an immense amount of computing power. To illustrate the point, giant bitcoin mining facilities are located in Iceland just to keep the temperatures of their hardware down.

In the past, Satoshi mined the very first block with his reportedly modest home computer. He was rewarded with 50 bitcoins for doing so.

How Exactly Does Bitcoin Mining Work?

Bitcoin miners are responsible for producing the 1MB ‘blocks’ that become part of the blockchain.

To create this block, they must solve a mathematical puzzle. This is not literal. The miner is not solving puzzles on a piece of paper. Instead, their computer is trying to ‘guess’ a pre-set 64-digit number, or “hash.”

The first miner to get ‘less than or equal to’ the hash, mines the block and is rewarded with bitcoin.

The current reward is 12.5 BTC per block.

The Bitcoin Halving

Remember we explained that bitcoin supply is capped at 21 million? That’s because the reward for mining is halved every four years.

The mining reward has been halved twice so far. The reward began at 50 BTC per block. It is now 12.5 BTC.

At this rate, we’ll hit the 21 million supply cap in 2140, after 64 halvings.

PART 3: How to Buy, Store, and Spend Bitcoin

How to Buy Bitcoin

Bitcoin is typically bought and sold on an ‘exchange.’

There are hundreds of bitcoin exchanges out there so it’s important to choose wisely. Many exchanges have been hacked over the years, and investors have lost their money, so do your due diligence to find a reputable exchange in your country.

Among the largest and most reputable exchanges are Coinbase and Gemini in the US. (Others are available and this should not be considered a recommendation).

To set up an account at these exchanges, you’re often required to upload a picture of your photo ID and proof of address. This is to ensure they comply with anti-money laundering (AML) laws and know-your-client (KYC) laws.

Can you buy bitcoin anonymously? Yes, some exchanges don’t require ID or proof-of-address. BitMEX is one example where you only need an email address. You can also buy in cash (see below).

Once registered with an exchange, you can link a bank account, or – occasionally for smaller amounts – a credit card or PayPal account.

Now, you can buy bitcoin with USD or your local currency.

Buying bitcoin on the coinbase exchange screenshot

Whichever exchange you choose, your bitcoins are stored in a wallet on their platform. We highly recommend you now transfer your bitcoin to a private wallet where you control the encryption keys (this is not as complicated as it sounds, and we’ll look at this in the next section).

How to Buy Bitcoin with Cash

If you’d rather not link your bank account to a bitcoin exchange, you can pay cash. Localbitcoins connects you with local cryptocurrency sellers who accept cash for bitcoin.

To make this transaction, however, you will definitely need a private wallet and address. We’ll look at how to set this up in our next section:

How to Store Bitcoin

You store your bitcoin and all cryptocurrencies in a ‘wallet.’

However, choosing the right wallet is perhaps the most important part of this entire guide.

You’ve probably heard that bitcoin is vulnerable to hacks and thieves. There are countless scare stories of people losing thousands.

But it’s important to know that these hacks are not related to the bitcoin system itself (or blockchain). Instead, the hacks usually target exchanges and poorly-maintained wallets.

Storing bitcoin can be safe and secure, but only if you do it correctly.

Recommended reading: 8 Cryptocurrency Best Practices (Keep Your Crypto Safe!)

infographic explaining bitcoin wallets - cold storage and hot wallets

Explaining Bitcoin Wallets and Encryption Keys

As we explained earlier, there are two aspects to storing and transferring bitcoin:

Public key – your wallet address that everyone can see (people need your public key to send you bitcoins)

Private key – a second key that only you have access to. This allows you to unlock the wallet.

When you keep your bitcoins on an exchange (like Coinbase), they hold the private key for you. This is called an ‘online wallet.’ While they are convenient and user-friendly, they are less secure.

Why? Because if the private key is on their servers, it can be stolen by hackers, who are more likely to target a large exchange.

So it’s important to make sure you hold the private key. That means moving your bitcoin off the exchange and into a private wallet.

Hardware Wallets (Cold Storage)

Hardware wallets are your most secure option. Think of them like an external hard drive or USB stick for bitcoin. For the vast majority of time they are offline, so cannot be hacked (except for the short periods when you connect to transfer bitcoin). This is known as “cold storage.”

Read More: What is Cold Storage for Bitcoin?

Of course, there is the risk of losing the hardware wallet, which is why some people keep them locked in secure bank vaults.

The most popular hardware wallets are Ledger and Trezor.

ledger nano cold storage bitcoin wallet plugged into a laptop

Desktop Wallet

With a desktop wallet, your private key is stored as a file on your computer.

The main advantage here is that you control the private key. They are usually free and easy-to-use, too.

However, your bitcoins are lost forever if your computer is lost, stolen or destroyed (unless you backed them up elsewhere). A hacker can also access your computer and take them.

In the past, using a desktop wallet meant downloading the entire bitcoin blockchain. Nowadays, light wallets are available which makes it a little easier. Some of the most popular wallets include Exodus and Electrum.

Paper Wallet

A paper wallet is simply a piece of paper with your private and public key written on them.

They are incredibly secure since they are never connected to the internet. You cannot hack a piece of paper.

However, you can lose a piece of paper very easily. So make sure you keep it somewhere safe.

Just don’t be this guy who showed his paper wallet to everyone watching Bloomberg TV. Within seconds, his account was empty (although the culprit offered to give it back after proving their point).

a man accidentally reveals his bitcoin paper wallet on Bloomberg TV and has his bitcoins stolen

‘Cold’ Software Storage

Some electronic and software wallets now facilitate offline or ‘cold’ storage options. This is a best-of-both-worlds option. Like electric wallets, they are easy to use, but they are also stored offline for additional security. Electrum, mentioned previously, offers this functionality.

Mobile Wallets

lastly, you can choose a mobile wallet. These are handy if you plan to store small amounts of bitcoin and spend them from time-to-time. Some are designed with spending in mind, such as Samourai for Android and Edge for iPhone.

None of the wallets mentioned here should be considered recommendations and many other options are out there. Do you own research and due diligence before using any of the services listed here.

Where Can I Spend Bitcoin?

The number of shops and businesses accepting bitcoin is increasing rapidly. Here are just some of the things you can buy with bitcoin:

Even if you can’t pay directly with bitcoin, there is often a workaround.

You can buy gift cards using bitcoin from eGifter or Gyft, which you can then spend at Nike, Starbucks, Whole Foods, eBay, and Wal-Mart, among others.

A new platform called Bakkt, powered by the New York Stock Exchange and Microsoft, aims to provide a system to convert bitcoin to dollars. So you could theoretically buy a coffee at Starbucks.

You can even pay for tuition at Lucerne University in Switzerland.

And, in the bitcoin tradition, you can buy pizza through pizzaforcoins.com.

PART 4: Should I Be Worried about Scams and Hacks?

Bitcoin has a reputation for its connection to hacking and scams.

There is, of course, some truth to this.

In 2014, hackers successfully targetted the world’s largest bitcoin exchange, Mt. Gox . The hackers stole 850,000 bitcoins from the exchange (worth about $473 million at the time).

Even in 2018, hackers stole $35 million worth of bitcoin from the South Korean exchange Coinrail.

Again, however, this reaffirms the importance of storing bitcoins safely in a hard wallet and not on an exchange.

Bitcoin has also been connected to numerous scams and Ponzi schemes.

Fake exchanges, fakes bitcoins, and fake crowdfunding campaigns (known as ICOs – initial coin offerings) are still out there.

Until bitcoin exchanges are regulated by government authorities, more will pop up. Here are some of the worst offenders to look out for:

1. Scam wallets – these are the most common scams. They’ll look like a legitimate online wallet, but you’ll know they’re nefarious because they ask how much you’re depositing. They’ll  set up an address for you, but it will link to their wallets, not yours

2. Dodgy miners – these scammers claim to mine bitcoin for you. You pay them money and never see it again.

3. Exchange scams – these exchanges look like legitimate bitcoin exchange websites. The giveaway is that they accept  credit card payments for large amounts of crypto, or offer better-than-usual exchange rates.

The best way to avoid these dodgy schemes is to do your due diligence. Research every exchange before you sign up. Make sure they are trusted and make sure you are on the correct website.

Ignore anything that seems too good to be true. It probably is.

PART 5: The Future of Bitcoin

Although bitcoin is less than a decade old, we are just at the beginning.

Bitcoin, and its revolutionary blockchain technology, has opened the floodgates.

There are now almost 2,000 cryptocurrencies out there. Some aim to compete directly with bitcoin. Others are expanding on the idea and branching out into new territories (see ethereum).

Bitcoin itself is constantly evolving.

Right now, its biggest hurdle is scalability. Without getting too technical, Bitcoin is slow compared to many of its peers.

a chart comparing the transaction speeds of bitcoin vs ethereum, ripple, litecoin, paypal and visa

Source

Bitcoin can currently handle seven transactions per second. Compare that to Visa which handles 24,000.

It also takes ten minutes to confirm a bitcoin transaction. At peak times, like during the ‘gold rush’ in December 2017, it takes days to process bitcoin payments.

If bitcoin aims to become a day-to-day cash system, it needs to be faster.

However, there’s a huge disagreement in the community about how to do this. In fact, this is why bitcoin cash ‘forked’ (but that’s a whole other story. Read about bitcoin cash here.)

Bitcoin developers are now working on the Lightning Network, which will help settle small amounts fast on the bitcoin blockchain.

Is Bitcoin the Future of Money?

It’s perhaps too early to call bitcoin the future. It has some big hurdles to overcome including speed, reputation, and mainstream adoption.

One thing’s for sure, however. Bitcoin triggered a revolution. Cryptocurrencies and blockchain are here to stay. Countries like Venezuela and Iran are even copying the idea by creating their own national cryptocurrencies.

As for blockchain, a huge 84% of companies are now experimenting with the technology.

The future of money might not be bitcoin, but it will be cryptocurrency. Get ready for it.

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Where to Go Next?

  1. Ethereum – Loved this bitcoin guide? Learn about the second-biggest cryptocurrency
  2. Guides – Dive into more guides about bitcoin, blockchain and all things crypto.
  3. News – Keep up to date with the bitcoin world.
  4. Market – See up-to-date price movements for the top 20 coins and more.
  5. Block Explorers – Our block explorers let you dive into the blockchain and find any bitcoin transaction.

Bitcoin stable vs tech stocks

How many times have you heard the bitcoin is too volatile? Too dangerous to invest in? Well, over the last 20 days, bitcoin has proven more stable than Netflix, Amazon, and Nvidia stocks. 

Bitcoin is only slightly more volatile than Apple – the largest company on the planet, and the Nasdaq 100 index as a whole.

The data, reported in Market Watch, refers to the 20-day historical volatility (HV). The measure is used by traders and investors to identify particularly volatile assets.

Bitcoin’s 20-day HV is at 31.5% as of October 22nd. Compare that to Amazon’s 35%, Nvidia’s 40%, and Netflix’s 52%.

Asset20-day historical volatility
Netflix52%
Nvidia40%
Amazon35%
Bitcoin31.5%
Apple29.3%
Nasdaq 10024%

Stock Market Correction at Play

Admittedly, the Nasdaq is now in correction mode (down 10% from its high), so tech stocks are fluctuating more than usual. At the same time, bitcoin has settled in a small range with low volume.

We should also point out that bitcoin’s 20-day HV is rarely so mellow. In January, when bitcoin prices slipped from their $20,000 highs, the 20-day HV hit 140%.

Fast forward to today and bitcoin volume is approaching yearly lows. With lower volume comes less explosive market movements. Many have suggested this quiet period is one of consolidation for bitcoin, a time of indecision which some investors are using to build their positions.

Bitcoin’s Relationship with Stocks

Bitcoin’s recent stability means it could theoretically provide an alternative to stocks during volatile market movements.

However, bitcoin isn’t yet acting as the “store of value” it has often been touted as during a stock market decline. If that were the case, we’d see a large spike in bitcoin volumes as the tech stocks fluctuate. 

We’re not seeing that. Instead, traders are still turning to traditional “safe havens” like gold.

That may change in the future as Wall Street giants like Fidelity and J.P. Morgan slowly build infrastructure around bitcoin. With more institutional access to cryptocurrency markets on the way, we are more likely to see this dynamic come into play.

For now, take heart in the fact that your money is more stable in bitcoin right now than Amazon stock. 

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