Bitcoin – what is it and how do you make money with it?

Bitcoin – what is it and how do you make money with it?

To understand the essence of Bitcoin, it is good to first look at the conditions for its creation. So let’s start by explaining the technical aspects of the cryptocurrency , but by the fact that its appearance coincided with a period when the whole world felt the effects of a huge economic crisis. This is important because the causes of its outbreak and the ways to rescue the economies that were subsequently implemented (mainly mass printing of money) led to a decline in confidence in governments and central banks.

Bitcoin was supposed to be an innovative virtual currency that would allow people around the world to be independent of the flawed financial system (according to the creators of the cryptocurrency). This was possible thanks to two main characteristics: a predetermined limited supply (21 million units) and the ability to conduct fast and secure financial transactions that do not require the participation of banks and are beyond the control of governments. For these reasons, cryptocurrency enthusiasts began to see in them an example of freedom, as well as a kind of “digital gold”, which should store the value of money over time. But is this true? Is Bitcoin a cure for the flaws of the modern financial system?

The article will help you find answers to these and other questions related to older (still around) cryptocurrencies. From him you will learn what Bitcoin is, how it works and how its path behaves. In the text, we will also suggest where and how to buy bitcoin and analyze whether it is worth investing in it at all.

What is bitcoin and who created it?

Bitcoin is an open source decentralized payment platform built on the basis of blockchain technology and uses its own cryptocurrency of the same name (the symbol is BTC). So if you want to invest in BTC, you buy peer-to-peer digital bitcoin which allows you to send and receive it. It might sound a little complicated, but thanks to cryptocurrency exchanges that provide easy-to-use investment platforms, trading bitcoin is not much different than trading in the stock market, for example.

Most importantly, the Bitcoin network is not under the control of any top-down organization, so no one can, for example, increase BTC emissions or withdraw or block a transaction that takes place on the network. The platform can be operated thanks to the users’ computers, which provide their computing power to perform complex calculations. This is necessary because encryption is used to perform, verify, and encrypt network operations.

It should be noted that the Bitcoin network is public, but the transactions that took place on it are pseudonyms. This means that no one can find out who the users of the network are, but everyone interested has access to the operations that take place in them or the balances of individual wallets (addresses).

One of the biggest mysteries surrounding Bitcoin is the personality of its creator. To this day, we only know that he was a very talented programmer or group of programmers nicknamed Satoshi Nakamoto. We probably won’t know who the actual inventor of cryptocurrency is, but it’s worth noting that there are many interesting conspiracy theories about this issue. According to them, bitcoin will be the work of US intelligence, the Bilderberg Group, the Chinese government, or artificial intelligence.

What is cryptocurrency bitcoin?

Bitcoin was supposed to be a global digital currency that would allow you to make fast, convenient, secure and cheap payments. However, various factors mean that its payment functionality is currently not the most important. Although some companies accept payments in BTC (even Tesla by Elon Musk did temporarily), and El Salvador has given Bitcoin as an official currency, nowadays cryptocurrency is treated primarily as a speculative tool and a way to store the value of money over time (that’s how Which is seen by the so-called Bitcoin.

It is worth noting that unlike many other cryptocurrency projects, such as Ethereum , cardano or eos, Bitcoin is not a platform for creating decentralized applications. It uses only one application of blockchain technology, the aforementioned electronic system for digital payments. Does this mean that it is a worse investment than it is now? Not necessarily, because, firstly, the valuation of cryptocurrencies is influenced by many different factors, and secondly – Bitcoin still has many important advantages for investors, for example, high recognition or low and limited supply.

Bitcoin was first used to pay for goods on May 22, 2010. On that day, 10,000 bitcoins were paid for two pizzas, which is now the equivalent of several hundred million US dollars. Over time, crypto enthusiasts began to celebrate the anniversary of this event, which is known as Bitcoin Pizza Day.

How does bitcoin work?

We have already explained what cryptocurrencies are and how they work in a separate text, so here we will limit ourselves only to the most important technical issues related to Bitcoin. It is worth getting to know them, because it will allow you to better understand their specifics, and this, in turn – to make more informed investment decisions.

Dated but still the most important thing

Let’s start with the fact that Bitcoin is one of the first cryptocurrencies in history (in fact the first if we take into account the modern understanding of cryptocurrencies), so it is necessarily a bit old. The most significant drawback is that using its network is neither fast nor cheap. Currently, you have to wait on average several minutes for the transaction to be approved, and the fees for transferring bitcoins can run into tens of dollars.

There are already many other digital currencies in the market that allow you to make much cheaper and faster payments. However, their prices are less stable and popularity is much lower, so if an entity decides to accept payments in cryptocurrency, it is most often in Bitcoin. Let’s add that Bitcoin is still capitalized around 40-60% of the entire cryptocurrency market, so we’re talking about absolute dominance. This includes therefore, the behavior of the BTC rate has an impact on the general sentiment of cryptocurrency investors and the ongoing evaluation of other crypto projects.

Technology, drilling and other technical aspects

Bitcoin uses blockchain technology, the operation of which prevents counterfeiting of cryptocurrencies, as well as the transactions in which they are used. Its blockchain uses Proof of Work consensus, which means that there is a mining process for cryptocurrency in the network, which is supported by so-called miners (miners) equipped with computers with high computing power.

The task of miners is to mine new bitcoins, as well as to approve transactions and thus create so-called blocks in which information about the process is saved. For every block mined, miners receive a bitcoin reward, with the reward amount gradually decreasing. The bounty of the chiseled block is reduced by half every 210 thousand. About every 4 years. Initially, 50 bitcoins, as of May 2020, will reach 6.25 bitcoins, while in 2024 it will drop to 3.125 bitcoins. The low rate of bitcoin mining means that while 19 out of 21 million have already been mined, the last bitcoin will only appear in more than 100 years.

The Bitcoin network’s inflation rate is already low and will be even lower, which is of course a positive sign for investors. Cryptocurrency proponents believe that this will be beneficial to further boost the BTC exchange rate in the long run.

How do you make money from bitcoin and what profits can you count on?

As you can see, there are at least two ways to make money with bitcoin. You can not only invest in it, hoping to increase the price, but you can also buy specialized equipment and work as a miner operating the network. If you want to seriously approach the latter option, first carefully calculate the costs of the entire process, taking into account possible electricity fees or the purchase price of a crypto-excavator.

Assign the numbers obtained with the income that mining can bring, and evaluate the profitability of the entire enterprise. Earnings here are very limited, but you can still find it rewarding. Also remember that you can also mine other cryptocurrencies, for some of them an ordinary computer is enough.

Bitcoin mining is energy intensive. In September 2021, the New York Times published a report stating that it represents about 0.5% of global electricity demand! Therefore, operating bitcoin consumes more energy than the annual electricity demand in many countries, including, for example, Denmark or Finland.

Bitcoin trading and raising

Most investors see Bitcoin as a high-risk financial instrument, but at the same time it has a much greater profit potential than other asset classes, such as stocks or commodities. Let us add, however, that they are divided into two groups: merchants and so-called dependents.

Traders or speculators generally treat bitcoin like any other investment. They often use technical analysis tools (usually fundamental analysis is less important to them) and assume a short or maybe medium term investment horizon. In their case, finding the best time to get in and out of an investment is the key to success. More importantly, some of them are not limited to playing against increases in the rate of BTC. Some take a short position using potential futures or options and also try to take advantage of the falling price of the cryptocurrency.

The second group are traders, that is, long-term investors, who often see Bitcoin as something more than a speculative tool. They are usually crypto enthusiasts who are close to the ideas behind them (decentralization, independence, no oversight, etc.), and are optimistic about the future of Bitcoin, and most often the entire cryptocurrency market.

It is worth noting that a large number of investors, especially dealers, attach great importance to the 4-year cycle theory of Bitcoin or the stock flow model, which expects an increase in its price in the long run. We will return to these issues later in the text, while providing a historical BTC price chart below, which allows you to better understand where the enthusiasm of Bitcoin fans is coming from.

The highest bitcoin price and profit potential

If you buy bitcoin in the first months of its existence and hold it for about 10 years, your return on investment will be several million percent. No instrument in history has recorded such a staggering increase in value in such a short time. It is worth noting that at the time of writing this article, the highest price for Bitcoin was the peak in April 2021, when it was set at around $65,000 USD. It was preceded by a bull market that lasted more than a year, which, as you can see in the chart, started at a price of about $5,000.

The 13-fold increase in value in such a short time should be considered impressive, even though Bitcoin has seen more price hikes in the past. In 2017 alone, the price of BTC rose 20 times, and in 2013 it reached 70 times (these are approximate values, because each exchange has its own crypto prices). Based on these results, it can be concluded that along with the increasing popularity and liquidity of Bitcoin trading, one should expect slower price increases dynamics. However, as long as the prevailing sentiment in the markets favors it, Bitcoin can still turn out to be a very profitable investment.

Lowest Bitcoin Price and Investment Risks

When it comes to the lowest price of bitcoin, we have to go back to the point where it is traded on the exchange. In mid-August 2010, 1 BTC cost only a few cents (on the Mt. Gox exchange), and a year later it was paid out for tens of dollars. Since then, the price of Bitcoin has risen dynamically, although we must not forget that it recorded many amazing drops in the meantime.

In the past, there were times when Bitcoin dropped more than 50% in just a few days. During the multi-month bear market periods, declines reached 90% (starting with the price peak that ended the boom). Over time, it turns out that even investors who buy bitcoin on the hill (for example in December 2013 or 2017) can count on making up for losses with a clear interest. However, earlier, many of them got frustrated with the cryptocurrency and sold it at a huge loss during the bear market months.

Today, the bitcoin market is more mature and has a much larger capitalization than it did a few years ago, so sharp sales are less frequent and a bit smoother. On the other hand, one drop is still 20 or even 30%. It is undeniable that for many investors such rate fluctuations are simply unacceptable.

Mountain. Gox has been one of the first cryptocurrency exchange platforms in the world for several years. It is also the first crypto exchange in history to mysteriously lose its clients’ funds and, as a result, declare bankruptcy. In 2014, as many as 850 thousand bitcoins evaporated from its servers, which at that time was equivalent to 450 million US dollars.

Will Bitcoin cost a million dollars? Price forecasts and popular theories

People who are considering investing in bitcoin often check their future price predictions first. However, you should be careful about these predictions. why? First, markets are inherently unpredictable and no one knows what the future holds. Secondly, many expectations come from analysts and investors who have a clear positive or negative attitude towards cryptocurrencies, and therefore may have concerns about their objectivity.

Bitcoin fans assume that it is the currency of the future and, at the same time, digital gold, which will only increase in value in the long run. They believe that sooner or later you will have to pay several hundred thousand dollars for 1 BTC, and sometimes several million dollars. They base their price predictions on the stock-to-flow model, but also on other tools and theories related to Bitcoin (for example, the four-year cycle theory).

There are also staunch opponents of Bitcoin who, in turn, claim that it is a huge speculative bubble. In their opinion, it is a worthless, power-hungry tool, with its best years behind it. There are also voices among them that Bitcoin will be strictly regulated over time, and that it is banned outright in many countries, which will lead to a permanent collapse in the exchange rate. Let’s add that although the implementation of such a negative scenario seems unlikely, it is not entirely possible.

Stock model for bitcoin flow dla

The stock-to-flow model (for short, SF or S2F) is a way to measure the abundance of a specific resource (such as natural resources such as gold). It refers to the ratio of the quantity of resources in stock, which we can call total supply or stock, to the quantity of resources extracted/produced (flow). According to this model, the smaller the number of assets assigned, the more favorable it is to evaluate them.

If you already understand how bitcoin works, you’ll likely see the point of using the S2F model in context. The “king of cryptocurrencies”, such as gold or silver, is a rare commodity that, in addition, has a strictly defined total supply (stock) and an extraction rate (flow).

In the cryptocurrency world, the most popular model is S2F, which was created by an investor using the alias Plan B. He took some input data (BTC supply, halving schedule, historical valuations) and then used linear regression to model the Bitcoin rate.

The chart above shows actual bitcoin prices over the years and the prices the model has predicted ( here you’ll find a constantly updated chart). As you can see, its verifiability has been very high so far, although it is worth noting that the periodic deviation of the price can be really strong. Suffice it to say that, for example, in the middle of 2021, the actual price of Bitcoin was closer to zero than the valuation indicated by the model.

Proponents of the S2F model assume that the price of BTC will follow a similar trajectory as in previous years. It will continue to grow in a way related to the recent decline in the supply of bitcoin. According to forecasts, the price of Bitcoin will reach 1 million US dollars in 2025.

It is worth noting that some investors use the S2F model to make decisions about entering or exiting bitcoin. In line with her assumptions, if the actual price clearly exceeds the expected price, it might be a good time to sell the cryptocurrency. On the other hand, when the current BTC rate is lower than what the model predicted, it is expected to increase. The more the price deviates from the price forecast chart, the more bullish or bearish market signals will be.

The downside of the described model is, among other things, the fact that it does not take into account the macroeconomic environment at all. It is important that the cryptocurrency market has been based on global sentiment for some time and shows some correlation with the traditional financial markets, especially the stock markets.

4 Years Course Theory on Bitcoin and Cryptocurrency Market

Some crypto investors, especially those who have been in the cryptocurrency market for a good few years, believe that bitcoin moves through 4-year market cycles. This theory is the basis for determining, among other things, the moment of the start of the next bull market, its duration or possible price peak. Based on this, you can look for a good moment to enter or exit the investment. Let’s add that this is not just about Bitcoin, but about the entire cryptocurrency market – we’ll explain a little later why.

The basis for this theory is the fact that the aforementioned halving occurs in the Bitcoin network once every four years. So far, there have been three BTC mining reward splits (in 2012, 2016 and 2020) and they have all produced a similar effect. Simply put, a few months after each of these events, a bull market began, which lasted several months. Then the bubble burst and a long bear market began, which severely smashed the rates of almost all cryptocurrencies.

The four-year cycle theory applies to Bitcoin, but it is practically applicable to the entire cryptocurrency market. This is because it is by far the most popular and capitalized cryptocurrency, whose behavior determines the sentiment in the broad cryptocurrency market. If the price of BTC goes up, the prices of most of the remaining cryptocurrencies will also go up – sometimes immediately, sometimes after some time. His rejections tend to drag the rest of the projects with them.

Keep in mind that bitcoin cycles so far have not followed the same path, and related theory, such as the S2F model, for example, does not take into account what is happening in other markets and the global economy. Moreover, it is only after the boom that ended in 2018 that we can notice that the previous two halvings actually marked similar cycles in the Bitcoin market. However, on this basis, many investors began to believe that after the next halving (May 2020), another big bullish rally will begin. 

The expected increases have already occurred, but it should be emphasized that they coincided exactly with the large-scale reprint of funds, the introduction of almost zero interest rates, and a very positive sentiment in the financial and commodity markets. All this undoubtedly contributed to the increase in cryptocurrency prices.

How to buy bitcoin and is it worth it?

The long-term bullish trend that has persisted in Bitcoin since its inception, as well as price expectations based, among other things, on the stock-to-flow model or the 4-year cycle theory, can encourage investment. Another positive sign is the growing interest in cryptocurrencies, also on the part of institutional investors. It is favored by strong price increases, but also by known numbers and events that contribute to increased recognition of Bitcoin and other cryptocurrencies – we are talking here, among others, about Elon Musk, Tesla or El Salvador, where BTC has become the official currency of the state .

It is worth noting that the great strength of Bitcoin, and indeed the entire cryptocurrency market, lies in its community. An important part of it are YouTubers and Twitter users with a large reach, the vast majority of whom are crypto enthusiasts. They have popularized pro-growth theories and predictions regarding the valuation of cryptocurrencies, which inevitably have a clear positive impact on cryptocurrencies.

You can also easily find information and negative opinions about Bitcoin and the cryptocurrency market on the web. Instead of repeating it here, we will mention an issue that analysts and investors rarely raise, which could be of great importance to the future of the cryptocurrency market and related price predictions. what the subject is about?

Well, you should be aware that the amazing long-term boom of Bitcoin coincides exactly with the longest boom in the history of stock markets (compare the BTC price chart, for example, the SP500 stock index), which began in 2009 and continues to this day (as of from September 2021). We won’t speculate on how long it will last (and whether it will ever end), but be aware that a change in sentiment and the entry of stock markets into a bear market for several months can shock the cryptocurrency market as well. In this case, existing models and theories (eg S2F, 4-year cycle) can simply be invalidated.

In short, the entire history of cryptocurrencies practically falls into the period of dynamic development of economies, lower interest rates, money reprints, and long-term price increases for many other assets, such as stocks. So it can be said that so far the conditions have been strongly favorable for an increase in the price of Bitcoin. Time will tell whether this will also be the case in the coming years.

If you are positive about the future of bitcoin, check our rating and see which cryptocurrency exchanges will allow you to buy it on the best terms; Remember that some of them also offer futures contracts, thanks to which you will also be able to earn low profits on the BTC exchange rate. However, if you are a beginner and not sure where to start, see Where and How to Buy Cryptocurrency? In it, we detail how you can trade bitcoin and other cryptocurrencies, and discuss the security of trading and storing digital assets. It is worth exploring these aspects so that you can consciously navigate the very interesting, but also risky, world of cryptocurrency.

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