How to use Bitcoin
What is Bitcoin and what can you use it for?
Want to know how to buy and use Bitcoin? Before you get started with Bitcoin it is worth knowing a bit about what it is and where it came from.
The birth of Bitcoin is an incredible story. It is no exaggeration to say that it sounds more like something out of a Hollywood blockbuster. Yet, as the old adage goes, life really can be stranger than fiction.
In 2009 an individual, though it actually might be a group, called Satoshi Nakamoto published a whitepaper which led to the creation of a digital currency called Bitcoin. In doing so they he/she/they managed to solve the puzzle that developers had been working on since the early days of the internet. How do you create a stable and secure global digital currency?
The really clever part was the creation of blockchain, an innovation which we will look at in more detail another time. Essentially, by harnessing blockchains Bitcoin transactions — payment exchanges etc — are decentralised and logged on networks across the globe. The world finally has a robust digital currency that could be used across the globe.
In this beginners’ guide, we will explain how to get started with Bitcoin and explain what Bitcoin is used for.
How to buy and use Bitcoin
There are two ways to get and use Bitcoins. One is via mining, which we will look at in detail in another article. Suffice to say for now, this is a long and involved process for which you will need a very highly specified computer and be prepared to fork out for astronomical electricity bills. You could mine for very long periods and not see any return, so this might be best left to the professionals.
The easier way is to actually buy Bitcoins. This is a fairly simple process. Firstly you need to set up a digital wallet. These come in a number of guises but the most popular tend to be online/ wallets or mobile wallets that are integrated into apps. Many people use a combination of both to track their transactions.
The wallets are controlled by a private key. In some instances you will own the key, but if you buy Bitcoin from exchanges or crypto sellers you might find they control your keys. Some people prefer the security of owning the key while others think it is easier and more sensible to entrust them to the organisations that sold them the Bitcoins. You pays your money...
If this is all sounds like a lot of trouble, don't worry there are ways in which, as an investor, you can harness the liquidity of Bitcoin without actually owning coins. We’ll explain that later.
Once your wallet is up and running and you have linked it to your bank account or card you can buy Bitcoins.
This can be undertaken a number of ways. The easiest way is to buy Bitcoin from an exchange. You simply set up an account and swap your fiat money for Bitcoin.
There are a huge number of places you buy Bitcoin, including Currency.com and its partner site Capital.com. If you do take the plunge keep a close eye on value as it can vary significantly from exchange to exchange — even more so than fiat money. Incidentally, you don't have to buy a whole Bitcoin you can buy a percentage of it, as you do with traditional fiat currencies.
How to use Bitcoin to make purchases
Once the purchase is done, there are several ways you can use your Bitcoin.
Firstly you can use it as standard currency to buy items. The number of retailers that accept Bitcoins is growing on a weekly basis, and there are many online directories which can point you to places where you can exchange your digital currency for goods and services.
One way of paying for things is via an app called Spedn. This enables consumers to make purchases through an app on their smartphone. The funds are instantly converted to local fiat currencies on behalf of the merchants. Among the retailers who work with Spedn are Starbucks and Whole Foods Market.
There are however some very clear disadvantages of using Bitcoins to pay for items. The price of Bitcoin can go up and down in a manner of minutes. It is not entirely impossible, in the time you have eaten a meal in a restaurant, for the price to have dropped to the point whereby the meal ends up working out more expensive than you expected when you entered the establishment.
How to use Bitcoin to trade
You can also use your Bitcoin to trade on exchanges, buying and selling the currency when you think the prices are likely to rise or fall. So, for example, you could set up an account on Currency.com and trade in this way.
More recently though some traders have felt that they wanted to keep their Bitcoin, but also wanted to make it work harder for them. This is where tokenised security exchanges like Currency.com come into their own.
The exchange enables you to not just trade in Bitcoin, but also use your Bitcoin to buy stocks and shares, investing in commodities, and a whole lot more. It is an ideal way to diversify a crypto based portfolio. Essentially cryptocurrency is used as collateral to invest in other markets. Instead of owning the actual stocks etc investors are given a token that represents the value of the shares. The advantage is that the investors don't pay the penalty of having to sell their Bitcoin to access these other assets.
Investing in Bitcoin without buying it
There is also a way for investors to experiment with Bitcoin without actually owning it. Currency’s partner site Capital.com enables anyone to speculate on the price of Bitcoin using a concept called Contract For Difference — or CFD. This is a system that enables investors to trade on margin. They do not buy the asset, whether it is Bitcoin or anything else. Instead a CFD is a contract between a broker and a trader who agree to exchange the difference in value of an underlying security between the beginning and the end of the contract. Investors can use leverage to increase the returns that are possible if the price of Bitcoin (or any other asset) shoots up. Or their losses if it all falls.
Again this is a concept that we will explore in another article.
Wait and watch on Bitcoin?
At the current time Bitcoin owners seem to be split with some adopting a wait and watch approach, confident that in the long run Bitcoin’s price will rise significantly. Others are making serious profits (and sometimes losses) using CFDs to trade on Bitcoin’s margins as its price rises and falls.
What makes Bitcoin exciting from a trading perspective is that its future is still very unclear. If the currency gains in popularity, and becomes more established across the globe, then it clearly has a bright and lucrative future. If however countries and organisations like the EU legislate against it — or adopt their own digital currencies — its could follow a very different path.
And from an investor’s perspective that bumpy path is likely to create all kinds of interesting opportunities.