The Bitcoin financial services industry has greatly expanded since its inception in 2008, in the wake of the financial crisis. Given the loud voices and polarizing positions in the cryptocurrency world, this article will attempt to explain:
- What is Bitcoin?
- Why Bitcoin is valuable
- How you can get started
- Where can you stay up-to-date
What is Bitcoin
Bitcoin is a digital token that is exposed to a set of policies and procedures to determine how many Bitcoin a particular person owns and to verify transactions. These rules are standardized on a ledger that is maintained by computer systems all over the world (i.e., a ‘decentralized ledger’). The set of policies and procedures for Bitcoin (or any other digital asset) are called its ‘protocol’.
Updates to the protocol can be made by ‘votes’ cast by the computers that maintain the system (referred to as mining companies). These updates are often made to improve the scalability of the protocol.
Bitcoin’s Value Proposition
Bitcoin has created value in a number of different scenarios on a global basis. The key value drivers include:
- Programmable Trust: The Bitcoin blockchain is a transparent set of rules and standards for the transfer of value maintained by the most powerful computing network in the world. Given the decentralized approach, the cost of access for users to latch onto a monetary system with sufficient liquidity is dramatically reduced.
- Scarcity: 21 million Bitcoin will be the maximum coins that can be in circulation. This deflationary aspect of Bitcoin positions the digital asset to one day be a “safe haven” vehicle given the inability to manipulate supply or generate artificial “credit”.
- Macroeconomic Backdrop: The current macroeconomic environment has been propped up by moral hazards (such as ‘too big to fail’ bailouts) and asymmetric distribution of capital. This has induced a highly leveraged macro environment that has created at atmosphere of uncertainty about global credit and central banking. Bitcoin is the first true escape hatch from this system.
- Self-Sovereignty: The amount of unbanked persons around the world are estimated to be $1.7 Billion1. People affected by hyperinflation in countries such as Argentina are set to possibly accelerate, Morgan Stanley economists predicted a “fundamental shift in inflation dynamics”2. The benefit of Bitcoin is to allow people around the world an alternative to store value in anticipation of currency depreciation.
How to Get Started
In order to buy and hold Bitcoin, there are a couple of items to know. The following is not meant to be comprehensive list, but rather intended to provide a beginner the tools they need to test and learn.
Wallets are essentially the bank and/or brokerage accounts for holding digital assets. As the name would suggest, wallets are essentially your keys to interact with a particular blockchain. There are many different types of wallets, each with its own opportunity cost3.
- Hot Wallets: Hot wallets have a liquid structure that can be accessed through web browsers. Since hot wallets expose your private keys to the internet, they are susceptible to hackers. The benefit of hot wallets is that they are more liquid (due to the shortened signing process4) and can be used for quicker transfers.
- Cold Wallets: Cold wallets are a less liquid wallet structure with keys often generated and stored without being exposed to the internet. Since storage of keys is offline, maintaining private keys through paper or hardware means can be a cumbersome task (many firms like Coinbase and BitGo offer cold storage solutions to minimize the administrative burden). The advantage for cold wallet structures relate to security.
Despite the wallet structure, a proper understanding of the risks pertaining to holding crypto are essential. It is important to back up your wallet.dat or seed phrases5 to ensure the security of your assets. Many platforms will walk you through the process when opening a wallet. Furthermore, using proper 2FA procedures or using a Yubikey can improve your security regime.
Given the high level of industry innovation, there are variants of these wallets being released with tradeoffs between security and liquidity. Multi-party computation, for example, uses a signature structure that requires multiple parties to generate a valid blockchain signature6.
Another differentiator in wallet structures is between custodial and non-custodial accounts. A custodial wallet provider stores your private keys and keeps a backup, while a noncustodial wallet providers enable the customer to manage their own private keys7.
How to Buy
There are a couple of ways to acquire Bitcoin. Just like with stocks, many investors can trade Bitcoin based on their desired style: swing / day traders, dollar cost averaging, etc. Remember, you do not need to buy a full Bitcoin as each unit can be divided into 0.00000001 (referred to as a ‘Satoshi’ or ‘Sat’ for short). Many platforms are optimized for each of these methods, we will discuss a few easy ways to acquire Bitcoin below.
- Stacking Sats: These are the long-term holders of Bitcoin. They tend to buy Bitcoin at set intervals (like every month) or whenever there is a more severe decline in Bitcoin’s price (known as ‘buying the dip’) – a process known as dollar cost averaging. The phrase “Hodl” is derived from the community’s ethos of holding on to your crypto through market cycles, with the hope that the value will be significantly higher over the long run. If you are looking to mimic this strategy, there are many options to slowly accumulate your position through dollar cost averaging:
- CashApp: One of the quickest way to buy and hold Bitcoin in the US. The UI is straightforward, fees are minimal for execution, and you can easily link up your debit card, credit card, or bank account to facilitate each buy. You are also now able to set automatic purchases of Bitcoin.
- Swan Bitcoin: Also an easy buy and hold platform, Swan allows you to program daily purchases and minimize trading spreads by spreading out transactions.
- Traders: Given the high volatility of Bitcoin and other digital assets, traders have moved their focus over to the digital asset landscape. The explosion of financial products has made it easier to use advanced trading tools, execution technology, and automated accounting. Popular trading venues in the US include:
- Coinbase: Coinbase was one of the original cryptocurrency trading exchanges in the US. The Company recently filed for its IPO8, has a large list of tokens/coins to trade9, and are backed by a top tier group of investors.
- Kraken: Kraken was also one of the original trading exchanges in the US. They recently received a limited banking charter10 and boast one of the most secure trading platforms in the industry.
- Mining: Companies that mine blocks on the Bitcoin blockchain receive a certain award. Given the extraordinary computational power required to mine a Bitcoin block, significant resources are needed to consistently profit from mining. Mining pools can provide access for investors by combining computational resources, reducing their cost to enter. However, high fees and uncertain returns deter smaller investors from mining today.
Information flows to the digital assets industry in a communal fashion. Twitter, Telegram, crypto-specific sites, company websites and Medium are some of the best places to find info on Bitcoin and the broader industry. Given the early stage nature of the industry, many companies prioritize investor education to this new asset class.
Here are some of the best handles / platforms to follow:
@bitcoincoreorg – Bitcoin Core Project
@blockstream – Bitcoin technology developers
@Jespow – CEO and CO-Founder, Kraken
@Dan_Pantera – CEO, Pantera Capital
@Michael_Saylor – Founder and CEO, Microstrategy
@CaitlinLong_ – Founder and CEO, Avanti Bank
@Brian_Armstrong – CEO and Co-Founder, Coinbase
@aantonop – Tech entrepreneur, Bitcoin advocate
@rogerkver – Investor in Bitcoin startups
@Cameron – Co-Founder Gemini
@tyler – Co-Founder Gemini
@haydentiff – CoFounder, Casheer
@cryptoyoda – Technical Analyst
@RaoulGMI – Global Macro Investor and CEO and Co-Founder Real Vision Group
@ErikVoorhees – CEO of Shapeshift
@TonyVays – Trader and Host of Unconfiscatable
@VitalikButerin – Founder, Ethereum
@TyDanielSmith – MD, Coinbound
@CryptoWendyO – Host of the O Show
@IvanOnTech – Blockchain Education
@Crypto – Bloomberg crypto
@LauraShin – Host of Unchained & Unconfirmed
@cryptomanran – Host, CNBC
@AriDavidPaul – CoFounder, CIO of Blocktower Capital
@iamjosephyoung – Analyst, Contributor
@CoinDeskMarkets – CoinDesk News Company
@NickSzabo4 – Computer Scientist
@woonomic – Investor, Podcast host
@fintechfrank – Director of News, The Block
@lopp – Co-Founder & CTO, Casa
Communication via Telegram channels has become commonplace for Bitcoin financial services firms and sharing of updates for various crypto projects.
Most of the large companies have a fantastic education center, there to keep you engaged and informed about industry progress! Here are a couple:
- World Bank, “Financial Inclusion on the Rise, But Gaps Remain, Global Findex Database Shows”, April 19, 2018.
- Morgan Stanley, “Why the Fed’s New Inflation Policy is a Big Deal for Investors”, September 8, 2020.
- Arcana, “Cold Wallet v Hot Wallet for Storing Your Crypto Assets”, May 30, 2018.
- Albertorio, Anthony, “Public Key Cryptography and Digital Signatures”, May 2, 2018.
- Binance, “Crypto Wallet Types Explained”, October 2020.
- Nash, “The safest crypto wallet is no longer hardware”, November 18, 2020.
- Freewallet, “Custodian vs Non-Custodial Wallet Comparison”, July 10, 2020.
- Capital.com, “Coinbase IPO”, December 21, 2020.
- CoinDesk, “How Does Kraken’s New Crypto Bank Work”, September 20, 2020.