Bitcoin

Buying Bitcoin in Ireland

What is Bitcoin?

Since its inception in 2009, Bitcoin has generated a good deal of media attention.
Yet what exactly is it and does it really bring something different to the financial world? Bitcoin is a currency, but it is unlike the traditional currency of dollars and euros with which most of us are familiar.

Bitcoin is a digital currency and can be viewed as a currency of the internet.

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Bitcoin does not have any national government affiliation or large corporate ownership and is instead governed by a community of internet users. It is a form of cryptocurrency where the money is totally virtual.

Yet Bitcoin can still be used like traditional currency in that it can be saved, exchanged and used to purchase goods and services.

How Bitcoin Differs from Traditional Currency

Traditional currency, or fiat money, will be the only currency the vast majority of people will have known. Yet Bitcoin is shaking up this position.

Originally purely inconvertible paper money, fiat money has moved with the times and can now be converted and sent all round the world through digital means. Yet fiat money remains subject to the decree of national governments in order for it to be considered legal tender in countries.

One of the large attractions of Bitcoin is its independence from this centralised form of currency issue and control. It also does not require any interaction with financial institutions such as banks.

Therefore, when using Bitcoin you cut out the middle man, with reduced transaction fees a resulting benefit.

Bitcoin operates electronically by using code and this code is run by a community of users around the globe.

This methodology is how Bitcoin remains a decentralised currency compared to your dollars and euros. Transactions involving Bitcoin are private and can not be traced back to an individual.

This does not mean there is not a log of each individual transaction, an important feature to ensure people can not spend the same Bitcoin twice.

Indeed, each transaction is recorded on a public log, but a digital wallet identification is the only visible id, not personal names.

These time-stamped, traceable transactions are possible through Blockchain technology.

What Is Blockchain and Why It Is Important?

Blockchain technology is the foundation of Bitcoin’s operational functionality.

Blockchain technology allows for a public ledger that records each Bitcoin transaction, providing transparency in the digital currency.

All participating members can access this ledger, allowing for faster verification of data and greater confidence in the accuracy of currency transaction details.

The ledger consists of transactions held as discrete blocks of data, and these blocks are held in chronological order.

Whereas in standard bookkeeping programs it is easy to amend previously entered records, with Blockchain technology the entries are immutable and cannot be tampered with. The transaction data makes up the blocks which are linked together to form the chain.

Any user with any malicious intent to alter transaction details would find the complexities of altering the chain highly challenging.

That’s not to say it is impossible, but the nature of Bitcoin’s user community means it would require huge computer power to achieve and would be rejected by other Bitcoin users as they can all see new blocks as they are added to the chain.

Having a time-stamped, permanent record of entries has allowed Bitcoin to become a serious currency alternative.

Digital currencies would always previously have the issue of preventing people with bad intent of spending the same digital money more than once.

With Blockchain technology this serious drawback is removed. Increasingly the potential of Bitcoin has been recognised for financial transactions, with its decentralised model offering faster, more secure processing speed in a more transparent setting.

The Miners Who Make It All Work

When talking about Bitcoin we often refer to its community of digital users, but who are they and what do they do?

These users are referred to as miners and their work is the cornerstone of Bitcoin, helping to keep the network secure, fair and stable.

As the name implies they do actually mine for Bitcoin, competing against one another to work out or guess random numbers to solve a mathematical equation in order to release new Bitcoin in to circulation.

Saying the user guesses the number makes it all sound far easier than it actually is. It is the user’s computer which processes the numbers, with the user hoping to be the first to crack the code.

However, Bitcoin’s source code means there is a set maximum quantity of coin which can ultimately be mined.

This is set at 21 million bitcoins, with around 18.5 million already mined in the first ten years since the digital currency was launched.

Therefore, mining these coins was always designed to be resource intensive to ensure only a steady supply of new Bitcoin was placed in to circulation.

This means a more powerful computer able to generate more guesses every minute than a rival user increases the odds of being a successful miner.

What each user computer or node is doing is adding and verifying Bitcoin transactional records by discovering new blocks to add to the Blockchain public ledger. By correctly guessing the next number you become akin to a temporary Bitcoin banker who gets to log the block on the public ledger.

However, before that happens the answer you have supplied will be made available to the whole Bitcoin network for verification.

Of course there are rewards for finding the next answer to the puzzle beyond winner’s pride. Each miner who successfully adds blocks to the Blockchain is given newly ‘minted’ Bitcoin in return.

This is how new coins are introduced in to the market. Having originally been 50 Bitcoins, since May 2020 6.25 Bitcoins is now distributed as the reward.

This value is halved with each 210,000 blocks added. On top of this a transactional fee is given to users adding new blocks, so even when the maximum 21 million Bitcoins has been issued there may still be an incentive for miners to continue with their mining.

That said, on current calculations it is estimated the last token will not be found until 2040 and by then new protocols may have been introduced.

Buying and Storing Bitcoin

Bitcoin operates in the same way as traditional currency, in that it can be bought, stored and used for purchases.

Bitcoins are usually purchased and sold at cryptocurrency exchanges, and can be bought with money or other cryptocurrencies. These exchanges are online platforms which can be accessed through websites and mobile apps and include Coinbase, Binance and Bitfinex.

As traditional exchanges have previously only tended to accept dollars and Euros, investors buying Bitcoin used fiat currency can be subject to foreign exchange fees.

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Once you have purchased Bitcoin it is important to protect your investment from online hackers and fraudsters.

Having a digital wallet is crucial for storing your digital currency. A digital wallet can be kept on a computer or mobile phone or in the cloud.

What Is A Digital Wallet, And Do I Need One?

A digital wallet consists of software which allows you to manage your Bitcoin investment, moving it there from the exchange where it was purchased.

There are quite a number of Digital Wallet providers to choose from, so doing a little bit of homework in advance to ensure they meet your requirements is key.

A digital wallet comes with a private key, known only to the wallet holder. This is like the password to your bank account and not to be handed out to anyone.

Whoever has your private key has access to your Bitcoins. A digital wallet will also have an address similar to your bank account number, allowing someone to send you Bitcoins directly to your wallet.

In the world of cryptocurrency not everything has to be totally digital. A currency wallet can also be physical and some may argue this is the most secure form, being offline and away from prying hackers.

As Bitcoin uses a private key of numbers and letters for authentication, transferring that key to paper which is then transferred to a safe place can be an effective method of storing Bitcoin.

The Beginning of Bitcoin

The idea of using cryptocurrencies to purchase everyday goods and services was being considered back in the 1980’s.

The following decade saw the proof of work algorithm Hashcash proposed and an early attempt at a decentralised digital currency, Bit Gold, launch.

These and other such advances on the theme of potential digital currencies no doubt aided and paved the way for Bitcoin.

Bitcoin was launched in 2009, following the issue of a white paper in October 2008. The individual or group behind Bitcoin’s creation is still shrouded in mystery.

The white paper ‘Bitcoin: A Peer to Peer Electronic Cash System’

Little is known of the people involved apart from the name used to announce the new currency. The white paper ‘Bitcoin: A Peer to Peer Electronic Cash System’ was published under the name of Satoshi Nakamoto, an assumed pseudonym.

In 2009 the first Bitcoin transaction was made when 10 bitcoins was sent to an early contributor to the digital currency, Hal Finney from its creator Satoshi Nakamoto.

The privacy element of its creators may well be a purely personal decision to avoid any publicity, but it also fits in well with the currency’s application of transaction privacy for its users.

Security may well have been another concern. Anticipating Bitcoin’s potential to challenge traditional currency markets, the creators may have recognised potential legal challenges from Governments keen to protect their currency as well as tax and regulate the new digital exchange.

Track Record Since 2009

Although originally created as an alternative method of carrying out everyday transactions and bypassing the traditional banking system, Bitcoin has not yet acquired mainstream acceptance.

However, that does not mean it has not attracted investor attention. Indeed, since its launch Bitcoin has experienced quite a volatile track record.

After one year of trading the value of one coin had jumped to $0.08 from $0.0008, a significant increase.

By 2011 this had jumped further to $1 per coin. Yet this was nothing compared to April 2011 when Bitcoin suddenly hit $32 per unit, the currency’s first price bubble. However, this then plummeted to just $2 by November of the same year, exposing the volatility of the early market.

2013 was another year which saw huge increases in the value of Bitcoin, followed by a steep drop. Yet the story continued and by December 2013 a single Bitcoin was worth an impressive $1156.10.

There were a number of early factors influencing price swings in Bitcoin.

Adverse industry reports took their toll. In 2014 reports of a hack at one of the currency exchanges where 850,000 bitcoins were reported lost led to a sharp fall in price.

Yet earlier in the same year the price topped the $1000 mark after a major retailer, Overstock, announced its acceptance of Bitcoins. Ultimately Bitcoin is a new currency type and its volatility reflects this.

Any potential investor needs to ensure they have done their homework and received good, professional advice. Even with a pandemic, 2021 saw Bitcoin rise to over $41,500 per coin in January, before tailing off again to around $30,500.

Bitcoin Investment

The decentralised, peer-to-peer methodology of Bitcoin is one of the major attractions for investors, as well as transactions which are quicker and lower in cost.

Bitcoin offers an alternative to traditional investments such as fiat currency and gold, and while the currency is not backed by any central government institutions it can still be traded on an exchange for international currency.

Cathie Wood of ARK Investments on Bitcoin

What investors will be noting is how Governments around the world continue to respond to Bitcoin, not just in regulation terms but also for taxation purposes. In the US the IRS treats cryptocurrencies as property rather than currency and therefore property transaction tax rules apply.

When you look across to the UK, digital currencies are viewed as investments and are subject to capital gains tax when sold. On the whole cryptocurrencies are still a new form of financial market which Governments are gradually acknowledging and responding toward.

The Risks in Investing in Bitcoin

The volatile nature of the market is one of the factors which needs to be considered before investing in the digital currency. However there are further risks which also need considering:

Security – As most of the trading of Bitcoin is done online there is always the threat of hackers stealing your investment. Hackers may target currency exchanges or digital wallets held on computers or in the cloud.

Once a hacker has your personal key they have access to your Bitcoin, and as transactions are permanent and can only be reversed by the recipient there is no comeback.

Like cash there is no third party to act as a mediator. This is why paper digital wallets are preferred by some investors or why computers with digital wallets are not left connected to the internet.

Fraud – As with any other market, scammers operate to try and part you from your hard earned investment.

Private key encryption software helps to register transactions securely and verify ownership, but scammers may still try to sell false Bitcoins.

Regulation – Originally an unregulated market, cryptocurrencies such as Bitcoin have gradually drawn more attention by providing an alternative method to process financial transactions.

Increasingly governments are looking to regulate Bitcoin, and even ban it in some instances. A lack of a worldwide uniform regulatory approach, with new rules introduced by different nations, makes predicting investment returns difficult and raises concerns over the future of cryptocurrencies.

Insurance – Digital currencies such as Bitcoin have not tended to be covered by any national government insurance program in the event they fail, unlike traditional banks.

Paying and Getting Paid in Bitcoins

Although Bitcoin might not have entered the mainstream yet, the digital currency is still accepted by outlets as payment.

Bitcoin tends to just be considered as an investment platform like gold, but there are stores which display signs to show they accept Bitcoin for payment of goods and services.

Provided the stores have the relevant equipment to process the transaction then you are good to go by scanning your QR code or via a mobile app.

Similarly, it is straightforward for a business to accept payment by Bitcoin online through adding the digital currency as another form of payment alongside existing options.

The Different Bitcoins

The Bitcoin network is not immune to dispute like any other industry. Since its launch in 2009 there have been splits or ‘forks’ which have occasionally led to the creation of another type of Bitcoin.

To change the rules or protocols which govern the digital currency requires the consensus of the whole community of miners.

The Bitcoin Fork

A ‘fork’ happens when a group branches out, amending the source code and changing the rules. A hard ‘fork’ will see the rules changed completely. Some examples of Bitcoin ‘forks’ include:

Bitcoin Cash – Launched in August 2017, this ‘fork’ was a result of perceived scaling issues with the original Bitcoin.

This centred on the 1MB block size of transactions which was viewed by some as outdated and limiting as more users entered the Bitcoin network. Bitcoin Cash was launched with 8MB blocks, with reduced transaction fees a further benefit of increased block size.

Bitcoin SV – This new type of Bitcoin was created following a hard ‘fork’ from Bitcoin Cash.

It was launched in November 2018 after some users felt Bitcoin Cash had veered too far from the original values of Bitcoin, hence the SV of the name which stands for Satoshi Vision after Bitcoin’s creator.

Bitcoin Gold – Launched in October 2017 to further decentralise the Bitcoin network.

The originators of this hard ‘fork’ felt the computer power needed and cost involved to mine Bitcoin had reached the stage where it disadvantaged individuals, giving the power to big mining corporations instead.

The solution was to change the protocol by adopting a new proof of work algorithm.

Bitcoin Diamond – Launched in November 2017 by two teams of miners to improve on elements of the original Bitcoin protocol, including quicker transaction times and lower transaction fees.

A further aim was to improve privacy protection.

Questions of Legitimacy Remain

While the promise of anonymity and privacy protection for transactions is appreciated by legitimate investors, it has to be acknowledged that this same anonymity is the lure which attracts those dabbling in shadier dealings.

Similar to gold, Bitcoin currently seems to be largely used for wealth investment and by financial speculators.

Yet it is believed to still be used to launder large sums of cash. Unfortunately this is a stigma which has dogged the digital currency for some time and continues to do so.

This largely dates back to 2013 when the FBI shut down the Silk Road, a clandestine online black market.

The Silk Road online site would only accept Bitcoin as payment for procured goods and services due to the anonymity it afforded users.

According to the FBI, by using the digital currency the Silk Road was able to develop in to a sizeable money laundering operation. Since then, while the vast majority of Bitcoin buyers and sellers are perfectly legitimate, for some potential investors this stigma still sits over the currency.

Cryptocurrencies such as Bitcoin are still a very modern addition to the world of financial transactions.

This naturally means they do not have the track record to compare against other markets.

However, even though Bitcoin has only existed for little more than a decade it has become increasingly popular as an investment option and has attracted miners keen to solve the numerical puzzles and earn Bitcoin for themselves.

The market has been volatile, as may have been expected for a currency still in its infancy and still developing.

Cryptocurrency remains one of the highest risk investments and its future remains uncertain as more governments decide on how to regulate these new forms of currency and transactions.

Many other digital currencies have been launched over the years, but Bitcoin still has a unique brand recognition among cryptocurrencies which helps keep it ahead of the rest.