A Beginner’s Guide to Bitcoin & Blockchain
I’ve been inundated with questions about Bitcoin:
- What is Bitcoin?
- How to buy it
- How does Bitcoin work?
- Is Bitcoin risky?
- Should a first home buyer save their money in Bitcoin?
Dear, handsome devil (that’s you),
Before I go on with this week’s update, just remember that the content you read or see on www.raskfinance.com or anywhere else on the internet is not financial advice. It’s for education.
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Okay, now that that’s done.
Let’s play a bit of Q and Aye with Gary, a carpentry friend of mine who loves a good night out, a few Little Creature Furphy’s (don’t we all?) and playing the field (be warned ladies, he’s single).
Gary: My parents told me about Bitcoin. They said I should buy some using my house deposit to save quicker. What the heck is Bitcoin?
First of all, Gaz, chances are, your parents don’t have a financial services licence (a legal requirement to give financial advice). So do what you did when they gave you the birds and the bees talk:
Put your fingers in your ears, yell “nah, nah, nah, I’m not listening”, and run away fast.
Second, Bitcoin is just one of more than a thousand (with a ‘t’) digital “currencies”. That’s right, Gaz, according to Benzinga there are more than one thousand different currencies, or “protocols”, in operation.
The backbone of digital currencies is a thing called “blockchain” (don’t worry, we’ll get to it in a moment).
Bitcoins are just a series of unique numbers and letters, which are “mined” by expensive computer servers. The coins are in limited supply.
How does Bitcoin work?
Blockchain could be a game-changer because it’s a technology which allows for anonymous transactions throughout the world. Think of groups in the pharmaceutical business transferring money back to their to distribution partners in South America.
No-one controls Bitcoin, or Blockchain technology, which is seen as a massive benefit for some people who don’t like their selfie turning up on a CIA server.
Each Bitcoin is a unique sequence of letters and numbers.
But don’t worry, there’s a bald guy with a goatee who ‘reads’ the jumble of letters and numbers and teleports people via public telephone to where they need to be.
Oh, wait, no, that’s the Matrix.
Anyway, every time there is a new transaction with a Bitcoin, an extra sequence is added to the network. The existing block of numbers and letters forms part of a chain (“blockchain”) to identify where the coin came from, where it went, and how much was sent. Everyone can see this sequence — not just the guy with a goatee (although, I’m sure there are a few goatees out there!).
This is the important part: only the person with the correct private key can access the Bitcoin at any time via their wallet.
“We can only show you the door, you’re [along with your private key] the one who has to walk through it.” – Morpheus (before his time), Matrix
This is getting weird.
So, the Bitcoin information is secured by a private key but the entire network verifies where it’s been and where it went. But, it’s just an address of the sender and the receiver, so we cannot see who sent or received it.
That’s different to sending money through a bank. When you do that, the bank acts a middleman and knows exactly who is buying and selling.
What are the benefits of Bitcoin?
People who have made money with Bitcoin, Ethereum, Ripple, or whichever currency, are always quick to point out that the payment solutions are virtually endless.
“Bro, it’s going to change the freaking world. Soon, I’ll be able to buy friends using my Bitcoin wallet!”
Maybe Bitcoin is the protocol which changes the world, but maybe it isn’t.
There are many other currencies out there, more are popping up each day.
However, one thing that the experts tend to agree on is blockchain, the underlying technology which powers the currencies. It appears to be here to stay.
According to CoinDesk, Bitcoin is:
- Easy to set up
- Decentralised (meaning no organisation controls it)
- Low cost
- Secure (unless you punch in a wrong number before sending coins — fat chance you get it back)
Is Bitcoin taxed?
According to the Australian Tax Office website, Bitcoin is, “an asset for capital gains tax (CGT) purposes.” That means yes.
How do I buy Bitcoin?
You have to get a “bitcoin wallet” before you can buy Bitcoin. I’m not going to name any providers because I wouldn’t want my — or Rask Finance’s — name on it. But you can Google “Bitcoin wallet” and it’ll return around 17.4 million hits.
Interestingly, the top news article for my search read:
“Bitcoin Gold Wallet Scam Nets $3 Million in Illicit Earnings”
“$3.2 Million Theft: Bitcoin Gold Wallet Scam Sees Fraudsters Steal Users’ Private Keys”
Is it safe to buy Bitcoin?
Good question, Gazza, read those news articles.
However, let me say this much: if my parents were telling me to buy Bitcoin and save for a house I would be very reluctant to ever, in a million years, discuss investments with them again.
Sure, your parents could be computer scientists who have secret codes to crack the market. But if they are not that cool (if they are, let me know), you should never go into any investment without doing months and weeks of research.
Maybe I’m just a bitternut pumpkin.
After all, I’ve known about Bitcoin for a while now and watched it rise rapidly. But let me tell you, I ain’t touching it.
Frankly, I don’t know enough about the technology (note: I’ve got a degree in Technology), the market or the risks, to believe that I can somehow have an ‘edge’ that other speculators and “investors” don’t.
I wouldn’t buy a risky investment unless I felt like the returns were going to be better than average. Sometimes, finding those opportunities are easier said than done.
I’m a beginner and my doctor says I have FOMO, what should I do?
My Mum had this frustrating policy when I was young and came to her with a new idea.
Mum: “Wait 3 days and if you still think it’s a good idea then we can talk about it again.”
Me: “What the heck, Mum. Don’t you understand I’m a 14-year-old invincible male? Give me the bloody cash so I can hurry up and get rich quick. I’m the future.”
At the time, I thought it was a crazy household policy. But, it’s right to say that I avoided my fair share of blowups. Thanks, Mum!
Instead of 3 days, it may be worth adding two extra zeros to that figure. 300 days, maybe.
In a year from now, people could be kicking themselves for buying or kicking themselves for missing out. However, simple math tells me that it is harder to make money once I’ve lost it, so I always err on the side of caution.
Plus, there are plenty of other ways to invest money.
Where can I get more info?
If you want to read — or listen to — more about Bitcoin, here are some resources I found useful:
- Invest Like the Best: Hash Power, a great podcast by Patrick O’Shaughnessy
- Bitcoin news and education – CoinDesk
- Original Bitcoin Thesis (PDF), Satoshi Nakamoto
Disclosure(s): I don’t own bitcoin, but I sometimes make decisions with my monkey brain.
Here’s to our financial future!
Tweet me: @OwenRask
p.p.s Ladies, Gary’s still (very) single and ready to mingle.
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