Cheat Sheet: How To Answer Questions On Bitcoin
09 July 2024
Read Time 3 MIN
What is Bitcoin?
- Peer-to-peer network: Bitcoin is a peer-to-peer network that allows users to transfer value directly to each other without intermediaries, using open-source software.
- Transparency: Transactions and addresses (akin to bank account) are publicly visible. Each transaction is recorded on a public ledger called the blockchain.
- Limited supply: With a capped supply of 21 million coins, bitcoin has become a popular store of value and emerging medium of exchange.
How does Bitcoin work/operate?
- Open to all: Anyone can download bitcoin core software and run it on a personal computer.
- Community-driven: Developers work on it voluntarily, for free, and the code is open for anyone to review and contribute.
- Verification: New/pending transactions are added to the ledger by hardware (miners) using computational power to solve complex mathematical problems.
- Consensus upgrades: Bitcoin upgrades are proposed and implemented through a voting process among the network participants.
How is Bitcoin valued?
- Digital gold: Bitcoin can be thought of like “digital gold”. Like gold, bitcoin offers investors a finite supply (there will only ever be 21 million bitcoins). This scarcity creates a store of value for investors.
- How big is Bitcoin?
- Bitcoin adoption and activity has grown tremendously.
- 19 million Bitcoin in circulation (again 21 million will ever be created).
- As of April 2024, its market cap was around $1.2 trillion USD.
- 1B+ unique addresses, about 600-800K use the network to transfer value every day.
Overall, there’s 2 trillion in wealth, the size of the ETF industry in 2014.
Is Bitcoin safe? Can it be hacked?
- Decentralization: Bitcoin operates on a decentralized network spread across the globe, eliminating a central point of control that could be attacked.
- Blockchain Technology: Bitcoin transactions are recorded on a public ledger called the blockchain, with each block containing a cryptographic hash of the previous one, forming an immutable chain. Altering any transaction would mean changing all subsequent blocks, a task made computationally infeasible by the network's immense computing power.
- Cryptography: Bitcoin transactions are protected by cryptographic keys: a public key (wallet address) and a private key. Users sign transactions with their private key, which can be verified by others using the public key. Keeping the private key safe ensures bitcoins remain secure.
What is Bitcoin mining?
- Creation and verification: Bitcoin mining is the process by which new bitcoins are created and transactions are verified and added to the blockchain.
- Mathematical puzzles: Miners use computers to solve complex mathematical puzzles that validate and secure transactions.
- Network maintenance: Miners are essential in maintaining the Bitcoin network and are compensated with new Bitcoin and transaction fees.
What are the benefits of investing in Bitcoin?
- Potential inflation hedge: Bitcoin is not subject to the same inflationary pressures as traditional currencies, potentially making it a hedge against monetary stimulus and erosion of purchasing power.
- Diversification benefits: Bitcoin historically has a low correlation to traditional asset classes, like stocks and bonds, offering potential diversification benefits.
What are Bitcoin’s biggest risks?
- Volatility: Since Bitcoin is a relatively new asset, its price can be highly volatile over short periods.
- Market Risk: Like gold, Bitcoin's value is influenced by supply and demand dynamics, investor sentiment, and macroeconomic factors.
How much should I allocate to Bitcoin?
- Individual goals: Every investor has unique and diverse goals. Your risk appetite and investment time horizon will determine where Bitcoin fits in your portfolio.
- Enhancing portfolios: Bitcoin can enhance risk-return profiles. As this chart shows, a small allocation to Bitcoin has significantly enhanced the cumulative return of a traditional 60% equity and 40% bond mix while only minimally impacting overall volatility.
What are the advantages of a Bitcoin exchange traded fund?
- Cost: Customers on exchanges pay around 2% for transactions. All costs by exchange traded funds are including in publicly available fees.
- Custody: Bitcoin held on exchanges are not actually held by the individual so there’s significant counterparty risk. Exchange traded funds use segregated qualified custody to alleviate this risk.
- Portfolio Monitoring and Regulation: As adoption expands, Bitcoin exchange traded funds fit into traditional portfolio monitoring with trims/adds as part of total portfolio analysis and rebalancing. Plus, the exchange traded fund structure presents standard investment oversight from regulatory and financial parties.
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