Coinfloor’s education section provides a straightforward guide to Bitcoin, how to start investing and trading, and what to look for in a trustworthy exchange platform – as well as the key qualities to look for in a cryptocurrency.
With any form of investment, the more independent research you do, the better. But for those starting their journey into the world of crypto, our guide provides the perfect introduction to the risks and rewards of Bitcoin.
What is money and how do we find the best money?
Money was invented to deal with the limitations of trade via barter. The easier it is for people to trade, the more prosperous, productive and beneficial it is for everyone. Good money such as gold facilitated trade and growth in the world economy by allowing people to trade at a distance and at a time and place convenient to the traders. Modern civilisation would simply not have been possible without money.
Over the centuries there have been many forms of money, ranging from shells all the way through to gold and, more recently, mobile payment apps. However you choose to pay, whether it’s via cash, card or electronic transfer, the money most people use is created and distributed digitally by banks on behalf of governments. This money is known as “fiat” money, which has many strengths over earlier forms of money, but it comes with one major weakness – fiat loses value over time due to inflation.
Some of the greatest minds in economics have long thought that the ideal money must be one with zero inflation, while retaining the benefits of modern digital cash and cards. This is because money should ideally not go down in spending power over the long term; instead, it should retain its value so that everyone’s hard-earned savings are protected. A money that maintains or stores its value enables holders to plan for the future, and to increase their wealth in a sustainable way. Currently, only one thing meets the ideal money standard: Bitcoin.
On 31st October, 2008, Bitcoin was unveiled by its anonymous inventor, Satoshi Nakamoto. One of the many innovative features of Bitcoin is that it was designed to be inflation-proof as there can only ever be a maximum of 21 million bitcoins. This feature meant that for the first time, the world had a money that could be sent digitally – just like fiat cash – but was guaranteed to have zero inflation. For this reason, Bitcoin has rapidly risen to become a multi-billion pound worldwide phenomenon. But this is only the beginning: Bitcoin is on the verge of becoming a worldwide phenomenon that could change the whole history of money
Bitcoin is already an incredibly powerful form of money, but there are still areas that need development. One key area of focus is making Bitcoin useable for everyday transactions. This challenge is being solved in different ways: Bitcoin-focused exchanges like Coinfloor provide the market with quick, secure and simple access to Bitcoin, while innovations like the Lightning Network enable smaller, peer-to-peer Bitcoin payments to be processed almost instantly. Though the current Bitcoin block chain is not set up to process payments at the speeds required for mass payments, solutions are in the pipeline.
Bitcoin isn’t perfect (yet) but it is still the most powerful form of money available today and getting better all the time.
The invention of Bitcoin inspired the creation of a number of alternative cryptocurrencies. These “altcoins” attempted either to solve different problems or improve upon Bitcoin in some way. Let’s look at some of the key qualities of a world-beating cryptocurrency, and cut through the noise to measure these cryptos against Bitcoin’s standard:
Cryptocurrencies that fail to meet these criteria are often colloquially referred to as “shitcoins”. So far, based on these tests, even the most advanced altcoins that have tried to improve upon Bitcoin have fallen short and the currencies designed to solve different problems, are yet to gain significant traction.
Bitcoin is the only cryptocurrency with a clear and proven use case. As an inherently inflation-proof currency, Bitcoin experiences a natural upward pressure on its price over time making it uniquely interesting as a potential investment, while its maturity and resilience enables you to trade Bitcoin with a level of confidence that’s simply not possible with newer and less-tested cryptocurrencies. This is why Coinfloor focuses solely on enabling our customers to buy, sell, trade and learn about Bitcoin, the world’s leading cryptocurrency.
How and when should you buy bitcoins?
Whether you are a seasoned bitcoin investor or an absolute beginner, the safest strategy is almost always to invest and hold over the long term. Don’t be distracted by complicated get-rich-quick schemes.
When you start investing in bitcoin there are a number of terms you should familiarise yourself with:
Whichever method you choose, only invest an amount that you can afford. Also, mixing investing and trading can be risky – if you wish to do both, you’d be wise to keep your investing separate from your trading activity. Finally, the tax treatment for profits or gains made by investing is often different from gains made by trading – you should understand how these are calculated to make sure you are prepared.
There are many alternative cryptocurrencies other than Bitcoin, we have already looked at the factors that distinguish a crypto with the technical maturity, value, community support and regulatory status to be successful.
These tests are designed to cut through all the noise, scams, and misinformation and allow us to quickly figure out whether a cryptocurrency has the potential to be a comparable investment to Bitcoin. Be aware that some exchanges are paid to promote, teach courses on, or list alternative cryptocurrencies. At Coinfloor, we only deal with Bitcoin because no other crypto meets the standard.
Trading Bitcoin or any cryptocurrency is risky because they are highly volatile in the short term and trying to figure out when best to trade is very difficult. It is normal for the price of a bitcoin to change significantly in a short period of time. Trading bitcoins should be done by those with the right skills and experience to do so effectively over the long term. Trading with leverage (i.e. borrowing money to trade more than you have) or trading smaller cryptocurrencies than Bitcoin are both even riskier as these are more volatile and difficult markets to trade.
If you are an experienced trader or trading firm, or you find the idea of trading interesting and want to develop the skills needed to trade safely and effectively, then trading is for you! However, it is important to focus on learning the basics, not trading with more than you can afford to lose, and being wary of anyone suggesting that trading is easy.
There are a lot of people in the crypto space trying to take your money in bad faith. Be careful of those that:
Investing by buying regular consistent amounts, also known as dollar cost averaging, is one of the safest and simplest ways to buy bitcoins. You should look for an investment partner that makes it easy for anyone to make regular or lump sum bitcoin purchases whenever you wish – the principle that underpins Coinfloor’s Auto Buy™ service.
The next step is to consider trading bitcoins directly. You’ll need to build up your knowledge and experience in Bitcoin first before considering trading other cryptocurrencies or more advanced products. The less traded (i.e. liquid) a cryptocurrency is, the easier it is for the price to be manipulated and the more volatile it will be. Also, more advanced products like trading on leverage or derivatives trading can offer greater rewards but also come with greater risks.
How do you determine where you should buy, sell or trade?
A cryptocurrency exchange is a website or service which enables its users to buy, sell, invest, trade, and store cryptocurrencies like Bitcoin. Choosing the right exchange is important because you are trusting them with your money. They should not be acting against your best interests.
Ideally, an exchange should be able to meet all the criteria discussed in this section.
A risk with using any cryptocurrency exchange is that it could misuse your funds by trading on other exchanges or lose funds by being hacked. If this happens, the exchange will be insolvent as it no longer has 100% custody of its clients’ funds. Worse still, the exchange may hide insolvency from its users and continue to operate for weeks, months or years. Exchanges can prove that they are solvent and have 100% custody using the power of the Bitcoin block chain by publishing bitcoin audits, also known as proof of custody or proof of solvency reports. Coinfloor is the only crypto exchange to have performed regular bitcoin audits since launch.
Running a crypto exchange is very hard and requires specialist skills and a lot of discipline. One of the best measures of an exchange’s trustworthiness is how long it has been operating.
There are many scams, risks, and complexities in the crypto space. More experienced investors and traders can navigate them but many can fall afoul and lose money. Does your exchange bury the risks in the fine print or promote high risk trading strategies, small cap cryptocurrencies, or unproven complicated technologies; or do they promote a no-nonsense, honest and clear guide to the crypto space?
If you have an issue with your exchange, you will ultimately want and need an independent authority to help resolve it. If it is based locally or in a well-regulated country, you will be able to seek the help of their regulator.