What is "backing" Bitcoin? #1 question
Bitcoin is not backed or collateralized by anything -- similar to gold. Gold has value because it has been a reliable way to store your wealth for thousands of years as a scarce, precious metal. Bitcoin has value because of its scarcity (there's only 21 million bitcoins) and growing network. We can measure the computing power (demand) in the Bitcoin network by the total hash rate. As the hash rate increases, the network becomes more secure.
A common argument is that gold previously backed the US dollar, so Bitcoin must be backed by something. Nope. Gold is to Bitcoin as the US dollar is to another fiat (government-issued) currency like the euro or yen. Don't compare Bitcoin to the US dollar. Instead, think of Bitcoin as digital gold and a way to store your wealth. There's 21 million and once they're gone, they're gone.
Why are there only 21 million bitcoins?
The short answer is that’s how Bitcoin was designed. Bitcoin has a fixed supply (hard limit) of 21,000,000 to preserve anti-inflationary properties of the cryptocurrency. Since Bitcoin's creation in 2009 the combination of fixed supply and growing demand has resulted in a rising price per bitcoin.
Wasn't a bunch of Bitcoin lost because people threw out old hard drives, USB sticks, etc?
Yes, it’s estimated that ~3.7m bitcoins have been lost. There is an endless supply of stories where people lost their private keys. The impact of the missing coins was analyzed in June 2020, and it shows the majority of Bitcoin is held by those who treat it as digital gold (54%). According to the analysis, of the 21 million available bitcoin, only 3.5 million coins (17%) are still actively traded. The remaining 81% is either lost (18%), held as long-term investment (54%), or yet to be mined (11%).
Would you buy Bitcoin while the price is at an all-time high (ATH)?
The short answer is yes (as of Feb 2021, Bitcoin was ~$50,000), although the longer answer probably requires a 30 minute discussion and this chart. I'm bullish on the utility of an accessible, fixed supply, global currency. One technique to reduce the risk of buying too much Bitcoin at high (and low) prices is called dollar cost averaging. Simply put, you buy a little on a regular schedule instead of buying a lot on no schedule.
Why should I invest in "crypto" rather than "traditional" investments? I’ve been successful in the US stock market for over 40 years.
Think of crypto as a hedge to your portfolio. It's an alternative investment (like real estate, gold, and art) uncorrelated to traditional asset classes like stocks and bonds. If you allocate 1% of your portfolio to Bitcoin then the most you'll lose if Bitcoin goes to $0 is 1%, but if Bitcoin continues to realize asymmetric returns then you've unlocked upside that previously did not exist.
Tip: It's common for high net worth individuals to allocate anywhere from 5% to 25% of their portfolio to alternative investments.
Do I need to pay taxes on crypto? new
If you traded, sold, mined, earned, or used any of your crypto, then yes.
The IRS decided cryptocurrencies are to be treated as property, and this qualification means crypto is subject to United States capital gains and income taxes. Specifically when you sell, convert, or use your crypto to buy something a taxable event occurs, and you must pay capital gains on this amount. Alternatively when you earn interest, receive an airdrop, block reward, staking reward, or receive crypto for payment you must also pay income tax on this amount.
Tip: You are not taxed when you buy crypto. So if you simply buy and hodl then you're in the clear.
Are there terms for smaller denominations of Bitcoin?
Yes! When people speak of "satoshis" they're referencing the smallest unit of Bitcoin. 1 bitcoin is equal to 100,000,000 (100 million) satoshis. Satoshis are useful when transacting small amounts of bitcoin. For example, it's easier to refer to 1,000 sats than 0.0000001 bitcoin. There are other, lesser known denominations as well. 1 bitcoin (BTC) is equivalent to:
- 1,000 millibitcoins (mBTC), or "millie"
- 1,000,000 microbitcoins (μBTC), or "bits"
- 100,000,000 satoshis (sat), or "sats"
Tip: People talk in terms of bitcoins and satoshis today. In fact, you may hear people refer to themselves as Bitcoin billionaires, and this means they own 1 billion satoshis (10 bitcoin). Also, nobody says "millibitcoins" or "microbitcoins" (yet).
Which exchanges and wallets do you recommend?
I recommend Coinbase, Gemini, and Binance to buy and sell crypto. They are reputable exchanges. As for wallets, my recommendation depends on the amount of crypto you own and your technical aptitude. For short term storage and small amounts of crypto it’s fine to keep your digital assets in the Coinbase app. This is where Coinbase will automatically place your crypto after you make a purchase on their exchange. For longer term storage and larger amounts of crypto, I recommend a hardware wallet like Ledger, KeepKey, or Trezor. For the most advanced security model, I recommend a service like Casa.
Wallet recommendations introduce a debate on custody, or where the responsibility lies for safeguarding one's financial assets. Should this responsibility remain with the individual, a company, or a combination? The answer is different for everyone.
Do you use Coinbase or Coinbase Pro?
I use both. Use (regular) Coinbase for the simplicity. That said, transaction fees are significantly lower on Coinbase Pro than (regular) Coinbase. The tradeoff is the Pro platform is more complicated to use. For more detail, check out this comparison.
Do you have a 101 guide on the most popular altcoins like Ethereum?
I wasn't able to track down simple 101 guides for popular altcoins ("altcoins" are any crypto asset other than Bitcoin). Instead, we have two paths forward. The first option is to follow our growing list of popular crypto asset descriptions. The second option is to go to Messari, which is a crypto encyclopedia. The information can get heavy, but it contains a library of almost every crypto asset so the learning is endless.
What is a stablecoin?
Stablecoins like Tether and USDC have their value pegged to another asset like US dollars. For example, 1.00 Tether is equal to 1.00 US dollar and this 1:1 price ratio should not change. It's a digitized dollar. The value stablecoins offer the crypto market today is a less volatile, stable asset that won't experience the same price swings as Bitcoin or Ethereum.
Unlike Bitcoin (see What is "backing" Bitcoin? FAQ question) stablecoins are backed, or collateralized, by an underlying asset like US dollars. The downside to this collateralization is that a stablecoin's value is fixed to the underlying asset. You won't see dramatic price appreciation.
Do you use a password manager like LastPass or 1Password?
Yes, I use 1Password to secure passwords to crypto exchanges like Coinbase, but don't use them to store my secret keys. Keep in mind while password managers are considered a best practice, they introduce a single point of failure. For example, if a hacker gains access to your master password (for your password manager) then you’ve given them access to all of your passwords stored within the password manager.
How do the Bitcoin halvings impact the price?
Historically, halvings have occurred prior to Bitcoin bull runs (BTC price going up). The last halving occurred in May 2020 and the next one will happen in 2024. A halving is when the reward for mining Bitcoin is cut in half (the "halving"). The reward is a financial incentive and a reason why Bitcoin miners decide to secure the Bitcoin blockchain and not some other digital asset. This event also cuts Bitcoin's inflation rate and the rate at which new bitcoins enter circulation. Halvings are a small component to why Bitcoin works and not critical to a 101 understanding of Bitcoin.
What is Ethereum (ETH) staking? advanced
Ethereum staking is the act of validating transactions on the upgraded Ethereum 2.0 blockchain and earning a reward for this work.
Tip: Coinbase customers can earn 3% to 7.5% by staking their Ethereum. This means if you hold ETH on Coinbase and decide to stake it then you can earn more ETH by temporarily not using it (leaving it on Coinbase). That's the deal. You earn extra ETH, but can't do anything with it. If you don't plan to use your ETH for the next year or so this might make sense.
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