Bitcoin for Beginners [Interview]
The goal of the interview below is to help you become more familiar with Bitcoin and how to earn money with this type of cryptocurrency.
Today, I want to introduce you to my friend, Investor’s Theory.
He is an experienced investor and has just released his already successful e-book: A Beginner’s Guide to Bitcoin.
In this interview, Investor’s Theory will be discussing the inner workings of Bitcoin – in plain English – so you can better understand:
- What it is
- How it works
- How you can start investing
Before I invest in Bitcoin, I want to learn a little bit about it, and this interview along with the beginner’s guide e-book is what you need to know to begin investing.
Best [and likely the safest] Cryptocurrency Exchange: Coinbase
I’m actually a fan of Coinbase because, according to Coinbase, your investment is insured against cyber attacks or hacking.
Coinbase holds only 2% of customers’ cryptocurrency investments online, while the rest is stored offline, which makes it less prone to hacking attacks.
Best Cryptocurrency High-Yield Savings Account: BlockFi
BlockFi is for the most part fee-free and offers some of the highest interest rates in the market.
However, I should mention that to use BlockFi effectively, you do need a base knowledge in cryptocurrency – which you can learn about in the interview below.
I’ve gone ahead and set-up my cryptocurrency accounts with Coinbase (and I started trading in Coinbase too!) as well as BlockFi.
Let’s see what my friend Investor’s Theory has to say.
About Investor’s Theory
I’m an experienced investor that has built a six-figure portfolio in my first few years out of college. I enjoy learning about and discussing anything fitness, finance, business, and personal development.
As long as I can remember I have been very good at math and enjoy working with numbers. That is what led me to develop a passion for investing.
Growing up in the Midwest, I had always heard so much about Warren Buffett.
At 18 years old I learned how Warren Buffett gained his fortune through investing and also learned about the concept of compound interest.
It was something I never considered since I always saw everyone working their butts off at jobs they don’t even enjoy.
I’m grateful I started to come to these realizations at such a young age.
What Sparked your Interest in Bitcoin?
I initially started learning about Bitcoin in 2017 when the price rose dramatically from $1,000 to $19,000 before entering a prolonged bear market.
During my time learning about investing, one of my favorite podcasts was The Investors Podcast co-hosted by Preston Pysh.
Over the years I had watched Preston transition from being a hardcore value investor to a hardcore Bitcoiner – and it seems like value investing and Bitcoin are on the opposite ends of the spectrum.
This led me to learn from other spectacular people involved in the Bitcoin space.
I feel that the Bitcoin community as a whole has provided much better access to learn about Bitcoin in 2021 than when I first gained interest in 2017.
What is Bitcoin?
Bitcoin is a digital currency that was created in 2009 by a pseudonymous person that went by the name Satoshi Nakamoto.
Although many transactions today are digital (such as using a credit card), Bitcoin is completely decentralized and outside of government or centralized control.
Bitcoin operates on an open source protocol that requires no specific entity to function.
Bitcoin is the first asset to ever exist that has a completely finite supply – as in no more than the supply limit will ever be created.
If you are storing your wealth in fiat currency, you are trusting that other people will continue to trust using that currency in the future.
The Federal Reserve in the United States has increased the M2 money supply by about 7% per year for the last 20 years, and that has accelerated as a result of the coronavirus pandemic.
The M2 money supply increased by 24% in 2020 alone, and the majority of people are completely unaware of this.
To help combat the potential effects of inflation, there has been increased interest in Bitcoin because it has the finite overall supply of 21 million and is currently the dominant cryptocurrency.
As governments around the world print more fiat currency, you can be certain that no more than 21 million Bitcoin will be created.
Thus, you can expect the value of your Bitcoin to increase in value as more fiat money is printed (just like any inflation hedge asset).
How does Bitcoin work?
Bitcoin transactions are stored on the blockchain which is updated and verified by Bitcoin miners.
The miners expend computing power to solve complex math problems and verify transactions on the network in exchange for a Bitcoin block reward and transaction fees.
It takes a significant amount of computing power to solve the complex problems; therefore, it is costly for miners to receive Bitcoin mining rewards.
The miner that solves the complex problem first publishes the transactions onto the ledger (blockchain), but only if at least 51% of the other miners verify that the transactions are correct.
Thus, the miner would lose the investment made into the energy costs and receive nothing in return.
This incentive structure encourages the miners to only publish transactions that actually occurred within the network.
Over the past 12 years, the Bitcoin network has operated flawlessly.
The network has become exponentially stronger and more secure over the years as the value of the Bitcoin has grown and more people invest in it.
How do you Invest in Bitcoin?
There are many ways one can gain exposure to Bitcoin.
Option #1: Crypto Exchange
The traditional method is through a cryptocurrency exchange such as Coinbase or Binance, but recently other financial institutions have offered cryptocurrency services.
Paypal offers Bitcoin trading but does not allow you to withdraw your Bitcoin into your personal wallet like Coinbase and Binance does. Robinhood also offers a similar service.
Option #2: GBTC
Another option is the Grayscale Bitcoin Trust ($GBTC). This fund offers investors exposure to the Bitcoin price without having to worry about storing Bitcoin yourself.
This has been a common vehicle for institutional investors and those investing into Bitcoin through retirement accounts (401k, IRA, etc).
Why is Bitcoin going up?
Bitcoin’s recent price movement upward (as of January 8, 2021), simply comes down to supply and demand.
On the demand side, we’ve seen increased interest from notable investors and billion-dollar institutions.
Paul Tudor Jones, an American billionaire hedge fund founder and manager, has said that investing in Bitcoin is like investing in an early tech company and will be “the fastest horse” in an inflationary environment.
Stanley Drunkenmiller, another billionaire hedge fund founder and manager, has said that he “strongly” recommends Bitcoin and expects Bitcoin to perform better than gold.
In late 2020, Paypal opened Bitcoin trading to their 300 million active users.
Microstrategy and Square have adopted Bitcoin onto their balance sheet with investments of $425 million and $50 million respectively.
MassMutual Life Insurance Company invested $100 million into Bitcoin.
I believe that we are just seeing the beginning of the institutional inflows. With the current state of the macroeconomy, I won’t be surprised to see more billion-dollar entities putting Bitcoin onto their balance sheet in 2021.
In addition to the institutional demand, Bitcoin also experienced a supply shock in 2020.
This event, often called the Bitcoin halving, occurred in May of 2020.
This puts deflationary pressure on the Bitcoin price as the miners have half as much Bitcoin for sale as before.
Because the miners are selling half as much Bitcoin as they did before, this tends to push up the Bitcoin price in a dramatic fashion.
Lyn Alden, founder of an esteemed investment strategy firm, put together a nice chart to help illustrate this phenomenon:
What do you Love about Bitcoin?
I love Bitcoin because it has the potential to do so many things.
Bitcoin can be:
- Used for international payments
- A life raft for people in countries with a collapsing currency
- A payment rail for those who are censored by governments or payment institutions
- An investing vehicle for those looking for an inflation hedge outside of traditional asset classes
Compare that to the current banking system which has ridiculous fees and wait times for international payments.
Last but not least, I love the asymmetric upside that bitcoin offers.
To date, bitcoin has had an average annual return of over 200% over the past decade.
That alone makes bitcoin something every investor should understand.
What exactly is the Beginner’s Guide to Bitcoin?
The Beginner’s Guide to Bitcoin is exactly what I wish I had when I first got into Bitcoin in 2017.
It covers everything from how to buy/store Bitcoin to the common criticisms.
I wasn’t able to find a source that covered everything a beginner should know when getting into Bitcoin, so I created it myself.