Is Bitcoin a new kind of currency? Is it a new kind of computer network? Is it software, an economic system, a way to send money across the world?

The short answer is yes! Bitcoin is a lot of things, and the technology is becoming more powerful as each week goes by. That’s because Bitcoin provides a massive, global platform that is open and free for anyone to build on and develop.

At its core, Bitcoin allows people to use the internet to engage in transactions that can be validated and confirmed without the need for an intermediary, enabling safe peer-to-peer transactions at an unprecedented scale.

The promise of Bitcoin is that it can become a global platform that is not in the control of any company, government, or special interest (other than the developers and miners of the Bitcoin community) and make independently sharing critical information (such as transaction details) safe, scalable, efficient, and cost-effective.

Birth of Bitcoin

Bitcoin is the first massively adopted cryptocurrency. The concept of Bitcoin was first outlined in late 2008 by a person or group operating under the name Satoshi Nakamoto.

Before Bitcoin, there was a movement to create a kind of money or currency that was native to the internet — a form of digital cash. The reasons for creating some kind of digital method of transferring value was seen as a significant milestone in truly building out an open and universal platform for sharing and transferring information.

image of the Bitcoin whitepaper

Caption: This is an image of the Bitcoin Whitepaper, which was written by the mysterious Satoshi Nakamoto and has become the basis for what we now know as the cryptocurrency movement. The paper laid out the design of Bitcoin and explained how it can be used as a peer-to-peer payment network. In the years since the paper’s publication, people all over the world have been building on top of the open-source technology and contributing to improve the underlying computer code with the goal of making the network more robust. 

Some of the forebears to Bitcoin (like Hashcash and DigiCash) made progress on the idea of internet-based money, but they were limited in their application because they still relied on an intermediary.

Any time there is an intermediary involved with a digital transaction, there is a central point of failure — or a security threat. But before Bitcoin, intermediaries were required because there was no other way to trust the legitimacy of the digital transactions. Without intermediaries, things like fraud and theft would run wild without recourse. But the use of intermediaries also comes at a cost of time and money.

And that’s where Bitcoin comes in. When Nakamoto first created Bitcoin, it was under the idea the internet needed a peer-to-peer system to transfer value (much like the way cash works in the analog world). If a digital peer-to-peer system existed, it would free people to interact with unprecedented efficiency and at an unprecedented scale.

Code Meets MoneyLooking for more info about the history of Bitcoin and some of the problems it was designed to solve? Check out Abra’s illustrated explainer guide about Bitcoin’s past, present, and future: Code meets money: The match that made bitcoin.

In order to solve for required intermediaries to enable digital transactions, Satoshi Nakamoto developed Bitcoin to solve the problem known in computer science as double spend. Before, bitcoin, the double-spend problem, or the ability to quickly and easily verify the legitimacy of a transaction without layers of complicated and costly infrastructure was a vexing problem.

The Bitcoin Whitepaper at 10

Reflections on the Bitcoin Whitepaper as it turned 10.

This meant, in the context of money, that it was hard to have any level of trust in transactions, or that transactions were not fraudulent.

But the invention of Bitcoin changed all of that by creating a distributed, public ledger which confirmed transactions (through incentivized computation known as mining, discussed in greater depth below). This auditable, distributed ledger that is the backbone of Bitcoin (other cryptocurrencies also rely on this technology) is called a blockchain.

By using a system of exchanges, wallets, and bitcoin addresses, anyone in the world is now able to exchange value back and forth across the internet without the need to put any kind of trust in an intermediary like a bank, credit card company, or payment processor.

Bitcoin provided a blueprint, not only for an entirely new cryptocurrency industry (in the last 10 years more than 2,000 cryptocurrencies have been developed), but it also opens the door to other kinds of financial innovation and access — such as new forms of credit and lending, as well as crypto-collateralized investing.

At Abra, we believe in the power of Bitcoin and crypto more broadly, and we are working to build a single, easy-to-use app that will provide global access to important financial services such as investing, money transfer, and more on the way.

A quick note about Bitcoin versus bitcoin: You may notice while reading this page, or on other pages on this site that both Bitcoin with an uppercase B and bitcoin with a lowercase b are used. This is intentional. We refer to the names of underlying software or networks as proper nouns, so Bitcoin. When we are talking about the actual currency, we use lowercase b, so bitcoin. Where it gets confusing is those times when we are talking about both the currency and the network, in which case we use Bitcoin. This is a style decision and in other places across the internet you might see Bitcoin only referred to with the uppercase B or the lowercase b.

Bitcoin as digital money

Bitcoin is a cryptocurrency, and its symbol or abbreviation is BTC on places like CoinMarketCap, which track the prices of cryptocurrencies.

Bitcoin price chart 2013-2019

This chart shows the growth of the bitcoin price from 2013 through April 2019. Bitcoin was first launched in early 2009, but some of the earliest chart data available starts in 2013.

Just like people use dollars to accomplish different goals, bitcoin can also be used as a currency in a few different contexts. Bitcoin can be used to pay for things (just like if you were paying with dollars or pesos when using an app like Apple Pay), an investment (speculating that the future value of the network will be greater than it is today), a store of value, and to send or receive money (especially powerful if sending money across international borders, which using today’s traditional systems requires a lot of friction).

One important aspect of bitcoin that is often misunderstood by people first getting into cryptocurrencies, is that it is possible to buy, sell, send, and receive a fraction of a bitcoin. So if the price of bitcoin is $20,000, but a bitcoin buyer only has $10 that they want to send or invest, then that user can buy $10 of bitcoin. Bitcoin can be divided down to eight decimal places, and those tiny fractions of bitcoin are known by some as satoshis (1 satoshi = 0.00000001 BTC). Since bitcoin exists as computer code it is easily divisible.

Because it is a digital currency, bitcoin is pretty much like email for money. The same way anyone can create an email address to send and receive messages, anyone can create a bitcoin wallet to hold, send, and receive money with just a smartphone and a data or internet connection.

Where financial systems were previously clunky, slow, and expensive to use, bitcoin provides a common language that computers can use to transfer money or value quickly and securely, and at a potentially much lower cost because it is a system with no intermediaries or banks.

Another thing that makes bitcoin great digital money is that it is programmable. That means that the Bitcoin protocol can be used to write and execute smart contracts, which enable more efficient (and cost-effective) ways of conducting business.

Watch Abra founder and CEO explain how Abra has created technology to leverage the programmable features of Bitcoin to created new financial infrastructure. 

The development of smart contracts will open a new frontier of financial engineering that have so far been impossible in traditional finance. Since the invention of Bitcoin and the idea of multi-signature smart contracts, other cryptocurrencies have launched that are developing other kinds of smart contract functionality, and to serve as smart contract platforms. Ethereum is one example of a popular (it is the second cryptocurrency by market capitalization) that is attracting a lot of developer attention. Other examples of emerging smart contract platforms include Cardano, EOS, and NEO.

What can I do with Bitcoin?

When Bitcoin was first invented, its creator Satoshi Nakamoto envisioned one purpose for the technology: electronic payments. Since then, people have figured out how to use bitcoin’s technology for a variety of uses.

Watch Abra founder and CEO give one of the first TED Talks about Bitcoin. The talk took place in 2012 when one bitcoin was worth about $5.

Bitcoin is often called a protocol, which means it is like a foundational layer that other services, technologies, companies, etc. can use to build. Just like the internet uses TC/IP as an underlying protocol that makes just about everything else on the internet possible.

Abra is a perfect example of a company built using the underlying functionality of Bitcoin to build something new. Put simply, Abra uses Bitcoin’s ability to create crypto-collateralized contracts using a non-custodial wallet. Abra is using Bitcoin as an infrastructure layer and leveraging things like non-custodial wallet architecture to make the entire system secure and universally available across the globe.

Other companies, people, and projects are building all kinds of new financial and information infrastructure on top of Bitcoin. Everything from faster, seamless micropayments to complex derivatives trading are currently operational using Bitcoin’s blockchain as basic infrastructure.

People are also developing Bitcoin for other applications besides finance. Documenting and monitoring supply chains is one popular idea. Other ideas for using Bitcoin-inspired technology include systems for better medical and property record keeping to building things like carbon markets.

Here are some ways that you can use bitcoin today:

SEND/RECEIVE MONEY

As a purely digital currency, bitcoin is borderless. Because it’s available nearly everywhere, you can send money around the world just as easily as you send it across the room.

Really all people need to be able to send and receive money internationally is a smartphone and each party to the transaction needs to have a bitcoin wallet. Sending money is nearly instantaneous — it can take between 10 minutes or up to a couple of hours for the transaction to be processed on the Bitcoin blockchain and then available on the other side of the transactions. Even with a slight lag, this is still way faster than trying to do a complex international bank transfer or for using an international wire service such as Western Union.

INVESTMENTS

Similar to buying gold or stocks, some people like to buy bitcoin as an investment in hopes that its value will go up. Historically, the price of bitcoin has been very volatile but overall, as mining has become more difficult and buying has become easier and more popular, the price has gone up over time.

Watch Abra CTO Willie Wang talk about how cryptocurrencies like Bitcoin can be used to build the banking of the future.

There are a few different investment ideas surrounding the Bitcoin network and the bitcoin currency. Here are a couple of high-level ideas about why people around the world are excited about investing in Bitcoin. It should be noted that there are a lot of reasons people view bitcoin and other cryptocurrencies as potential investments.

Three ideas for investing in Bitcoin:

  • Reserve currency: A reserve currency is used to settle international trade and is viewed as strong and stable. Right now, the dollar is the world’s most dominant reserve currency, followed by the euro. At other times in history, other national currencies — and for a long time gold — have been used to settle international debts, hold as a long term store of value, and are used to denominate values for trade.

Some bitcoin investors think that because of bitcoin’s digital, open, decentralized, and apolitical nature, it has the necessary attributes to become a global reserve currency. Over time, as adoption and liquidity increase, bitcoin could become less volatile.

  • Digital gold: Another potential outcome for bitcoin is its use as a form of digital gold or a digital store of value. As more and more of everyday life unfolds on the internet, it’s only natural that people will start wanting to store value on a digital platform. This allows for easy access, greater liquidity, and the ability to take the value literally anywhere across both the physical and virtual worlds.

Having a single source of digital wealth as an idea is growing in popularity, and even despite its volatility on a month-to-month basis, bitcoin has shown that it is a good store of value over its lifetime.

  • Protocol adoption: Bitcoin investors are also bullish on the idea is that the Bitcoin network or protocol will only continue to evolve, mature, and grow. As it does, and as more companies, projects, and people start using the network and building on the protocol, then it will continue to grow in value. A very basic comparison is often made between the growth of the internet and the potential for the Bitcoin protocol to grow.
  • Use as collateral: Another emerging idea in terms of investing in bitcoin is that it can be used as a way to digitally collateralize other non-digital assets, such as real estate or traditional stocks and commodities. The advantages to doing this are that Bitcoin provides a way to easily document and verify ownership and chain of custody, while at the same time bitcoin-based contracts are easily traded and they are universally available.

Finally, bitcoin collateralization allows users to fractionalize investments (or make more divisible pieces — so that a large building or a prohibitively expensive share of the stock market can be made into smaller portions). The whole concept of bitcoin as collateral is a great example of fully leveraging the programmable features of cryptocurrencies to create products and services that have not yet existed in finance and beyond.

These are just a few examples of some of bitcoin’s investment potential. There are many other potential uses, ranging from machine-to-machine payments, micropayments, and conditional debits and credits spread amongst a large group of people or entities.

COMMERCE

Bitcoin was originally developed as a peer-to-peer payment method or a form of digital cash. In the spirit of bitcoin as digital cash, over 100,000 online merchants accept bitcoin payments.

An increasing number of local businesses also accept bitcoin. Use coinmap.org to find a business in your area.

One strong use case for using bitcoin for commerce is that it is really easy to send long distances and because of the public/private key setup, people on both ends of the transaction are able to conduct business without really needing to know much about the other’s identity and without the need for a centralized third party.

Bitcoin ATMs and other easy on- and off-ramps are becoming more widespread so that it will be easier for people to quickly move back and forth between traditional fiat systems and emerging cryptocurrency systems.

DONATIONS

In addition to the many online merchants who accept bitcoin for e-commerce payments, there are also many nonprofits and interesting internet-based projects that accept bitcoin donations.

There is also a growing movement of Bitcoin-based philanthropy, and organizations such as the California-based BitGive Foundation are using the Bitcoin blockchain to track gifts made by donors to build international projects, such as clean water and sanitary infrastructure.

TIPPING

Tipping is a way to send (usually) small amounts of money as appreciation for someone else’s work. Some online content creators, for example, will leave their bitcoin address or QR code at the end of their articles and can send bitcoin directly to their wallet.

The introduction of the Lightning Network made using bitcoin for microtransactions such as tipping feasible technically and cost-effective from a network perspective. One reason why technology like Lightning Network is so effective is that it is what’s known as a layer two solution.

Layer two solutions are new projects and technologies that are being built “off-chain” but that are designed to easily interoperate with the Bitcoin blockchain. Layer two solutions are thought of as one way to quickly and cheaply scale Bitcoin’s capabilities without having to overhaul Bitcoin’s primary protocol layer.

The project tippin.me is one example of a bitcoin wallet interface developed to use the Lightning Network to create a simple and easy-to-use bitcoin tipping interface.

INTEREST BEARING

Another recent trend in the Bitcoin space is that wallets and exchanges have started to pay interest to users when they hold their cryptocurrency investments on the platform. The crypto can then be used by the platform to make other investments or perform other transactions, much in the way that banks use the funds stored by their account holders in exchange for paying interest.

Additionally, crypto networks themselves might begin paying interest in the future as the network models move from proof-of-work to proof-of-stake or some other kind of consensus model.

In other words, instead of paying miners to verify transactions and create and confirm the blockchain, which is the proof-of-work model, proof-of-stake blockchains will allow users to stake their coins or tokens to formulate consensus about which blocks are valid.

Understanding the Bitcoin protocol

Like email, Bitcoin is a protocol. Where email is a protocol for sending messages over the internet, Bitcoin is a protocol for sending money over the internet. The Bitcoin protocol defines the rules of a payment network to pay computers around the world for securing the network. The software that implements the Bitcoin protocol uses a special branch of mathematics called cryptography to ensure the security of every Bitcoin transaction.

The rules of the bitcoin protocol include the requirement that a user cannot send the same bitcoin more than once (the double-spend problem discussed earlier) and a user cannot send bitcoin from an address for which they do not possess the private key. If a user tries to create a transaction that breaks the rules of the bitcoin protocol, it will automatically be rejected by the rest of the Bitcoin network.

Bitcoin addresses

Understanding Bitcoin addresses is an important building block because a Bitcoin address is central to sending and receiving bitcoin and making sure that bitcoin is secured properly.

Bitcoin uses public-key cryptography in order to create a bitcoin address. Bitcoin addresses are stored in Bitcoin wallets (there are different kinds of wallets, and safe handling of bitcoin wallets is really important, so more on wallet options below.

The thing to understand about public-key cryptography is that there is a public key, which is accessible and visible to everyone — in fact you share your public key with people in order for them to send you funds, or someone can use your public key to view transaction details on the public blockchain (like confirm funds 

in advance prior to engaging in a transaction). But there is also a private key, which only the owner of the bitcoin wallet should possess and control. Without the private key, any assets stored on the Bitcoin blockchain are inaccessible.

A QR code of a bitcoin address

This public/private setup

A bitcoin address looks like this:

19wrFHPLc23rqeeZx1YAb5wjNLr8oDMg7G

Bitcoin addresses are often turned into QR codes so they can easily be scanned by a smartphone camera:

(Note: bitcoin sent to that address cannot be spent, so don’t try it unless you like throwing away money!)

Like an email address, a bitcoin address can be shared with anyone that the owner wants to receive a bitcoin payment from. Private keys, on the other hand, should not be shared. Anyone who possesses the private key to a bitcoin address can spend the bitcoin sent to that address.

The Bitcoin network

The Bitcoin network is made up of thousands of computers around the world called “Bitcoin nodes” and “Bitcoin miners.” Bitcoin is an open network, meaning anyone can run Bitcoin software to become a Bitcoin node (running a node entails downloading a copy of the Bitcoin blockchain) or if they have the right kind of equipment, they can become a Bitcoin miner.

This map shows the global distribution of bitcoin nodes. Most of the nodes are located in North American, Europe, and Asia, but there is also good distribution of nodes in other locations.

This map shows the global distribution of Bitcoin nodes around the world as of mid-2019. For a live view of the map check out: https://bitnodes.earn.com/nodes/live-map/

Bitcoin nodes help enforce the rules of the Bitcoin protocol while Bitcoin miners process transactions and add them into “blocks” that are confirmed by bitcoin nodes. The Bitcoin protocol is designed to ensure that new blocks are created and confirmed approximately every ten minutes.

The Bitcoin network is really unique because it is a distributed network of people and machines working together and coming to agreements through a combination of consensus algorithms and a kind of community governance for things like updates and protocol changes through a process known as forking. A fork, simply put, is a code update, but the community decides if they want to follow the new version of the code, or keep running the old version of the code.

Most forks are not contentious and are relatively minor software updates. Non-contentious or minor forks are known as soft forks and they happen regularly. Bigger protocol overhauls, which can sometimes be contentious, are known as hard forks. Bitcoin has gone through a number of hard forks or hard fork proposals in the past. Some of the more well-known forks have been around increasing the Bitcoin block size, which would impact the cost and time to process transactions.

One hard fork resulted in Bitcoin Cash, which was created to increase block size with the goal of making Bitcoin Cash more usable as a spendable currency. Another big hard fork in the cryptocurrency world happened when Ethereum split from Ethereum Classic over a governance dispute.

To secure each block of Bitcoin transactions, Bitcoin miners must use their computing power to solve a unique math problem provided by the Bitcoin software. If a Bitcoin miner can solve the math problem before any other bitcoin miner, they will win a “block reward” that consists of all the fees paid by each transaction included in their block, as well as newly generated bitcoin.

Bitcoin mining

The Bitcoin network is constantly maintained (and blocks of transactions are confirmed as accurate) by specially designed computer hardware known as mining rigs.

An image of a bitcoin mining operation.

Large-scale industrial Bitcoin mining operations look a lot like data centers. (Image courtesy Wikimedia Commons)

Bitcoin miners have a strong incentive to produce blocks that follow the rules of the Bitcoin protocol. If a bitcoin miner produces a block that does not follow the rules of the Bitcoin protocol, then Bitcoin nodes will reject the block and the miner will lose out on their chance to win the block reward.

The sheer amount of computer power (known as the hash rate) needed to mine bitcoin is controversial. For some, the use of electricity to run computer equipment to perform calculations to win the block reward seems like a misallocation of resources, especially given pressing issues such as global climate change.

But the reason for the energy consumption is that it creates a cost for running and managing the Bitcoin network. The cost of running the network helps reinforce the underlying value (as bitcoin becomes more valuable, the cost of mining goes up, which makes the network more valuable). The energy inputs in a lot of ways mimic the production requirements of other extractive industries that use the investment of capital and energy to produce something that is valuable — such as the process of mining precious metals.

The high level of energy required to perform bitcoin mining also helps keep the network secure. One threat to Bitcoin and other crypto networks is a 51% attack. A 51% occurs when a bad actor is able to capture more than half of the current mining power and essentially manipulate the underlying blockchain, potentially invalidating previous transactions or otherwise compromising the integrity of the ledger.

So proof-of-work bitcoin mining, despite the controversy, is enormously valuable.

A quick aside, but it’ll be worth it: The two dominant consensus algorithms currently discussed in the cryptocurrency space are proof-of-work and proof-of-stake. A consensus algorithm is a foundational piece of how these permissionless and distributed systems work. Since there is no centralized gatekeeper or referee, there has to be an orderly standard by which the network can be confirmed and maintained.

Most (but not all, the currency XRP being one exception) currently use proof-of-work as a means of deciding which of the transactions are accurate and how blocks of transactions are bundled and documented on the blockchain, forming an immutable (or censorship-resistant) ledger.

Proof-of-stake, which Ethereum is attempting to move to, entails a system of delegated consensus, by which holders of the currency elect to put up some of their coins as collateral and use that collateral to vote as a means of finding consensus (the risk is that if you back bad actors you will lose your stake or the collateral that you put up). There are other forms of consensus that some crypto projects are trying out too.

Bitcoin price

Most conversations about Bitcoin eventually find their way to the price of bitcoin. And for good reason. The price movements of bitcoin, since its inception, have been historic.

This chart is showing bitcoin's linear price movements over time.
This is an example of a linear bitcoin price chart. (chart credit: Messari)

The bitcoin price is characterized by heavy volatility. That means that instead of a steady rise in price over the last decade, bitcoin’s price has zig-zagged, reaching all-time highs several times, only to retrace some of its steps, retreating from the highs only to rebound again.

One important thing to understand is that on a yearly basis, the price of bitcoin keeps increasing, even if the daily or weekly bitcoin price might see wild fluctuations.

This is an example of a logarithmic bitcoin price chart.
This is an example of a logarithmic bitcoin price chart. (chart credit: Messari)

One really clear way to understand the difference between the short-term bitcoin price and the longer-term bitcoin price increase is to study linear price charts and compare them to logarithmic charts.

 

But what does this mean in terms of the bitcoin price?

One important thing to keep in mind is that the price of bitcoin and the value of bitcoin are not always equal. Many observers believe that as the bitcoin market matures the price and the value will track closer to one another and the big, dramatic swings will

The bitcoin price is often tracked by cryptocurrency data companies such as CoinMarketCap, or Coin Gecko. Those companies collect information from numerous exchanges where people are buying and seeing cryptocurrency trading pairs.

Total market capitalization, which is another important price metric, is determined by multiplying the current price of bitcoin by the circulating supply.

On December 17, 2017,  the bitcoin price hit a historic high of $20,089 on CoinMarketCap.

How to buy bitcoin

After learning about Bitcoin so of the advantages and potential use cases of Bitcoin, the question “How can I buy bitcoin?” usually comes up.

The good news is that there are a number of ways to answer the “How can I buy bitcoin?” question, which is outlined in more depth below.

It’s important to keep in mind that bitcoin is completely digital and that there is no such thing as a physical bitcoin. Despite the use of words and descriptive terms like wallet and miner, the beauty of Bitcoin is that it really only exists as computer code. But that code can have a value attached to it (in the same way that a precious commodity, like diamonds or gold, can have a value attached to them).

Like more traditional commodities, bitcoin’s value comes from its programmed scarcity and from the fact that it takes energy to create and maintain, which was covered in more depth above.

Another huge thing to remember when thinking about “how I can buy bitcoin” or when getting ready for a first-time bitcoin buy is that buying bitcoin also requires figuring out how to handle and store the bitcoin. While there is a little bit of a learning curve involved in making the right decisions about where to buy bitcoin and then the right storage methods, it is actually getting easier every day to buy bitcoin and then use it for a wide variety of applications.

And that’s one of the greatest things about Abra. As an easy-to-use global investment app, Abra users are able to buy, sell, hold, send, receive, and invest bitcoin in a number of different digital assets all from one app.

Today, Abra users can buy bitcoin right from the app using a credit/debit card, a bank or wire transfer, or they can convert other cryptoassets (like litecoin, ether, and bitcoin cash) into bitcoin.

Beyond Abra, there is a whole ecosystem of other crypto products and services that are all getting better and easier to use.

The number of confirmed daily bitcoin transactions.

This chart shows the growth in the number of daily bitcoin transactions over time. 

If you are interested in how to buy bitcoin, check out some of these options:

Where to buy bitcoin

EXCHANGES

Bitcoin exchanges are companies that create a live market for buying and selling bitcoin. Customers will deposit bitcoin or fiat currency into their accounts and then place different order types that are recorded on an order book managed by the exchange. Some exchanges offer simple limit orders, while others offer advanced order types such as stop-loss orders and margin trading.

Having an account with a bitcoin exchange is like having a seat on the NYSE. Bitcoin exchanges are great for day traders and institutional traders who trade bitcoin full time. They often require advanced knowledge of financial markets to use correctly.

BROKERS

Bitcoin brokers are individuals and companies that take buy and sell orders and execute those orders on an exchange on behalf of their customers. The broker will often receive a fee for their service and the customer will receive the bitcoin they placed an order for in exchange.

If having an account at a bitcoin exchange is like having a seat at the NYSE, then doing business with a bitcoin broker is like having an e*Trade or Charles Schwab account. The advantage of using a broker is simplicity. The customer asks for a quote, places an order, and receives what they asked for, and the broker removes the complexity of dealing with an exchange.

OTC MARKETS

Bitcoin over-the-counter (OTC) markets are “off-the-books” decentralized exchanges that happen through face-to-face meetings and remote trades. In a face-to-face exchange, the buyer and seller will meet at a designated time and place and exchange cash for bitcoin at an agreed-upon rate. In remote exchanges, the trade is coordinated by telephone, email, or another remote communication method. After a price is agreed upon between buyer and seller, the buyer will send an electronic funds transfer to the seller and the seller will send the bitcoin to the buyer’s bitcoin address.

OTC markets are most useful for either buying bitcoin with cash or purchasing large blocks of bitcoin at a guaranteed price. These trades protect against “slippage” that can occur when purchasing large amounts of bitcoin on an exchange.

Ranging across a spectrum, OTC markets are used to handle everything from big trades worth millions of dollars to smaller transactions. Local Bitcoins is an example of a peer-to-peer exchange method where people can trade cash for Bitcoin anywhere in the world. The Local Bitcoin site helps to match bitcoin buyers and bitcoin sellers and then they can arrange trades, usually based on market rates.

OTC bitcoin markets have been around since the very first bitcoin trades, and they still provide a really valuable function in the bitcoin and cryptocurrency ecosystem. OTC services are particularly important in parts of the world where access to financial infrastructure is difficult to obtain, or where there are no other options for buying and selling bitcoin.

ABRA

Abra is a bitcoin-based digital wallet app that lives on your smartphone. It is the easiest way to buy, sell, store, send and receive bitcoin from anywhere in the world. It’s similar to a brokerage, but it’s also a wallet. Abra supports bitcoin as well as over 50 global currencies which means you can convert in and out of bitcoin or any available currency, easily. You can also send bitcoin to anyone who has a bitcoin or an Abra wallet and receive bitcoin or money.

Once Abra users have their secure wallet established (and they have tested their recovery phrase) they can then use the Abra app to send, receive, and store bitcoin and other digital assets.

Abra users can also use the app to buy bitcoin, or convert other assets into bitcoin with Abra and then transfer that bitcoin to any external bitcoin wallet, or they can use the Abra app to send bitcoin to any other Abra user.

How to store bitcoin using a bitcoin wallet

Just like there are a few different ways of buying bitcoin, there are also a few different methods of storing bitcoin once you have some. Bitcoin is stored in wallets, which are a little bit of a misnomer because a bitcoin wallet doesn’t hold actual bitcoins, but rather it holds the keys needed to access bitcoin on the blockchain.

What is a bitcoin wallet?

Bitcoin wallets are software applications that implement the rules of the Bitcoin protocol to ensure that users can easily and securely send and receive bitcoin transactions. Bitcoin wallets also show information about each transaction that is relevant to the wallet, including transactions sent and received by the wallet.

To receive payments, a wallet will usually generate a new address for each transaction. To send payments, the wallet will digitally sign transactions with the correct private keys and broadcast transactions to the bitcoin network. Once a transaction is confirmed by the network, the wallet will no longer be able to spend the same bitcoin used in the transaction again.

When you think about buying bitcoin, you will also need to think about a place to store it. Bitcoin is usually stored in wallets. Bitcoin wallets use special codes called private keys to authorize transactions.  Anyone who has the private key to a bitcoin wallet can authorize transfers to other wallets. Hence, it is very important to keep the private keys to your wallet safe and secure.

Bitcoin wallets can be offline (also known as cold storage) or digital wallets. Additionally, they can be custodial or non-custodial. When using a custodial wallet, you are entrusting a third party to hold your private key. When using a non-custodial wallet, you are the only one to have the key to your wallet.

Not all crypto wallets are created equal. There are a few different types of wallets, and the best bitcoin wallet largely depends on how you plan to use bitcoin, what your risk tolerance is, and how much time and energy you want to put into securing your bitcoin.

Bitcoin wallets largely exist on a spectrum. On one side of the bitcoin wallet spectrum, there are wallets that are easy to use, but that require users to give up levels of security in exchange for that ease of use.

On the other end of the bitcoin wallet spectrum are wallets that might take additional time or expense to set up and establish — and they might be more difficult to access on a day-to-day basis, but they provide secure long term storage of bitcoin and other digital assets.

The great thing about bitcoin wallets is that most bitcoin users have more than one kind of wallet depending on how when and how often they plan to use their crypto. Another thing to consider is that bitcoin wallet design and usability is getting better every day, which means that in the future there will be even better and more secure options.

The most common types of bitcoin wallets

  • Custodial crypto exchanges and wallets: Many crypto exchanges and/or wallets are custodial, which means the exchange controls all of the users’ private keys to their crypto wallets. There are advantages and disadvantages to using a custodial exchange or wallet. Often custodial wallets are used out of convenience or habit. Traditional banks are custodial because they control your funds and you need to go through them to get access to your money. Crypto exchanges and wallets are similar to traditional banks in set-up and execution. Instead of utilizing the decentralized architecture outlined above, centralized wallets and exchanges are more like massive databases or accounts. This centralization creates a massive attack surface for hackers or thieves. The dangers of storing account information on a centralized server or database are well-known and hacks that compromise the data of millions of users. There have been numerous high-profile hacks of crypto exchanges throughout the years.
  • Non-custodial crypto exchanges and wallets: A non-custodial crypto wallet means that there is no centralized gatekeeper or account where user assets are stored. Instead, in a non-custodial crypto wallet, user funds are stored on a blockchain and the wallet provides an interface for the user to interact with other users.

Non-custodial wallets offer greater freedom in the sense that the user maintains control of the assets (or more specifically, they maintain control of the private keys, which are needed to access the Bitcoin blockchain).

  • Offline cold storage: Offline cold storage bitcoin wallets can come in a few formats, but the idea is to put some kind of gap between your digital assets or cryptocurrencies and an internet connection. Most offline cold storage tactics and technologies are designed for long-term and secure storage of bitcoin, crypto, or digital assets. One thing to consider when deciding between bitcoin storage options is how frequently you plan to need access to your bitcoin or crypto assets and how long you plan on holding those crypto assets.
    • Hardware wallets: A bitcoin hardware wallet is a specially designed, encrypted device which connects to a computer and is capable of storing bitcoin private keys. These devices act almost like specialty USB drives, but they are designed to safely secure bitcoin and provide an added layer of protection between the bitcoin wallet and the user’s internet-connected device. In some senses, a hardware wallet is a kind of like a half-step between a web-based wallet and a complete off-line cold storage solution. The great thing about hardware wallets is that they allow users to have some peace of mind because of the added layer of security, but the assets stored on the hardware wallets are still accessible for use and can be sent directly from the wallet to other bitcoin addresses or services.
    • Paper wallets: A bitcoin paper wallet is among the most secure kind of wallets in existence. To store bitcoin in a paper wallet, users create a public wallet key and a private key and then print them out on paper. This is one recommended method for long term bitcoin storage. Some people go to extra lengths and print the wallets on archival paper using high-quality ink. It’s important that the paper wallets are securely stored (you can even make backup copies and store them in different locations). While the upside of a paper wallet is that they make a good long-term storage solution, they are not that convenient for everyday use and they require the added step of making sure the paper where the address is stored is adequately secured and protected.

An example of a bitcoin paper wallet.

Caption: This is an example of a simple bitcoin paper wallet. These wallet address, which contains a bitcoin public key (or address) and a bitcoin private key were made using the free service bitaddress.org. There are a number of similar services that range from creating elaborate paper wallets to creating simple ones. Image from bitaddress.org

  • Hot wallets: A bitcoin hot wallet is a wallet that is constantly connected to the internet. There are a couple of reasons for using a hot wallet, but the most common reason is that bitcoin hot wallets are the easiest to access when using bitcoin as a currency or when making frequent trades or transactions. Like cold storage bitcoin wallets, there are also a couple of different kinds of hot wallets.
    • Mobile wallets: Mobile bitcoin wallets are exactly what they sound like. A mobile wallet is based on a mobile device such as a smartphone or tablet. Most mobile use the identifying features of the mobile device to help create a unique and secure wallet. Usually, mobile wallets can be restored using a seed phrase if the device containing the wallet is lost or stolen. Obviously, the trade-off for always having your bitcoin with you is that you need to be careful that the mobile wallet is not compromised in other ways. If you use a mobile bitcoin wallet, implementing good digital security is important, as is securing the seed phrase that will give you access to the wallet if you need to run a restore.

Abra is a robust non-custodial mobile wallet that gives users lots of options for buying, selling, and storing bitcoin and a wide variety of other assets.

  • Exchange wallets
    • Desktop: A bitcoin desktop wallet refers to a crypto wallet where your private keys are stored on the hard drive of a computer. In some ways, a desktop wallet is like a step between a mobile wallet and a hardware wallet. While there is an extra physical layer between a potential security threat and your bitcoin, a desktop wallet is not completely secure and tactics like malware or social engineering attacks can still be used to gain access to any wallet that is connected to the internet.

Bitcoin buying services can support one or more wallets. When you buy bitcoin with the Abra app, you will automatically create a non-custodial mobile bitcoin wallet, which means that only you have the key to your wallet, so you are in control of your funds at all times.

Investing in Bitcoin

One of the most dominant use cases for bitcoin at the moment is investing ― or speculating that the price will continue to rise over the next several decades as the use cases outlined above continue to evolve and mature.

Before proceeding, it’s really important to understand that bitcoin, like any other potential asset is not a sure thing. There are a lot of reasons why the price could go down — including future government regulations, a discovery of a bug or vulnerability (or some other security breach), the emergence of some kind of competitor that is a vast improvement to Bitcoin, the erosion to the incentives (like mining fees) to continue to maintain and upgrade the network in the future, etc.

There are also a lot of reasons that some investors are extremely optimistic or bullish about the investment potential of Bitcoin. Either way, it’s really important to do your own research around Bitcoin as it is with any potential investment.

How to invest in bitcoin: A new asset class

Bitcoin is an emerging asset class. What that means in terms of investing is that bitcoin and other cryptocurrencies can be useful as a hedge against other investment classes, and also provide a useful diversification function in traditional investment portfolios.

Cryptoassets like bitcoin are not correlated to other traditional investment assets.

This chart shows Bitcoin’s relative correlation to other traditional assets. Bitcoin demonstrates a low correlation, meaning it can be a beneficial addition to an investment portfolio. To learn more about Bitcoin in a portfolio context, check out Abra’s whitepaper on the topic

Financial asset classes usually share characteristics among themselves, but they are distinctive from members of other asset classes in the way they behave. This makes them useful in a portfolio context because if one asset class is losing value, other asset classes might be able to withstand the losses, or if they are completely uncorrelated, some asset classes might increase in value as other assets lose value.

Two main characteristics that are already defining bitcoin and cryptocurrencies as an asset class is that they are uncorrelated to the US stock market and that they have a good Sharpe Ratio or a risk-adjusted rate of return.

Analysis done by Abra has shown that adding even small percentages of bitcoin and cryptocurrencies to a traditional portfolio can help substantially in terms of diversifying risk exposure and increasing returns over time.

When to invest in bitcoin

The question of when to invest in a valuable asset is age-old. Bitcoin and other cryptoassets are somewhat notorious for their volatility and bubble-like boom and bust.

While no one can provide an answer for when to invest in Bitcoin, there are some good benchmarks or waypoints for evaluating Bitcoin’s investment potential.

Time: As mentioned earlier, Bitcoin has been around for a decade. In that time the network has grown to cover the world. The number of active nodes and the number of bitcoin wallets in existence has increased, while the value of bitcoin’s currency has grown from $0 at the beginning of 2009 to several thousand dollars by 2019. (So far, BTC’s all-time was achieved on December 16, 2017, when the price touched $19,665.39).

So in less than ten years, the price of one bitcoin has ping-ponged between $0 and nearly $20,000, making a historic run that attracted a lot of attention to the asset’s underlying volatility. During the past 10 years, bitcoin’s market run has not been linear. Instead, the growth of bitcoin both from a general user perspective and from a market perspective has followed a cyclical pattern of runs and retreats. Ideally, investors secure positions before dramatic market runs and then make decisions about profit-taking at the market peak. This strategy is not only true with bitcoin and cryptocurrencies, but with all kinds of investments and asset classes. So the question about “when is the best time to buy bitcoin” is best answered by trying to figure out where the asset is in the timeline of price movement. Of course, if people knew that then investing would be a lot easier.

There are a few things to consider when trying to figure out bitcoin market timing. These are just for consideration and they are not the basis for any kind of investment decision:

    1. There will only ever be 21 million bitcoin ever produced. Now, this doesn’t exactly tell the whole story, because as you might remember from reading earlier, each bitcoin can be divided by 8 decimal places, but the fact that Bitcoin has a set schedule for creation (the final bitcoin will be mined in 2140) and that there is no entity that can change to underlying Bitcoin network numbers means that it is a deflationary currency and that as time goes on it will become more scarce, and likely more valuable.
    2. From studying previous technological shifts we know that there are distinctive ways of tech adoption: Innovators, early adopters, early majority, late majority, and then the laggards. This cycle has happened again and again and is particularly applicable to internet technologies and products. Depending on where you think Bitcoin is in the technology adoption cycle should help guide potential investment decisions. While identifying the exact phase of Bitcoin’s trajectory is difficult, by all accounts, the Bitcoin network and the bitcoin currency are still in the pre-mass adoption phase. Important milestones on the technology adoption curve include the innovator phase, the early adopter phase, early majority phase, late majority phase, and then the laggards.
    3. Network effect: Bitcoin benefits from a network effect. This effect will impact future growth in two ways. The first impact of the network effect is that new growth fuels future growth. Just like the way social networks grow new users invite other users to interact with new Bitcoin users help convert other users so that they can share value over the network. Since Bitcoin’s total addressable market is the whole world, there is really no limit to the potential spread of the network other than basic infrastructure.
    4. Competition: Bitcoin’s network effect also works to keep it competitive in the crypto market place. As mentioned earlier, Bitcoin is the oldest cryptocurrency and enjoys a first-mover advantage, but it also has a very active developer community (not to mention its solid design foundation) which means that Bitcoin coins to be number one cryptocurrency by market capitalization. The longer Bitcoin stays in this position, the more it reinforces its dominance. Ethereum is the second-place cryptocurrency by market cap, but it has completely different economics.

Cost averaging: One simple, but timeless, investing strategy is to average into a market when making investments. The basic concept is to make small purchases of the investment spread over a long time. The goal is to spread the purchases over times when the market is up and times when the market is down. This is an especially useful tactic when trying to create a position in a volatile market like bitcoin or cryptocurrencies.

More than money

For all of the reasons outlined above, Bitcoin represents a fundamental shift across a number of fields including finance and computer science. The combination of those two fields will enable disruptive technologies, ideas, and companies (including Abra) across a number of fields that touch traditional industries such as banking, money transfer, investing, and payments. On top of that, there are also a number of other opportunities that Bitcoin’s underlying technology enables — and which are just now being explored and developed.

A full conversation about the power of Bitcoin would not be complete without mentioning the fact that the development of Bitcoin has driven the creation and adoption of the entire new cryptocurrency and blockchain sector.

Ten years after the publication of the Bitcoin whitepaper, there are more than 2,000 (the number is growing every day). Companies (like Abra) have sprung up around the world to build on Bitcoin and related technologies. Colleges and universities now offer degrees in cryptocurrencies and blockchain — and there are even children’s books written about the power of decentralization and the next wave of innovation that is made possible because the barriers that Bitcoin breaks down.

Whether you are a veteran crypto investor, or just discovering cryptocurrencies, we always recommend doing your own research and constantly finding ways to learn more about how crypto works and what some of the latest applications are, which is hard because the field is so innovative and dynamic that new companies, projects, and services are being introduced every day.