Bitcoin is one of the leading cryptocurrencies today. Since its entrance into the financial scene, it has grown. People who bought the virtual currency some years ago and held on to them are richer today. The assets have appreciated over time.
Some Bitcoin users may choose to sell off and get their gains while some will chose to still hold with the hope that in the future, it will yield more dividends in terms of its value. With the success of most traders and investors, more people want to become Bitcoin owners. If this is you, then you have made a smart move.
Bitcoin has its advantages over other options out there when it comes to making transactions. It explains why most people prefer the distributed ledger to other options. With Bitcoin, you can be sure of a faster, cheaper, and more secure way of doing transactions. Verifying transactions is also faster on the network.
However, you can only get to do it the right way if you are properly guided. That is why you have us. We have compiled in this article what you need to know about transacting with Bitcoin. You will learn how to do Bitcoin transactions, how they work, the costs, the blockchain technology, and its advantages including how to go about it without exposing yourself to risks.
What is a Bitcoin transaction?
Bitcoin transactions are mails or messages that are signed digitally using cryptography. After the signature is appended the messages will be sent to a Bitcoin network where they will be verified.
Whatever transaction you make is public and can be seen in the blockchain. It is one reason why the system is trustworthy. It is transparent and can be verified by everyone concerned.
The blockchain records transactions between different users. The Bitcoin network updates the records as the balances increases and decreases with profits and losses. These transaction records can be seen in each node of the blockchain.
Satoshi Nakamoto explains it better:
We define Bitcoin as a chain of digital signatures. Each owner transfers Bitcoin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.Satoshi Nakamoto
A Bitcoin transaction has three parts, namely an input, an amount, and an output.
Input is the record of the Bitcoin address from which the sender received the Bitcoin he or she wants to send to a receiver. Before you can send a Bitcoin to someone else on the network, you might have received it from someone else.
The record of the address you received the Bitcoin from is the input. The address would also give you a sort of digital signature. You would have to sign a hash at this point. The hashrate would depend on the network’s processing power. You can also send multiple inputs though it might take longer.
The amount is the worth of the Bitcoin the send want to send to the receiver. Of course, you know how much Bitcoin you want to send.
The transaction output is the receiver’s Bitcoin address. It is the receiver’s public key. The block size might also play a part in how quickly the receiver gets the cryptocurrency.
At this juncture, it is essential to state that Bitcoin is a digital currency. It does not exist like fiat currencies. It is not hard and seeable like the Dollar, Euro, Pounds, etc. Cryptocurrencies are digital so Bitcoin exists digitally hence they are called digital currencies.
They do not exist in a server or bank account. You only know you have carried out a transaction with Bitcoin from the records.
How do Bitcoin transactions work?
Once you have an interest in Bitcoin transactions, it goes without saying that you have to understand how it works. Whether you want to buy or sell, you need a proper understanding of every aspect of transactions on the cryptocurrency exchange.
Before you send a Bitcoin, there must be public and private keys to the amount of Bitcoin you want to send. You need to have access to the required public and private keys.
As a Bitcoin owner, you have access to two keys, that is the public key which is the address to which some amount of Bitcoin was sent, and the private keys which authorize the Bitcoin sent previously to be resent to another address. This explains why you can fund your account and send BTC to a receiver.
How much does Bitcoin transactions cost?
Transactions attract a Bitcoin transaction fee. The fee goes to the Bitcoin miner. Bitcoin mining requires a good deal of work and effort. Some wallets also give a block reward to their miners.
Mining Bitcoin also involves some energy consumption. There are several factors that impact the fee. Most wallets will let the user set the fee. Though there might be an average transaction fee that you can just use.
Since the transaction fees go to the miners, you may want to make it handsome to spur the miners to prioritize your transaction when they are mining. If your transaction is prioritized, it will go in with the block on time rather than waiting in a queue. The transaction speed relies heavily on the mining speed.
Steps to investing in Bitcoin
Before you put your money in Bitcoin, you ought to understand the necessary steps to it. It is not a venture you undertake without the know-how. If there is any situation you have to prepare to succeed more than ever, it is in the Bitcoin exchange market.
There are certain areas you have to consider before putting a foot forward. Your proper preparation will determine how much you understand the market, how much profit you will make, and how exposed you will be to risks. There is no denying the fact that you need sound computing power.
Know what influence the price of Bitcoin
It is necessary that you know the drivers of price as a Bitcoin user. You will make a profit or incur a loss if you trade well or not respectively. If you trade well, your chances of making profits are higher. If you know what drives the price of Bitcoin, what is responsible for its fluctuations to an extent, it will help you make informed moves.
You cannot trade well when you do not know the price movements. If you know the factors that impact the price of Bitcoin, you will know how to handle any trade situation. Whether or not you are an expert, there are situations that will test your wit and affect the success of your transactions.
Knowing the factors that impact the price of Bitcoin will inform you in the decisions to take and the routes to avoid. Here are the factors that influence the price of Bitcoin:
The supply of Bitcoin
The supply of Bitcoin will influence the price of the coin. Currently, the supply of Bitcoin is capped at 21 million. What having a finite supply implies is that the price is not constant because it can go up depending on the demand for the coin. Therefore, if in the coming years the demand for Bitcoin increases, the price will likely increase.
And of course, there is a law in any kind of market that the price of a good or service is never constant and when the demand for it increases, the price also increases. This is the same with Bitcoin.
The status of Bitcoin is greatly impacted by its integration into new payment methods. As the years go by, new banking frameworks and payment platforms, and methods are being introduced into the financial world.
How much Bitcoin is able to integrate into these new systems will determine the movement of the coin’s price to a large extent. If Bitcoin easily integrates into the novel systems, it will increase the demand for the asset.
And of course, as the demand increases, the price rises as well. Knowing this, you can now have a better understanding of the price movement vis-à-vis the demand rate. This will inform a better transaction decision.
News and rumor
Cryptocurrency and Bitcoin are easily affected by the information. If there is negative information on the longevity and value of Bitcoin, the demand rate will go down. This is because a lot of traders depend on the latest news on the asset. Since everyone is trying to protect their investment, everyone is depending on the latest news to make a smart move.
If there is a rumor on the security of Bitcoin, the demand for this asset will either increase or decrease depending on the kind of information whether positive or negative.
Just as the rumors and news on the asset affect its price, current happenings also influence it. Government regulations, economic decisions, and all will influence the price of Bitcoin. If the government of a nation bans cryptocurrency, the price might decrease because it will affect the value of digital assets.
In a situation like this, some people may even rush to sell off in a bid to get whatever gains they can gather. This kind of event will determine whether people in that nation will regard the asset enough to want to trade in it or ignore it completely. And when there is no demand for an item in the market, the price cannot be as it were when there was a demand for it.
After an event that weakens the regard people have for Bitcoin, the value will drop. If the users decide to boost the network, people might begin to see reasons why they should continue to trade Bitcoin and this will impact the price.
Knowing that these events will influence the price of Bitcoin will enable you to make the right decision when they do occur. Also, it helps you to maintain your cool in a seemingly chaotic situation or hard times.
Choose the Bitcoin trade style you like
Before you get on the Bitcoin network, you have to decide on the kind that you want to engage in. There are several ways you can trade Bitcoin including:
It means you have to open and close your position within a day. That is, you will have to open a position and also close it within a single day. When you are into day trades, you do not have market exposure at night. As expected, you do not incur funding charges on your position during the night.
This strategy is beneficial in that it lets you take advantage of short-term price movements. You can monitor the market and make transactions when you think the price is right and make your profit from it. Since the digital asset is volatile, you can make gains in the short term with this method.
This will require you to have all the necessary information to help you make informed decisions whenever you make a move.
This method simply means to trade in line with the present trend. The market is never static. Several factors can influence it. The market can be bearish or bullish. When you are into trend trade, you are buying and selling based on the prevailing or current market condition.
When the market is bullish, it means that the market is on the rise. A bullish market is one in which the traders and investors are confident and optimistic about the relevance and value of cryptocurrency. For the market to be bullish, it means that the traders are buying into positive information than negative news.
The market assumes an upward trajectory when the asset is doing well in the market. And for this to happen, there have to be some factors like confidence in the asset. This is not to say that there is no negative news. What is simply happening is that the people buy into the positive news than the negative ones.
It might not be easy to know when a bullish market is beginning or ending because attitudes to the asset might change due to change in opinions and news. Therefore, it is advisable to be vigilant and know what news and opinion are thriving in the market.
The same applies to a bearish market. This is when the market is on a downward trend. This might be sponsored by negative reviews and news. In a bearish market, you will have to go short.
Your trades are based on the trend. If the trend continues, you may sustain your position. However, if you notice that the trend is on the reverse, you will have to close that position and open another one. The one you open will then match the new trend.
Bitcoin hedging is about managing risk or protecting yourself from risk. You do this by taking a position opposite to the one you have already if you think the market condition might change and this change might affect you.
What this means is that if you have a position already but you think the price of the asset may experience a short-term change, you might want to protect yourself from loss by opening a short position in the asset using Contract for Difference. Contract for difference (CFD) will help to cover for the differences.
So, if you own some Bitcoins and you think there might be a short-term drop in their value, you can open a short-term position with CFDs. This way, if you incur some losses, the profit from the short position will cover some of the losses on your coins if not all of them.
HODL came up as a misspelling of “hold” on a site. However, it now means “hold on for dear life”. What HODL means is buying and holding on to assets especially if you think they might increase in their value in the future. This phrase is meant to encourage people to not sell off their assets in the slightest.
The phrase expresses confidence in the long-term value of digital currencies. However, you should not take this as a code of conduct in every market situation. If you think that the long-term has a promising outlook, you might want to hold on to your assets.
If think the value of Bitcoin may drop at some point, you have to act wisely. If it means selling your positions and making a profit or limiting losses, then it is a smart move. You should always do your research and have a smart plan to know what moves to make.
The aim is to make a profit and limit losses. Therefore, if it means closing your positions, then you have to do it. You may even want to set stop losses to automatically close your positions.
You should choose any style that sits well with you.
Decide on your way of getting exposed to Bitcoin
Before you start making transactions, you have to decide on how you want to get exposes to Bitcoin.
Trading Bitcoin derivative
Rather than owning Bitcoin, you may want to speculate on the price of the asset using CFDs. In this case, you can take a position on the price of Bitcoin and go long or short. This method has its advantage. With CFDs, you can have full exposure to the market with your margin which is your deposit.
When you trade Bitcoin derivatives, you can go short as a way of hedging your asset. This way you can protect yourself from adverse market conditions. Also, there are the chances of you getting your orders met at the price you set for them.
Use an exchange
You can buy Bitcoin using exchanges. This way, you will own Bitcoins directly. This is why it is for people who use the buy-and-hold method. If you go by this method, then you are buying Bitcoins with the expectation that the value will increase and you will make profits when you sell-off.
If you are buying Bitcoin through an exchange, you have to be vigilant. Get an exchange that will serve you well. Some exchanges may not respond to your requests on time. You have to do your own research and try to make up for any shortcomings on the part of the exchange in terms of proper regulations.
With Bitcoin exchanges, you will have to pay some fees for transactions. Each time you fund your account and withdraw, there may be charges involved.
These are the methods by which you can be exposed to Bitcoin and join the network. Ensure that you make a decision on which method to use depending on which one works well for you.
Choose to go short or long
You have to decide on going short or going long. If you go short, it means that you foresee a drop in the value of Bitcoin and are therefore being careful with your orders and deals. If you go long, you are optimistic about the asset price and hope to make a profit when you sell in the future. People often go short because they are careful not to incur losses.
If you trade financial derivatives, you can go both ways – long and short – with reference to the conditions of the market. The market trend has a lot to do with going long or short. This is why you have to be vigilant and do your own research.
Use stops and limits
Stops and limits are essential for protecting yourself from losses. They come in handy for managing risks on the network.
There are several stops and limits to pick from including:
Normal stops and limits
This is a stop order given to your broker to sell off your asset if the market price drops to a certain level. Usually, this level is less favorable than the current price of the asset. A limit order is an instruction to your broker to buy or sell an asset at a certain price. Usually, this price is more favorable than what obtains in the market.
There are two types of stop orders you can explore:
This is an instruction to your broker to sell off your assets once a particular level of loss is reached. You do this to prevent yourself from losing too much.
Stop limit order
This is where your open a new position in line with market trend. If you note how the trend is going and want to take an advantage of the situation, you can open a new position when the market price decreases to a particular extent.
When using these stop orders, note that the market price can change at any time and your stop order may experience slippage. Slippage is when you have unwanted losses or unexpected gains.
The guaranteed stop is used to close your position at a particular level. Guaranteed stop does not regard slippage. Also, you can set guaranteed stops without a fee. However, if your guaranteed stop is executed, you will have to pay.
Trailing stops are used to lock in your profit when the market condition is good. It caps your downside risk. With trailing stops, there might be slippages.
Close your position to cut losses or take a profit
Market prices are unguaranteed. Assets are volatile and market trends are diverse. When you trade on the network, you should be ready to make a profit or loss. No one wants to make losses but the market can change dynamics at any time.
You can decide to close your position at any time. In order to cut losses, it is advisable to close your position. You can close a position to take profits as well.
While your profit is deposited in your account directly, your losses are deducted from your account balance. It is essential to know when to close a position and when to keep it open. Your success as a trader depends on these.
Start transacting and monitor it
You will either buy if you expect the value to increase, or sell if you expect the value to decrease. When you open a trade you have to monitor it constantly to ensure that your predictions or anticipations tally with the reality of things. You want to be sure that you will make the profit you envision to make or avoid the loss you intend to avoid.
Indicators can help you in this regard. They can monitor the market sentiment and rate of the volatility of the asset and all. Some platforms have technical indicators that can keep you informed on the character and actions of Bitcoin prices.
Advantages of Bitcoin transactions
Before the coming of cryptocurrencies into the financial world, there has been the traditional method of making financial transactions. People are getting interested in Bitcoin and other cryptocurrencies, and one can see that there are some factors that are endearing people to the currency.
Bitcoin transactions have some advantages that are making them an option for people. Here are some of the advantages;
A Bitcoin is faster and easier
Unlike the traditional financial system that takes a long time with several repeated movements to be completed, it is faster and easier. Also, in the traditional financial system, your transaction may be successful or not but in Bitcoin trading, a new transaction is almost always successful.
You can make transactions in Bitcoin without involving an intermediary. There is no need for your transaction to take days to be done. With Bitcoin, your transaction will be validated in the node within a shorter time. The miners will validate the transaction in the blockchain network of nodes. This is quicker than it will take a traditional financial institution to get your transactions done.
Many people worry about Bitcoin’s energy consumption. Bitcoin makes use of a lot of electricity. Bitcoin’s carbon footprint is said to be as high as that of countries, among the highest 30 in the world. While it is still on the high side, plans are in place to shift to more renewable energy without compromising transaction speed.
The transaction is irreversible
When you start investing in Bitcoin, you should know that every transaction has to be carefully thought out before you a leap. Once a new block is generated on the Bitcoin network, the transaction will be added to the Bitcoin blockchain where it will be mined. Once it is added and the mining is done, you cannot make amendments or reverse the transaction.
Also, in the system, there is no provision for refunds. This is advantageous because it rules out the possibility of having issues with transactions. It just goes smoothly with no complaint. There is a super low risk of unconfirmed transactions.
Bitcoin transaction fees are cheaper
Compared to what banks and other financial institutions charge, it is cheaper. What you pay miners for processing your transaction cannot be compared to what you pay banks and other financial institutions to process a simple transaction.
In a Bitcoin transaction, the commission might be dependent on the size of the transaction. Therefore, a transaction can only cost you a few pennies.
A Bitcoin transaction is safer
A Bitcoin transaction is carried out using public and private keys. With a public address, you can easily send and receive Bitcoin. With the private keys, you can spend your Bitcoin without stress.
So long as you do not let another person whom you do not trust have access to your information, your funds are safe. It is also safe because the system is transparent. If you decide to monitor every transaction, you can.
You can see the history and present status of any transaction in the blockchain. The system makes provision for you to trace every transaction in the blockchain.
Another aspect of Bitcoin’s security is that the crypto exchange you will be using has a way of protecting its users from hackers. For instance, if you are using Coinbase, you will have little to worry about. Coinbase makes provision for the traders and investors to save their assets in a cold Bitcoin wallet to prevent hackers from having access to them. So you can use two Bitcoin wallets that is one online and one offline.
If you can keep your details, especially your private keys, safe, you have little to worry about with support as strong as that provided by the two-factor verification and the hardware wallet Coinbase offers.
Why is Bitcoin transaction slow sometimes?
Before you can complete a transaction, Bitcoin miners have to make verification. The transaction will be broadcasted to the Bitcoin network and miners will verify that the sender’s keys can access the inputs he controls. If the verification is successful, the transaction will be confirmed.
Sometimes the confirmation of a BTC transaction may take time because your transaction may be exempted from the current block. If this happens, other transactions will be confirmed except yours. When the next block is being assembled, your transaction may be a part of it.
Bitcoin miners mine blocks of transactions. A block can contain several transactions. The mining time is controlled by the Bitcoin protocol. This protocol adjusts the requirements dynamically to let each block mining take about 10 minutes.
The current Bitcoin protocol also limits a block to a megabyte. The effect of this is seen in the number of transactions that the block will accommodate per time. Resultantly, the time it takes to confirm transactions becomes longer. Your transaction may have to wait for the next set if it does not go with the current set. Once the confirmation is slow, consequently, the entire Bitcoin network is slow. There are technological improvements to enable miners to enhance their Bitcoin hash rate.
How to be security-conscious on the Bitcoin network
When it comes to BTC transactions, the issue of security cannot be over-emphasized. You need to be security conscious. There are some steps to take to secure your assets:
Keep your details safe
Do not share your private keys with anyone. If you own Bitcoins, you have two keys: the private and public keys. The public keys enable you to receive BTC. In other words, everyone out there has access to your public key. This is because they need it to send you BTC.
However, you need not let anyone have access to your private keys, except you trust the person so much that they cannot steal from you. You alone have access to the private key because it is the key that authorizes any amount of Bitcoin to leave your account. You send BTC to people using your private keys.
To better understand this explanation, you should see your Bitcoin address as a safe that is transparent and visible to everyone. But, while everyone can have a look at it, they cannot take anything from inside because they do not have access to the private keys. Your money is safe because only you can access them with your private key.
Keep your devices safe
One danger that faces traders generally is hackers and scammers. Its is advisable to secure your devices – your phones, PCs, tablet, and what have you. You can install antivirus and opt for the premium version for guaranteed security. Also, enhance your security with firewall settings. Antispyware software is a welcomed idea. Whatever you can do to keep your devices from the reach of hackers is a smart move.
Use a backup system
It is advisable to have your cryptocurrency data backed up. If you happened to be a victim of theft, you can have something to fall back on. When it comes to cryptocurrency, you cannot be too careful. If you have your information backed up, you can retrieve them and get another system and you are good to go.
You cannot overemphasize the importance of an offline space where you have all your data safe. A colocation server, an encrypted external disk, and a thumb drive come in handy here. Once your data is compromised, you can swiftly make the right move to secure your assets.
Do not use public Wi-Fi
Using public Wi-Fi is not the best when it comes to cryptocurrency. Through public Wi-Fi, you can become easy prey to hackers. If you care about keeping your details and money safe, you should be wary of free connections.
In this regard, you should endeavor to keep your devices safe. If you must lend it out to someone, then it should be a trusted person. And when you access the internet with your laptop or phone, you have to be careful and vigilant.
Use extra security
Beyond the protection offered by your username and password, ensure that you enable two-factor authentication. That means you have to get a wallet that will permit this. It is a surer way of keeping your money safe.
Get a device for cryptocurrency only
One smart move you can make is to get a device for cryptocurrency only. This may be expensive to get more than one PC now, one for your cryptocurrency affairs and one for your other commitments. However, given the importance of your assets and your cryptocurrency dealings, you can surely make this happen.
Ensure that you keep your cryptocurrency device safe and out of public eyes. You can leave it at home or a safe workplace where no one except you or a trusted partner has access to it. Also, you should endeavor to use private servers and dedicated IPs to keep your personal data and activities private. Here, privacy is the goal, whatever gets you there is a smart move.
Use more than one wallet
It is advisable for Bitcoin users and cryptocurrency traders generally to use more than one wallet. While you have a hot wallet that serves you when making transactions, you should have a cold wallet that serves as storage. Whatever protection your exchange offers you is cool but the added advantage you give yourself is also cool.
Bitcoin transactions are advantageous for several reasons including the fact that they are safe, cheaper, and faster. Bitcoin transactions are transparent and traceable. They are not reversible. Bitcoin transactions are simple and straightforward to carry out. With input, the amount, and an output, you are good to go.
Sometimes Bitcoin transactions can be slow if the miners do not include the transaction on the current block and it has to wait. There are several ways to carry out a Bitcoin transaction safely including enabling two-factor authentication.