INTRODUCTION

TO BITCOIN
INTRODUCTION TO BITCOIN

DailyFX Research Team

Table of Contents
Introduction to Bitcoin ..................................................................................................................... 3

What is Bitcoin? .............................................................................................................................. 3

Why Bitcoin? ................................................................................................................................... 4

Where do Bitcoins Come From? ..................................................................................................... 4

What are “Altcoins?” ........................................................................................................................ 5

Hazards and Risks .......................................................................................................................... 6

How do I Invest/Trade in Bitcoins? .................................................................................................. 6

Derivatives – CFD Trading and Spread Betting .............................................................................. 6

Bitcoin Outlook ................................................................................................................................ 7

VIRTUAL CURRENCY DISCLOSURE ........................................................................................... 8

DISCLAIMER...................................................................................................................................... 8

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Introduction to Bitcoin

“First, they ignore you, then they laugh at you, then they fight you, then you win.” -
Mahatma Gandhi

Bitcoin as an investment product is no longer mocked nor ignored. Instead, it receives an

unprecedented amount of media attention and coverage as it increasingly moves into the focus of
investors and makes its way into many portfolios. Famous investors and entrepreneurs such as Paul
Tudor Jones, Jack Dorsey or Tim Draper have endorsed Bitcoin, embracing qualities such as its finite
supply and decentralized nature. While central banks regularly issue warnings related to this and
other new digital currencies, most have yet to put into place restrictions or regulations to control these
emergent disruptors, however, recent proposals like Libra and central banks’ digital currencies are a
testament to the increasing importance of cryptocurrencies today.

What is Bitcoin?
Bitcoin is a digital and cryptographically secured currency – or cryptocurrency – based on a
decentralized peer-to-peer protocol which is registered on the blockchain. The Bitcoin whitepaper
emerged online on 2008, written by “Satoshi Nakamoto” a pseudonym used by the single or group of
developers that invented Bitcoin. After that, the Bitcoin source code was made public, allowing users
to run nodes, mine and send Bitcoins freely. Bitcoin nodes are copies of the full Bitcoin blockchain,
they hold a copy of every transaction since its creation to today.

Bitcoin miners are responsible for verifying Bitcoin transactions. When they successfully verify a
number of transactions, the miner is rewarded with new Bitcoins. Bitcoin’s value against fiat currencies
– like the dollar or the euro, which are issued by central banks – is determined by supply and demand,
no central entity can issue, confiscate or tamper with Bitcoin. Investors now see Bitcoin as a valuable
alternative to other traditional government-backed currencies or to commodities like Gold. Bitcoin
(BTC) is actively traded against most of the other major currencies in the world and is held in digital
wallets. These wallets are made up of public addresses, similar to an email address, which users can
utilize to send or receive Bitcoins, and private keys, similar to the password of an email, which allows
the user to access the wallet.

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Why Bitcoin?
Bitcoin is a decentralized currency that operates without a central entity as incentives are aligned
between the multiple stakeholders, mainly users and miners. As Bitcoin is an online protocol, anyone
with an internet connection can receive and send Bitcoins, and this allows for cheap and fast
international payments to be accessible to everyone. Additionally, as Bitcoins cannot be confiscated
nor transactions blocked, citizens of countries with more volatile currencies and oppressive regimes
are able to transact online with Bitcoin.

Where do Bitcoins Come From?

Bitcoins are created when a new block is created. A Bitcoin block is composed of a series of Bitcoin
transactions, which are pooled together, and verified by a miner. Therefore miners make sure
transactions are accurate and that users do not double spend their Bitcoins. These miners are

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machines, usually GPUs or ASICS, which are purposely designed for this job. These machines solve
mathematical problems in order to compete for Bitcoin block verifications.

When a miner successfully solves the problem, it is rewarded with the Bitcoin block, which includes a
Bitcoin reward. This reward is currently 6.25 Bitcoins per block mined, which means that when a new
block is created, 6.25 new Bitcoins enter into circulation. The speed at which miners can mine blocks
depends on their computing power. More powerful machines can mine blocks faster, however the
Bitcoin code automatically adjusts the difficulty in order to keep the time per block at an average of
10 minutes per block. Every 210,000 blocks, the reward per Bitcoin block is cut in half, and this occurs
approximately every 4 years. Even though new Bitcoins come into circulation every time a block is
mined, only 21 million coins will ever exist. Eventually the reward of the blocks will be cut to almost 0
and no new Bitcoins will enter the current stock. This will happen around the year 2140.

What are “Altcoins?”

Alternative currencies launched after Bitcoin are called ‘altcoins’. Initially these coins were created
using similar frameworks as Bitcoin, however now thousands of cryptocurrencies exist with different
functions and capabilities. Currently all altcoins take up approximately 45% of the total cryptocurrency
market capitalization, with Bitcoin holding the other 55%. The best known altcoin is Ethereum, and
unlike Bitcoin, its founders are well known. Created by Vitalik Buterin and four other individuals,
Ethereum is based on a decentralized platform which runs smart contracts, or applications that
operate without the possibility of censorship, fraud and downtime or third-party interference. Ethereum
is the second biggest cryptocurrency by market capitalization. Altcoins are considered to be higher
beta than Bitcoin, their prices are more volatile than Bitcoin’s and therefore also more than the broader
market. Altcoins can be traded against fiat currencies and also against Bitcoin, as for example the
ETH/BTC pair.

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Hazards and Risks

Warnings by the US supervisory authority, the SEC, and the German central bank about the
unpredictable nature of the Bitcoin market warrant attention. Additionally, cryptocurrency holders can
be subject to hacks and fishing attempts in order to steal their priced coins. Furthermore, because
cryptocurrencies are decentralized in nature, transactions are irreversible, which increases the
chances of loss if users commit serious errors.

How do I Invest/Trade in Bitcoins?

Many Bitcoin exchanges allow the ‘physical’ purchase of Bitcoin, stored in an electronic wallets. These
wallets can be set up on a smart phone, a tablet or a computer, allowing the holder to see price
movements in real time. Many of these exchanges are unregulated and offer little comeback in the
case of any financial dispute. There have also been reports of exchanges being hacked and
customers losing some or all of their cryptocurrency holdings without legal recourse.

Derivatives – CFD Trading and Spread Betting

Contracts for difference (CFDs) and spread betting provide a way to benefit from the fluctuations and
volatility of a digital coin. Payment is made on the difference of entry and exit price in settlement,
without having to actually exchange the cryptocurrency. These alternative products have a number
of advantages compared to trading the underlying market. Funds are held in segregated and secure
bank accounts, giving you greater peace of mind and allowing you to simply trade the market without
worrying about coin custody. Additionally, CFDs and spread bets operate on margin, so you can use
leverage to exploit small price movements more efficiently. Derivatives also allow you to take short
positions to capitalize on falling markets - a feature valued by most experienced traders – which is
not available with spot coins. CFDs and spread betting is not currently available to US investors.

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Bitcoin Outlook
Bitcoin remains a complex asset and subject for traders and investors to understand. Many dismiss
it based on its price volatility and famous boom and bust cycles. However, behind this volatile price
lies a currency that is durable, portable, fungible, scarce, divisible, decentralized and tamper proof.
Bitcoin is considered by many as one of the most important inventions in computing in the last century.
A nascent technology and asset class is usually subject to higher than normal volatility as it increases
its users and total value. Traders and investors should look out for adoption or rejection from
government agencies in regards to Bitcoin which can determine how the cryptocurrency will be
regarded by different regulatory bodies. This approval or rejection may lead to volatility in the price of
Bitcoin in the years to come. Looking at the future for Bitcoin, users must also look at metrics that
help understand the state of the network such as the wallet count or the hash rate, in order to gauge
how healthy the system is, these considerations can be very helpful along with price analysis.

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Forex trading involves risk. Losses can exceed deposits.
We recommend that you seek independent advice and ensure you fully understand the risks involved before trading.

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VIRTUAL CURRENCY DISCLOSURE

DAILYFX IS A MEMBER OF THE NFA AND IS SUBJECT TO NFA’S REGULATORY OVERSIGHT
AND EXAMINATIONS. HOWEVER, YOU SHOULD BE AWARE THE NFA DOES NOT HAVE
REGULATORY OVERSIGHT AUTHORITY OVER UNDERLYING SPOT VIRTUAL CURRENCY
PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR
MARKETS.

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High Risk Investment

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INTRODUCTION TO BITCOIN

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Trading in financial markets, foreign exchange, índices, commodities and cryptocurrencies on margin
carries a high level of risk and may not be suitable for all investors. The high degree of leverage can
work against you as well as for you. Before deciding to trade in financial markets, foreign exchange,
indices and commodities, you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain losses in excess of your
initial investment. You should be aware of all the risks associated with financial markets, foreign
exchange, indices and commodities trading and seek advice from an independent financial advisor if
you have any doubts.

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