What is Bitcoin? – A Complete Guide for Beginners
By now, you’ve probably heard about the huge hype surrounding Bitcoin and the crazy, volatile world of cryptocurrencies. There are stories of bitcoin millionaires and others investing in new “altcoins” and making hundreds of times their initial investment in just weeks. But what is bitcoin and why does it matter?
This guide is designed to teach you everything you need to know about Bitcoin so you’re ready to take your own crypto journey. For a more general guide to cryptocurrencies, check out our Ultimate Beginner’s Guide to Cryptocurrencies.
What is Bitcoin (BTC)?
Simply put, Bitcoin, commonly abbreviated to BTC, is a digital currency. Just like every other currency in the world, such as the Dollar or Euro, it has value because people accept that it has a value. Like other currencies, it can be used to buy and sell goods and services and has even been used exclusively to live on by people all over the world. But that’s about where the similarities with standard currencies end. What makes Bitcoin (and most other cryptocurrencies) special is that it is decentralised. What this means is that it is not owned by a government and doesn’t have a central issuing authority controlling the amount of Bitcoin in the world at any one time. Instead Bitcoin exists on an open, yet secure network with a limited amount available at any time. There is a maximum of 21,000,000 Bitcoins that can ever exist with almost 17,000,000 currently in circulation. This means Bitcoin is almost completely safe from inflation but is still able to scale due to Bitcoins being easily divisible all the way down to something called a Satoshi.
What is a Satoshi?
A millionth of a Bitcoin – 0.00000001 BTC – is called a Satoshi. You may have heard of the creator of Bitcoin, Satoshi Nakamoto, the illusive person or people who are still yet to come forward as the inventor of the world’s first cryptocurrency. The Satoshi, the smallest possible denomination of Bitcoin, was named after it’s mysterious creator and is often used as a measurement when comparing other cryptocurrencies to Bitcoin.
How does Bitcoin Work?
The entire process is controlled and recorded mathematically by something called the “blockchain”. The blockchain is like an enormous open ledger that records every single transaction that is made on the network. You can have a look at all the transactions that have ever taken place here. All the data inside each “block” is encrypted by another block and Merkle trees which need verifying, making the entire chain incredibly secure. Every few minutes the entire network will then settle the transactions through a simple election and essentially agree on who currently has the money. There is no middle man or central server controlling the system, this is completely peer-to-peer, just like sending an email. The blockchain technology has a huge amount of potential and digital currency is just the start. This is already being built upon by others such as Ethereum with their smart contracts that allows two parties to make exchanges with no middle man in a trustless system, amongst many others.
So instead of a single source verifying every single transaction on the network there are many people, called “miners” that verify the transactions.
What is Bitcoin Mining?
Within the blockchain there are many very complicated mathematical problems that need to be solved to verify a block of data and add it to the ledger. A miner is the person who solves these mathematical problems, which verifies that everything is good with the block and adds that block to the ledger for everyone else to see. Now when I say “person”, what I actually mean is a computer, usually a very good computer that has been built specifically for mining.
For more information on how the blockchain and mining works, check out the video below for a great demonstration:
One of the most popular ways of mining Bitcoin today is to use an ASIC (Application Specific Integrated Circuit) mining rig. These are built specifically for mining and are much quicker and more energy efficient that standard processors. In the early days of Bitcoin and other cryptocurrencies it was possible to use a desktop computer or laptop to mine Bitcoins, but due to the way Bitcoin is designed it has become more difficult to do this and so specific, sophisticated hardware is now needed to make mining worth while. But why would you mine Bitcoin in the first place?
Bitcoin has a built in reward system that rewards miners with Bitcoin for verifying the transactions on the network. The amount that is rewarded and the difficulty of verifying a block changes over time. The rewards are becoming smaller and the task of mining a block is becoming increasingly more difficult. This is why mining is becoming more and more expensive to get into so many people join pools of miners that all work together over the network to verify block and then share the rewards.
So now you know what Bitcoin is, where it came from, roughly how it works and a little bit about why it’s such a big deal, but why would you buy some and how can you make money with Bitcoin?
Well a lot of people, from hedge fund managers to your next door neighbour, are starting to see the value in the technology and the potential to make a lot of money from investing in it. Whilst it still isn’t really the currency that it intends to be, it has paved the way for other currencies and innovative blockchain projects, making it the cornerstone of the crypto world and a potential investment opportunity like the world has never seen before. The late 2017 increase in price elevated it into the mainstream public eye, creating huge public awareness and made some people very rich. If you’re looking to be another one of those people then we advise you to do a lot of research first, not only into Bitcoin but into other cryptos as well. Use the rest of Cryptos Decoded to find information on many of the most interesting altcoins available today as well as Bitcoin itself.
So, let’s say, after a bit more research into the financial side of Bitcoin you decide you want to buy some.
How to Buy Bitcoin
We’ve written a much more in depth guide on how to buy bitcoin that goes into the many ways to buy it, which exchanges to use and what to expect during your purchase.
If you’re not looking for a variety of in depth methods and just want the best way to buy Bitcoin then we’d recommend signing up for a website called Coinbase, that we rate as the best Bitcoin exchange for beginners.
Coinbase is an exchange where you can trade fiat currencies (USD, EUR, etc) for cryptocurrencies, specifically Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH) and Litecoin (LTC). It has a simple sign up process, is easy to use and is one of the most popular exchanges available today.
If you sign up using our referral link, not only do you support Cryptos Decoded but you’ll also receive $10 worth of Bitcoin for FREE when you make your first purchase.
Read More: Coinbase Review – Is Coinbase Safe?
How to Store Bitcoin
Once you’ve bought yourself some Bitcoin you’ll probably be wondering what you can do with it to keep it safe. As it’s a digital asset and doesn’t physically exist in a form that is tangible then storing it in your safe under your bed is impossible.
What you need is a Bitcoin wallet.
But what is a Bitcoin wallet?
A Bitcoin wallet is a piece of software that you download onto your computer or your mobile phone that has a set of public and private keys that make your wallet unique. The public key acts as a kind of address that people can send money to, and your private key acts as a way for you to digitally sign any transactions to allow you to send money. It is very important that you do not ever share your private key with anyone that you wouldn’t want to access your money, because if they had your private key they have complete control over where your money can be sent. For this reason it is highly recommended that you keep your private key on pieces of paper in multiple locations and not on a computer to reduce the possibility of people acquiring your private key to an absolute minimum.
As you can probably tell, a Bitcoin wallet isn’t an actual wallet. The best way to think of a Bitcoin wallet is like a keyring with a set of keys. Your money is always on the Bitcoin network but with your set of keys you can access it from a very secure part of the network that only you can access.
If keeping your keys on a piece of paper doesn’t sound like your kind of thing, then you can buy a hardware wallet. A hardware wallet is essentially a USB stick that will very securely store your keys. This is what we recommend and think that if you’re planning on keeping substantial sums of Bitcoin or any other currency then a hardware wallet is a must! The only way other people can access your money if it is stored on a hardware wallet is if they physically steal the wallet. So, make sure you keep it safe!
If you have some Bitcoin right now, you may be wondering why I’m telling you to take it off the exchange and store it elsewhere. Well, an exchange is a centralised system where one company is in control of all the money of their users. If the exchange were to be hacked, for example, there is a high risk that your money could be stolen. Whilst most exchanges are relatively safe and use two factor authentication to add another layer of security to your account, it is still recommended that you do not keep your Bitcoin or any other cryptocurrency on an exchange if you can help it.
There have been instances, such as the hacking of an exchange called MtGox where people have lost fortunes in Bitcoin due to the insecurity of the exchange. In the case of MtGox, they lost 850,000 Bitcoins. Use our Bitcoin calculator below to see how much 850,000 Bitcoins would be worth in today’s prices:
[currencyprice currency1=”btc” currency2=”usd,eur,jpy,gbp,chf,aud,cad,bgn” feature=”calculator”]
Advantages of Bitcoin
There are a huge number of advantages to Bitcoin and other cryptocurrencies, we’ll go over a few here. If you want more information on what makes Bitcoin so revolutionary we’d highly recommend the books of Andreas Antonopoulos, who does an incredible job at explaining the value that Bitcoin and the blockchain can bring to the world.
- Bitcoin is completely decentralised – This basically means that there will never be an inflation problem as there is no one party in control of the money. It means that if things start to go bad the government can’t print more Bitcoin to inflate the price. It will give confidence to people storing money as there will be no need for banks to hold it, which means there will be no risk of losing it all if another financial crisis hits like the one in 2008.
- (Almost) Instant, (almost) free transactions – No more waiting 3-5 business days for cheques to clear. No more paying substantial fees and waiting days for international payments to go through. Bitcoin doesn’t discriminate, because there is no-one in control of Bitcoin. It’s just maths and it just works.
- Hugely secure – Bitcoin is, by design, more secure than any other payment system on the planet. Without the need of additional layers of cryptographic encoding it provides a system that gives people freedom and security like no other payment system today.
Disadvantages of Bitcoin
Not everything with Bitcoin is as good as the core design.
- Volatility – Whilst a very volatile currency is great for investors and traders, it doesn’t make for a good currency. Imagine buying a car with Bitcoin with today’s volatility. By the time you’ve driven home the car could be worth 25% more or less than what you paid due to the volatility of the crypto market. For Bitcoin to become a fully functioning currency it needs to stabilise to be able to be used as a wide spread currency by the masses. This will happen as more people being to use it.
- Fees and number of transactions – Due to the high number of transactions per second (tps), Bitcoin’s fees have recently increased to almost unusable figures. There are plans to alleviate the stress on the network during 2018 which will help to reduce fees so this might not be as much of a problem in the near future. Hopefully these additions to the network will also be able to increase the amount of transactions per second. At the moment Bitcoin can handle 5-10 transactions per second whereas VISA is capable of a theoretical 24,000 tps!
- Exchange Hacks – Whilst Bitcoin itself is hugely secure, there is always the potential that the exchanges themselves will be the victim of attacks. This has always caused the market to crash as the media and the ignorant slate Bitcoin for lack of integrity. Secure exchanges are beneficial for everyone and seeing features such as Coinbase’s “vault” is a step in the right direction but it will always be a problem.
Whilst Bitcoin is still in its infancy for a technology it is already providing huge growth and potential with substantial adoption by everyday users and large financial institutions. Many believe that the underlying technology has the potential to completely revolutionise the financial sector and some say that the blockchain could be the thing to end world poverty. It’s the cornerstone of the cryptocurrency world with new coins and technologies being built everyday expanding on what Bitcoin has already achieved. As you can see, there is a lot resting on Bitcoin’s shoulders but if the world continues to adopt cryptos and if the technology and people behind the coins themselves continue to innovate at the same rate the future could well be a whole lot brighter than it is today.