Are you having a hard time wrapping your head around Bitcoin? You shouldn’t be – not if you read this article to the very end. Here’s a quick overview of what you’ll find in this Bitcoin beginners’ guide:
- What Bitcoin is
- How to get started with Bitcoin
- Blockchain and its relation to Bitcoin
- How a Bitcoin transaction occurs
- How Bitcoin works
- Where to get Bitcoin
- How to spend Bitcoin
- The current status of the Bitcoin market.
We’ve even thrown in fun facts about Bitcoin.
Let’s dive right into it.
What is Bitcoin?
For starters, Bitcoin is the world’s first and most well-known cryptocurrency. It is a form of digital money that isn’t controlled by a central authority such as a government or bank.
Like all money, you can store, exchange or use Bitcoin to make payments.
As a beginner, you must be thinking – do I need to understand the technical details to get started with Bitcoin? Not necessarily!
Creating a Bitcoin wallet is the first step to getting started with Bitcoin. You will use your wallet to buy, sell, receive and trade Bitcoins. You can easily download a wallet to your phone or computer.
A Bit of Bitcoin History
Bitcoin became available to the public in 2009. The anonymous Satoshi Nakamoto – whose identity is still unknown – is the brains behind Bitcoin’s development.
In the same year, mining – creating new Bitcoins, recording transactions, and verifying them on the blockchain – began.
It wasn’t possible to assign a monetary value to Bitcoin until 2010 when someone decided to swap 10,000 bitcoins for two pizzas. If the buyer hung on to those Bitcoins, they would be worth a whopping $350 million at today’s Bitcoin price.
Currently, there are 18,745,150 bitcoins in circulation. This figure changes at intervals of 10 minutes when a new block containing 6.25 Bitcoins is added to the network
Blockchain and Its Relation to Bitcoin
At its core, a blockchain is a type of a distributed ledger.
It is a Distributed Ledger Technology (DLT), a database consensually shared and synchronized across various computers called “nodes.” Any user in the blockchain can be a node. Nodes verify, approve, and store data within the ledger.
A blockchain arranges new data that comes into the ledger in blocks. Each block can only hold a specific amount of data, so new blocks are continually added to the data, creating a chain.
New information on the blockchain is encrypted with a unique identifier known as a “hash.” This data cannot be changed or altered.
Each node contains a timeline of data that goes back to when the node was first created. Essentially, this means that even if someone tampered with the data in one node, they wouldn’t change the stored information.
Any node that has been interfered with can be easily identified and rectified since it doesn’t look like the rest of the nodes. That way, it is almost impossible to replicate the computing power at the back end to reverse engineer to know what all those hashes are.
Many cryptocurrencies, including Bitcoin, run on blockchain technology.
How Does a Bitcoin Transaction Get Into The Blockchain?
Each Bitcoin transaction goes through several steps before it is delivered to the blockchain network. These are:
Bitcoin is built upon a cryptographic system that uses public and private keys.
Public keys, as the name suggests, are publicly known and crucial for identification. Private keys are kept secret and are essential for authentication and encryption.
These two keys create a unique, secure digital identity and signatures that authenticate a user before granting them access to perform a transaction from their Bitcoin wallet.
Once a user initiates a transaction, it is transmitted to the Bitcoin blockchain and broadcasted to nodes on the network.
When a node receives the transaction, it checks the validity. The node decides whether to accept or reject the transaction. Put differently, the majority of nodes must accept a transaction for it to be deemed valid.
The blockchain system often offers rewards to Bitcoin “miners” in the network through a process known as “proof of work” to induce authorization of transactions.
Proof of Work
Bitcoin mining isn’t easy. It involves solving a complex mathematical problem to generate a block to be added to the chain.
Further, solving a bitcoin mathematical problem is a hit-or-miss undertaking. With the probability of solving the problem being 1 in 5.9 trillion, it is not surprising that miners have to be incentivized to verify transactions.
Mining is costly too. It takes a significant amount of computing power and energy to solve computationally intensive mathematical problems. Since mining is complex and time-consuming, the miners must be given a worthwhile incentive to fast-track the process.
Proof of Stake
Proof of stake consensus protocols allocates the right to select, verify and validate transactions randomly across users.
The chance to win the right depends on the user’s stake in the network, for instance, the number of Bitcoins the user owns. Proof of stake eliminates the need for mining, saving a significant amount of computing power resources.
The blockchain recently adopted smart contracts, a self-enforcing, autonomous program that automatically completes transactions if they’re in line with certain requirements to speed up consensus.
How Do Bitcoins Work?
Each Bitcoin is a computer file stored in a Bitcoin wallet on a computer or phone.
Once you’ve downloaded and installed your wallet, it automatically generates a Bitcoin address that you can share with other users in the network. You can get paid or pay other users using this address.
Note – A particular Bitcoin address is used only once.
Other concepts you need to know to understand how Bitcoins work include:
- Blockchain – As stated, blockchain is the technology that powers Bitcoin. Every confirmed transaction is added to the blockchain.
Bitcoin balances are kept on a public ledger. Other users have to verify new transactions to ensure that any user who initiates a transaction is the actual owner of the spendable balance.
- Private keys – A Bitcoin wallet contains a private and a public key. These keys work together to allow a user to initiate and sign transactions digitally, thereby providing proof of authorization.
- Mining – This is a consensus-based system that allows miners to verify new transactions. Each confirmed transaction has to be bundled up in a block that conforms to exact cryptographic specifications.
Since miners in the network have to reach a consensus before validating a transaction, it is hard for a single person to add a new block to the chain.
Where Can You Get Bitcoins?
You can get Bitcoins through one of the following main ways:
- Buying Bitcoins using “real” money on cryptocurrency exchange platforms such as Coinbase, investment brokerages, or Bitcoin ATMs. This is the most straightforward way to get Bitcoins.
- Accepting Bitcoins as a form of payment for your products or services.
- Mining Bitcoin.
What Can You Do With Bitcoins?
You can use your Bitcoins in several ways, including:
- Buying things online and offline – There are hundreds of eCommerce businesses that accept Bitcoin. Search engines like Spendabit allow you to browse through millions of products, all available for purchase through Bitcoins.
You can also use your Bitcoins to buy food in restaurants that accept Bitcoin, pay for accommodation on sites such as Expedia.
- As an Investment – As a concept, Bitcoin is a system to store money digitally. Since Bitcoin prices fluctuate from time to time, you can hold on to your Bitcoins as an asset and cash in when the prices are high for a profit, much like gold.
- Lending out your Bitcoins for an Interest – Several platforms allow people to lend and borrow Bitcoins without the user having to surrender control of the centralized entity.
Fun Facts About Bitcoin
Here are some interesting facts about Bitcoin to tickle your fancy.
- China owns an incredible 60 percent of Bitcoin hash power. In other words, 60 percent of all new Bitcoin mining happens in China.
- Genesis Mining sent a 3D Bitcoin model into the upper stratosphere tied to a weather balloon in 2016.
- Only a handful of people revealed their Bitcoin income to the IRS in 2015 – 802 people, to be exact.
- Satoshi Nakamoto, the creator of Bitcoin, remains unknown to date.
- In 2015, James Howells, a 35-year old IT engineer from Newport Wales, accidentally threw away his computer drive containing 7,500 Bitcoins!
- On May 22, 2010, a man exchanged 10,000 bitcoins for two pizzas worth a measly $25.
- Lamborghini was the first car maker to accept Bitcoins.
- The FBI owns the largest Bitcoin wallets worth $120 million. The Bitcoins were seized from Silk Road, an internet black market, making the agency one of the wealthiest Bitcoin operators in the world.
- Satoshi Nakamoto is sitting on millions of Bitcoins mined during the early days of Bitcoin.
… before you go
Is Bitcoin Legal?
While Bitcoin is safe to use, its legality varies from location to location. Bitcoin is legal in most developed economies, but emerging markets are yet to embrace it fully. The legality also depends on who you are and what you’re doing with your Bitcoins.
Even where Bitcoin is legal, governments have voiced the following concerns:
- The fact that Bitcoin can’t be fully controlled.
- Bitcoin can be used for illegal purchases.
- Bitcoin’s price volatility can be risky to investors.
- The potential to destabilize or challenge the authority or control of central banks.
The Current Status of the Bitcoin Market
Even though Bitcoin trading has been wildly speculative and volatile lately, it still offers exciting opportunities and the potential to make money.
At the time of writing this, 1 Bitcoin was equivalent to $33,411.20
As a rule of thumb, make sure you have the right information, a well-thought-out training strategy, and a reputable exchange platform if you want to trade in Bitcoin.
That said, we wrap this Bitcoin beginners’ guide.