Bitcoin for Dummies

Bitcoin for Dummies

Bitcoin basics

Who created Bitcoin?
Satoshi Nakamoto

What is Bitcoin?
Digital currency controlled by no central authority

How to use Bitcoin?
Bitcoin is good for all financial transactions online

What is a Bitcoin wallet?
An app or a small device to create and manage Bitcoin storage

What is PoW?
Proof of work, the consensus algorithm used by nodes (servers) to validate transactions

Definition: What is Bitcoin?

Child of the digital era, Bitcoin has at least two definitions: one for end users and the other for crypto geeks and blockchain developers. This article is targeted at laymen, so let’s not dig too deep into the mind-boggling technical lore and try to keep things simple, not stupid though. 

In a nutshell, Bitcoin is a digital (or virtual) asset that combines properties of a currency, of a stock and of a commodity. 

How to use Bitcoin? Well, you can pay for things with it, make investments and savings.

What we love about Bitcoin is that it doesn’t belong to any government and is generated or mined according to the strict and fixed rules in a quite predictable way. 

The total amount of Bitcoin is limited to 21 million, how about that, the FRS? So it’s probably a worthwhile decision to get some once you’ve read this article, got answers to questions like “what is Bitcoin?”, and learn the ropes of how to use Bitcoin. 

History of Bitcoin

The technology underlying Bitcoin was laid down in a whitepaper published in October 2008. The document is credited to a mysterious figure named Satoshi Nakamoto. To the date there is no serious proof he even exists, yet the contrary has not been proven either. Some think it is a team, and some of its members later came into limelight as early adopters of Bitcoin. Several months later, on January 03, 2009 the first block or the genesis block of the Bitcoin network was created and gave start to the new era of digital assets that are not controlled by any central bank or other authority. Early adopters supported the initiative by joining the network, mostly these were creators of other electronic assets.

In 2010 Bitcoin passed the reality test as the first known commercial transaction using it was carried out: a programmer Laszlo Hanyecz bought two Papa John's pizzas paying ₿10,000 from his Bitcoin wallet. 

The rest is history. From then on Bitcoin started its inexorable offensive against traditional (fiat) currencies and the centralized financial model that they represent. 

Now Bitcoin itself is an expensive asset, but you can always buy a fraction of it to join the community of people who believe that money 2.0 is already here and is here to stay. Bitcoin, how to use it, “how works Bitcoin” and other crazy search combinations ignoring all possible grammar rules have mushroomed, as people from all over the world rushed into crypto. 

Operating principles 

How does Bitcoin work?

The backbone of Bitcoin that ensures decentralization, transparency, security and anonymity  is the blockchain. In layman's terms, blockchain is a network where servers (nodes) manage a public database (distributed ledger). Ledger entries cannot be edited and when new ones are created, some serious cryptography is involved to ensure security and prevent any modification attempts. Hence the term “cryptocurrency”. Cutting off technical details, each entry is a block that includes data on a specific number of transactions as well as a “tag” (hash) that links each block to the previous one up, ensuring traceability up to the genesis block. This process enables operations with Bitcoin: exchange, transfer, spending, etc.

Note that the total amount of Bitcoin is limited to 21m by the source code, but the good news is there is an internal mechanism (halving) that slows the exhaustion process.

So much for the network operations, but where does Bitcoin itself come from? Well, as we mentioned above, it is somewhat of a commodity and it is mined. Let’s see how.

What is Bitcoin mining?

To confirm (validate) blocks and add those to the blockchain ledger, nodes have to solve complex computational puzzles, i.e. to perform a certain “work” to prove their validity. That’s the essence of the Proof of Work consensus in plain words. Also, each node competes with other nodes to solve the current puzzle before them, therefore it cannot be predicted which node will generate the next block. In case of success, a node gets a small reward in Bitcoins. This process is called mining and it’s rather costly, as miners need advanced equipment and a lot of energy.

In some countries mining is prohibited by the law which puts additional pressure on the network development. Yet, there is no way to stymie progress or new technologies; as some doors get closed, new ones are opened. More and more countries provide legal framework for Bitcoin mining, holding and trading.

How to store Bitcoin?

Bitcoin is a digital currency and even if you heard of Bitcoin ATMs, don’t get misguided. Those devices allow you to buy Bitcoin by depositing cash, but not to withdraw anything like banknotes or actual coins. Bitcoin is stored at individual network addresses. To create an address like that and manage it, a user needs a wallet application or device, depending on preferences. Hardware Bitcoin wallets are better for passive storage, as they are safer with sensitive data stored offline, hot software wallets allow acting promptly and offer a commendable security level as well. All transfers are authorized with a unique alphanumeric sequence (the private key). The science behind it is sophisticated, but all you need to know as a user is that you mustn't disclose this key no matter what. Reputable blockchain-related services never ask to provide this data. 

Otherwise Bitcoin wallets are even friendlier and simpler than the most part of banking apps available so far. 

Investing in tomorrow

Why does Bitcoin have value?

Bitcoin enthusiasts maintain that the key value of Bitcoin is decentralization. All assets that have ever existed before are somehow controlled by specific centralized authorities like central state-owned banks, major private corporations, governments, etc. These authorities can manipulate asset prices by tampering with the supply and introducing various laws to control circulation and ownership. While not 100% beyond the reach of the authorities and laws, Bitcoin does not belong to any specific agency and cannot be controlled from some cockpit. Nodes operate independently making sure that all transactions are fair and valid.

Given that, Bitcoin price is supposed to better reflect its actual value. And, given the current rates we can conclude that this value proved to be quite significant, and people do believe in Bitcoin as a replacement for fiat currencies, gold or equities.  

How to make money with Bitcoin?

Basically, there are three options to earn with Bitcoin: trading, mining and investing. Trading principles are pretty much the same as in the stock market. You are either bullish or bearish, watch trends and make decisions. Also, derivative financial instruments involving Bitcoin have mushroomed recently. But don’t rush headlong into it, get some advice or training from professional providers.

Becoming a miner takes some serious investment and a solid source of power. And, as the network develops, technical requirements become harder to meet. Yet, if you are serious about it, there is nothing impossible and it’s definitely not rocket science. Mining does not require programming skills beyond deployment of the source code, and this procedure is well documented. Moreover, the community is always ready to help newbies. 

Are Bitcoins a good investment option or not? Well, it depends on your goals and strategy. Even without interference from authorities and regulators, Bitcoin remains a volatile asset and its dynamics is still not easy to forecast, yet so far it has proved to yield tremendous profits to those who entered Bitcoins investment first. Bitcoin’s future is vague, but so is the future of any asset, so unless you try, you will never know. 

Buying Bitcoin: The pros and cons

Let’s have a brief check why one should buy Bitcoin and why it may be not the best idea.

Why we love Bitcoin and why we don’t love it all the time:

  • Secure and fast transactions (max. several hours) compared to bank transfers (up to several days)
  • Vague forecasts on Bitcoin’s future
  • Transparency and traceability of network operations
  • Vague legal status in some locations 
  • No authority can prohibit transfers
  • Limited spending options, mostly online 
  • Promising Bitcoin earnings for investors and holders 
  • Volatile rate threatening Bitcoin investments

Buying and spending 

Should you buy Bitcoin?

To buy or not to buy is the eternal question followed by how to buy Bitcoin. Well, the decision is up to you, but there are several reasons why you probably should give Bitcoin a try. 

  • It is a good option to diversify your savings even if you are not a crypto enthusiast.
  • More and more online retailers allow users to pay with Bitcoin, even some offline stores turn to it.
  • Bitcoin is a way to keep your financial life confidential. Beating the system is always good, isn’t it?
  • Contrary to the popular belief, Bitcoin is better protected from fraud than fiat money on your bank account.
  • So far, it is one of the very few options to make finances thrilling and interesting.

Where to buy Bitcoin?

There are many reputable exchanges to choose from. You can find various independent reviews and ratings on the Internet. Some are fully-fledged exchange platforms offering multiple currency pairs, additional fin-tech services like online wallets, custom blockchain browsers, cross-platform apps and even AMA courses answering questions like “how to buy Bitcoin?”, “pay with Bitcoin?” and “how do you spend Bitcoin?”. Some operate at a smaller scale and only allow buying crypto for fiat. Sometimes they have very friendly and concise flows and save users a lot of money.   

It's easy to buy Bitcoin

Whichever platform you choose, be prepared for an identity verification procedure. Laws against money laundering and terrrorism prohibit anonymous payments with bank debit and credit cards. Note that if a service offers an anonymous payment option it is 100% a fraud. 

Well, that’s it for today. Stay tuned for more articles and of course share your feedback with us.