Bitcoin Explained Simply For Beginners
Before 2009, cryptocurrency existed only as an academic concept.
Cryptocurrency is now well and truly reality (if only a virtual one), and its switch from an idea to reality was precipitated by Bitcoin, the world’s first cryptocurrency.
But what is Bitcoin exactly?
In this introductory guide, we take a look at what Bitcoin is, why Bitcoin matters, how to use Bitcoin, what Bitcoin wallet to use and lastly, where to buy Bitcoin.
What Bitcoin Is and Why It Matters
Bitcoin (BTC) is the poster boy of the cryptocurrency world.
Bitcoin was the original digital coin or cryptocurrency; a decentralised digital currency that relies on a peer-to-peer network technology – which has shaken the world.
Bitcoin was launched in 2009 by a mysterious “man” named Satoshi Nakamoto who said that “He wanted the coin to create a new electronic cash system that’s completely decentralised with no server or central authority.”
Bitcoin can be used to purchase goods and services just like “regular” money can.
But because the currency is digital, you’ll never get to see or hold an actual Bitcoin.
Much like a digital currency bank account balance except you can't go to an ATM and withdraw out a Bitcoin.
You can, however, withdraw your Bitcoin at special Bitcoin ATMS which convert your Bitcoin and other cryptocurrencies to cash.
As Bitcoin and other cryptocurrencies become more and more popular so will the availability of these ATMs.
Bitcoins and cryptocurrencies are stored in a wallet with each Bitcoin wallet address having an identifier of 26-35 alphanumeric characters, beginning with the number 1 or 3.
Each wallet address represents a possible destination for a Bitcoin payment.
Much like a current day bank account.
A Bitcoin wallet address looks like this: 1DVsE9EKCn3mV62WcAb9H3CVzQrX4b
Below is a screenshot of the Coinbase Wallet on the IOS app which allows you to buy, store, send and receive Bitcoin payments using your mobile.
How To Use Bitcoin
In case you're wondering how you can actually send and receive well it's really simple.
There are two main methods:
Either obtain the transaction counterparty's wallet address who you wish to send a payment to;
Or give your wallet address to someone who owes you a debt to send you Bitcoin (much like a normal bank account transfer).
Now I know some of you are probably thinking “How on earth can I remember a wallet address like that?!”
Well, we've got you covered.
Using the Coinbase platform (which is probably the easiest and most user-friendly app) as an example I will show you how to make a payment:
1 – Input the payment amount in Bitcoin or in currency to be made. For example £20
2 – Now the way you can make payment without inputting the long wallet address number is by scanning the recipients QR code (see image 2 below for a picture of a QR code) – this needs to be requested from the recipient;
3 – Scan the QR code with your mobile phone camera (Hit: Try it by scanning image 2 below) if you want to send them a payment.
4 – This will automatically bring up their wallet address (See Image 4). Next simply hit next to confirm and send your payment.
Currently, the amount of goods and services you can purchase are nowhere near as much as what you can purchase with traditional cash.
However, as more and more merchants start to accept Bitcoin payments this will gradually change.
If you're might be wondering why merchants would switch to a cryptocurrency system?
Well, one of the main reasons is that Bitcoin and cryptocurrencies are a lot more efficient and quicker form of electronic payment then using a bank.
You can literally send Bitcoin anywhere around the world in a matter of minutes and pay little to no fees.
This is especially good news for merchants!
In the case of other digital currencies, this sending time is only a matter of seconds to anywhere in the world.
The other main reason why Bitcoin is preferred to existing currencies issued by Central Banks is Trust.
Nakamoto’s aim was to create a limited currency and payment system that would replace centralised banks and help restore trust to what was becoming a trustless world.
Bitcoin was born in the aftermath of the Global Financial Crisis.
A world battered and bruised by Greedy Bankers.
It’s hardly a coincidence that the digital coin was launched in 2009, a year after bankers were accused of rigging the system and causing a worldwide recession.
Similarly, unlike existing currencies where Governments can print as much money as they like, Bitcoin has a fixed capped maximum supply of 21,000,000.
This helps to preserve the value of your Bitcoin.
Further, Bitcoin allows you to safely transfer cash via the internet without a bank or any human input.
A network of computers replace the bank's traditional role of rubber stamping and verifying transactions.
In short, Bitcoin eradicates the need for a bank and returns the power to the users of the financial system.
So how does a Bitcoin transaction work?
Once you hit send transaction the network computers begin a validation process of confirming that the transaction is a legitimate transaction that should be added to the Blockchain.
What do the computers need to validate? They need to validate the following:
1) That you own the Bitcoin you're intending to transfer; and
2) That you haven’t sent these Bitcoins previously to someone else
As soon as your info is verified, your transaction details are bundled into a new block along with other transactions and added to the Blockchain.
The sender and receiver's transactions details are now stored on the Blockchain and can’t be deleted, altered, refuted or tampered with.
Are Bitcoin transactions traceable?
Each transaction you make that is approved by the Bitcoin Network is recorded on the Bitcoin blockchain by computers.
The Bitcoin blockchain is a public ledger available for anyone to review.
This allows for total trust and confidence in the ledger.
As a result of the way, regulations are moving soon each time you exchange fiat currency to buy Bitcoin from an exchange, the exchange will have a duty to perform identification checks on you.
Once a purchase is connected to your identity, it will become possible to trace all subsequent transfers of Bitcoins back to you and movements of Bitcoin to wallets that are linked to identified people.
However, if the wallet doesn't belong to an identified user then it won't be possible to determine who the Bitcoin belongs to but it will be possible to identify where the Bitcoin is.
Which Bitcoin Wallet To Choose?
How Bitcoin wallets work is that a wallet stores your private and public keys and not your Bitcoin.
This is a common misconception held by owners of Bitcoin
Your keys are what allow you to connect to the Blockchain and interact with the Chain.
Instead, the details of your coin purchases are stored on the blockchain.
You can think of a Bitcoin wallet as more like a decentralised bank account than a physical wallet.
Now there are 5 different types of digital wallets:
1) Desktop wallets
These are generally very secure provided that you take precautions when online.
Desktop wallets are easy to use and sit on your computer's desktop rather than a third-party server.
2) Online Wallets
Online wallets are vulnerable to hackers because the wallet is online and your keys are stored on a third-party server where the hackers can steal your keys.
That said, transactions made from an online wallet are faster than on any other type of wallet.
3) Mobile Wallets
A mobile wallet is a wallet-on-the-go, accessible at any time through your mobile device.
Mobile wallets are practical but they’re also very susceptible to hacking and the safest.
4) Hardware Wallets
Hardware wallets are similar to USBs and are a lot more secure than online wallets.
This is because they’re not connected to the Internet and thus harder to be hacked.
5) Paper Wallets
Paper wallets are also not connected to the Internet – However, they’re also really hard to use.
Beginners should avoid them.
However, because your private keys aren’t in the hands of a third party server, they’re super secure.
Unfortunately, as your keys are kept on paper they can be easily lost.
What Bitcoin Wallet Should You Choose?
It’s all about priorities. If convenience is important to you, you might prefer a desktop, online or mobile wallet, such as Coinbase.
Your coins are in the hands of a third party, but the wallet is easy to use and you can spend your coins straightway.
If, however, you’re very security conscious, you might want to take a look at a hardware or paper wallet.
As mentioned, these are harder to use, but they are much more secure.
The two wallets we recommend are as follows:
Ledger Nano is the first of the top two safest hardware wallets aimed at Bitcoin and alternate coin users who want more security that we recommend.
Thanks to a second security layer, Ledger Nano is able to thwart attack vectors, and it doesn’t even cost that much – just $65.
You can purchase the Ledger Nano wallet by clicking this link.
The second Bitcoin hardware wallet that we recommend is Trezor wallet.
Trezor is bullet-proof against malware and your private keys will never be exposed.
Trezor is also easy to use, open source and ideal for beginners. It does however, cost $99.
You can purchase the Trezor wallet by clicking this link.
Our Wallet Recommendation
As we’ve already mentioned, the wallet you pick will come down to what your priorities are.
For example, how risk averse are you?
If security rather than usage is important to you, or if you’re an investor who needs to store a lot of coins and is holding for the long term than it’s hard to look beyond either Trezor or the Ledger Nano.
Trezor is the most expensive out of the two, but it’s pretty much as safe as a bank that holds your physical cash.
It’s transparent and user-friendly.
Ledger Nano is much the same and no computer is even needed to recover your wallet.
Due to the lower price point, we are a big fan of the Ledger Nano.
Want to get started buying Bitcoin today?
If you're new to Bitcoin and want the easiest, quickest and most convenient way to purchase Bitcoin we recommend using Coinbase.