If you want to know what is Bitcoin, how you can get it and how it can help you, without floundering into technical details, this guide is for you. It will explain how the system works, how you can use it for your profit, which scams to avoid. It will also direct you to resources that will help you store and use your first pieces of digital currency.
What is Bitcoin in a nutshell
Small wonder that Bitcoin emerged in 2008 just after Occupy Wall Street accused big banks of misusing borrowers’ money, duping clients, rigging the system, and charging boggling fees. Bitcoin pioneers wanted to put the seller in charge, eliminate the middleman, cancel interest fees, and make transactions transparent, to hack corruption and cut fees. They created a decentralized system, where you could control your funds and know what was going on.
Bitcoin has come far in a relatively short time. All over the world, companies, from REEDS Jewelers, a large jewelry chain in the US, to a private hospital in Warsaw, Poland, accept its currency. Billion dollar businesses such as Dell, Expedia, PayPal, and Microsoft do, too. Websites promote it, publications such as Bitcoin Magazine publish its news, forums discuss cryptocurrency and trade its coins. It has its application programming interface (API), price index, and exchange rate.
Problems include thieves hacking accounts, high volatility, and transaction delays. On the other hand, people in third world countries may find Bitcoin their most reliable channel yet for giving or receiving money.
What is Bitcoin in-depth?
At its simplest, Bitcoin is either virtual currency or reference to the technology. You can make transactions by check, wiring, or cash. You can also use Bitcoin (or BTC), where you refer the purchaser to your signature, which is a long line of security code encrypted with 16 distinct symbols. The purchaser decodes the code with his smartphone to get your cryptocurrency. Put another way; cryptocurrency is an exchange of digital information that allows you to buy or sell goods and services.The transaction gains its security and trust by running on a peer-to-peer computer network that is similar to Skype, or BitTorrent, a file-sharing system.
The creator of bitcoin figured out a way to let two entities confidently trade directly with one another, without the need to rely on all these intermediaries. The key is mathematics. As long as we both trust in math, we can be confident the exchange to occur as expected.
Bitcoin uses public key cryptography and an innovative approach to bookkeeping to achieve the authorization, balance verification, prohibition on double spending, delivery of assets and record inalterability described above. And it happens in near real time at no cost.
Cryptography ensures authorization. You need a private key to transact. And your key is complex enough that it would take the best computer longer than the earth has existed to crack it. In other words, it’s essentially unhackable.
Where can I find Bitcoins?
First, we would recommend you read this in-depth guide for buying Bitcoin.
You can get your first bitcoins from any of these four places.
- A cryptocurrency exchange where you can exchange ‘regular’ coins for bitcoins, or for satoshis, which are like the BTC-type of cents. Resources: Coinbase and LocalBitcoins in the US & Canada, and BitBargain UK and Bittylicious in the UK.
- A Bitcoin ATM (or cryptocurrency exchange) where you can change bitcoins or cash for another cryptocurrency. Resources: Your best bets are BTER and CoinCorner
- A classified service where you can find a seller who will help you trade bitcoins for cash. Resources: The definitive site is LocalBitcoins.
- You could sell a product or service for bitcoins. Resources: Sites like Purse.
Caution! Bitcoin is notorious for scams, so before using any service look for reviews from previous customers or post your questions on the Bitcoin forum.
How does Bitcoin work?
Without getting into the technical details, Bitcoin works on a vast public ledger, also called a blockchain, where all confirmed transactions are included as so-called ‘blocks.’ As each block enters the system, it is broadcast to the peer-to-peer computer network of users for validation. In this way, all users are aware of each transaction, which prevents stealing and double-spending, where someone spends the same currency twice. The process also helps blockchain users trust the system.
“Unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority. Instead it is underpinned by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent, a file-sharing system, and Skype, an audio, video and chat service. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”. The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to “mine” Bitcoins over time, and the total number that can ever be mined is limited to around 21 million. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.”
How can I store my bitcoins?
To see how the system works, imagine someone called Alice who’s trying out Bitcoins. She’d sign up for a digital wallet to put her bitcoins in.
The Bitcoin Wallets
There are three different applications that Alice could use.
- Full client – This is like a standalone email server that handles all aspects of the process without relying on third-party servers. Alice would control her whole transaction from beginning to end by herself. Understandably, this is not for beginners.
- Lightweight client – This is a standalone email client that connects to a mail server for access to a mailbox. It would store Alice’s bitcoins, but it needs a third-party-owned server to access the network and make the transaction.
- Web client – This is the opposite of “full client” and resembles webmail in that it totally relies on a third-party server. The third party replaces Alice and operates her entire transaction.
You’ll find wallets that come in five main types: Desktop, mobile, web, paper and hardware. Each of these has its advantages and disadvantages.
How do I buy and sell stuff with Bitcoins?
Here’s the funny thing with Bitcoins: there are no physical traces of them as of dollars. All you have are only records of transactions between different addresses, with balances that increase and decrease in their records that are stored on the blockchain.
To see how the process works, let’s return to Alice.
Example of a Bitcoin transaction
Alice wants to use her bitcoin to buy pizza from Bob. She’d send him her private “key,” a private sequence of letters and numbers, which contains her source transaction of the coins, amount, and Bob’s digital wallet address. That “address” would be another, this time, the public sequence of letters and numbers. Bob scans the “key” with his smartphone to decode it. At the same time, Alice’s transaction is broadcast to all the other network participants (called “nodes”) on her ledger, and, approximately, ten minutes later, is confirmed, through a process of certain technical and business rules called “mining.” This “mining” process gives Bob a score to know whether or not to proceed with Alice’s transaction.
The transaction between Alice and Bob
What is Mining?
Mining, or processing, keeps the Bitcoin process secure by chronologically adding new transactions (or blocks) to the chain and keeping them in the que. Blocks are chopped off as each transaction is finalized, codes decoded, and bitcoins passed or exchanged.
Miners can also generate new bitcoins by using special software to solve cryptographic problems. This provides a smart way to issue the currency and also provides an incentive for people to mine.
The reward is agreed-upon by everyone in the network but is generally 12.5 bitcoins as well as the fees paid by users sending transactions. To prevent inflation and to keep the system manageable, there can be no more than a fixed total number of 21 million bitcoins (or BTCs) in circulation by the year 2040, so the “puzzle” gets increasingly harder to solve.
What do I need to know to protect my Bitcoins?
Here are four pieces of advice that will help your bitcoins go further.
As you’d do with a regular wallet, only store small amounts of bitcoins on your computer, mobile, or server for everyday uses, and keep the remaining part of your funds in a safer environment.
- Backup your wallet on a regular basis and encrypt your wallet or smartphone with a strong password to protect it from thieves (although, unfortunately, not against keylogging hardware or software).
- Store some of your bitcoins in an offline wallet disconnected from your network for added security. Think of this as a bank, while you, generally, keep only some of your money in your wallet.
- Update your software. For added protection, use Bitcoins’ multi-signature feature that allows a transaction to require multiple independent approvals to be spent.
Spending some time on these steps can save your money.
What else do I need to know?
Protect your address: Although your user identity behind your address remains anonymous, Bitcoin is the most public form of transaction with anyone on the network seeing your balances and log of transactions. This is one reason why you should change Bitcoin addresses with each transaction and safeguard your address. You can also use multiple wallets for different purposes so that your balance and transaction history remain private from those who send you money.
Your confirmation score: As said, you receive a confirmation score of about 10 minutes before you make your purchase. Different wallets have their own reading.
Government taxes and regulations: Government and local municipalities require you to pay income, sales, payroll, and capital gains taxes on anything that is valuable – and that includes bitcoins. The legal status of Bitcoin varies from country to country, with some still banning its use. Regulations also vary with each state. In fact, as of 2016, New York state is the only state with a bitcoin rule, commonly referred to as a BitLicense.As shown in the Table above, zero is the least with the number 3 being the most reliable for average bitcoin transfers. If you’re sending or paying for, something valuable, wait until you, at least, receive a 6.
What are the disadvantages of Bitcoin?
Bitcoin got off on the wrong foot by claiming an apocryphal person (or persons), Satoshi Nakamoto as its founder. Nakamoto has never been found.
Regarding more practical concerns, hacking and scams are the norms. They happen at least once a week and are getting more sophisticated. Bitcoin’s software complexity and the volatility of its currency dissuade many people from using it, while its transactions are frustratingly slow. You’ll have to wait at least ten minutes for your network to approve the transaction. Recently, some Reddit users reported waiting more than one hour for their transactions to be confirmed.
Scams to watch out for
The four most typical Bitcoin scams are Ponzi schemes, mining scams, scam wallets and fraudulent exchanges.
- Ponzi Scams: Ponzi scams, or high yield investment programs, hook you with higher interest than the prevalent market rate (e.g. 1-2% interest per day) while redirecting your money to the thief’s wallet. They also tend to duck and remerge under different names in order to protect themselves. Keep away from companies that give you Bitcoin addresses for incoming payments rather than the common payment processors such as BitPay or Coinbase.
- Bitcoin Mining Scams: These companies will offer to mine outrageous amounts of bitcoin for you. You’ll have to pay them. That’s the last you’ll see of your money (with no bitcoins to show for it, either).
- Bitcoin Exchange Scams: Bitcoin Exchange Scams offer features that the typical bitcoin wallets don’t offer, such as PayPal/Credit Card processing, or better exchange rates. Needless to say, these scams leave you in the hang while they siphon your dollars.
- Bitcoin Wallet Scams: Bitcoin scam wallets are similar to online wallets – with a difference. They’ll ask you for your money. If robbers like the amount, that’s the last you’ll see of your deposit. The address, in other words, leads to them, rather than to you.
Of all of these, wallet scams are the most popular with scammers managing to pinch millions.
What are the advantages of Bitcoin?
The best thing about Bitcoin is that it is decentralized, which means that you can settle international deals without messing around with exchange rates and extra charges. Bitcoin is free from government interference and manipulation, so there’s no Federal Reserve System to hike interest rates. It is also transparent, so you know what is happening with your money. You can start accepting bitcoins instantly, without investing money and energy into details, such as setting up a merchant account or buying credit card processing hardware. Bitcoins cannot be forged, nor can your client demand a refund.
It’s small wonder that users call Bitcoin “Money 2.0” or that Bill Gates called it “a techno tour de force.”
Tyler Winklevoss, co-creator of Facebook, summed it up when he said:
“We have elected to put our money and faith in a mathematical framework that is free of politics and human error.”
Rick Falkvinge, Founder of the Swedish Pirate party, predicted that
“Bitcoin will do to banks what email did to the postal industry.”
According to John McAfee, Founder of McAfee,
“You can’t stop things like Bitcoin. It will be everywhere and the world will have to readjust.”
Where do I go from here?
Here are various resources that will direct you to best places for finding wallets, stores that accept bitcoins, exchanges for trading Bitcoin, and Bitcoin news, prices, charts, guides and analysis among other information.
- 99Bitcoins – 99Bitcoins supplies video and text tutorial on how to buy Bitcoins with Paypal, Credit Card, debit card and more.
- Bitcoin.org – Choose your Bitcoin wallet from 12 different mobile, desktop and hardware applications.
- Coinmap – For bitcoiners who want to spend their BTC at brick-and-mortar locations, Coinmap refers you to hundreds of retailers who accept bitcoin at their physical store locations.
- Blockchain.info – Blockchain info is the go-to place for checking transactions on the ledger. You can check how much money your wallet contains, or, for that matter, how much BTC is stored at any particular wallet address.
- Bitnodes – Run by the Bitcoin Foundation, Bitnodes estimates and visualizes the size of the bitcoin network.
- Wizbit – Wizbit shows all transactions and newly mined blocks in real time on an eye-catching spinning globe.
- We Use Coins – Weusecoins.com is a list of credible exchanges for trading Bitcoins worldwide or in the U.S.
- Buy Bitcoin Worldwide – Get help finding a Bitcoin exchange.