Bitcoin 101 – What This Guide Will Cover
In 2013, I first heard about Bitcoin. Unfortunately, this is NOT a story of me buying and holding it to become a quick Bitcoin millionaire. Instead, this is the type of Bitcoin 101 guide that I wish existed at the time, while being current for Bitcoin in its current 2018 form.
In this guide, I’ll cover just about everything you’d need to know to get started on your Bitcoin journey. While I’d recommend reading this in its entirety, you can use the links in the table of contents to jump to a specific topic that you’d like to learn about.
- What is Bitcoin?
- How to Invest in Bitcoin
- How to Store Bitcoin
Bitcoin was launched in 2009, as the world’s first “double-spend proof”, peer-to-peer digital currency. This was a major accomplishment, because not only was Bitcoin decentralized, but it was also protected from malicious actors.
Bitcoin offers a censorship free way for anyone on earth to transfer value to anyone else in the world almost instantly, while simultaneously preventing manipulation of its supply. It allows you to have full control over your money, rather than trusting it with third-parties (banks, etc.).
The technology that makes Bitcoin possible and the true feat of its inventor is called Blockchain. The blockchain is an immutable and public digital ledger that records all Bitcoin transactions that have and will ever occur.
I’ll get back to how Bitcoin works, but first let’s go over some of the problems in traditional financial systems.
There’s nothing particularly new about digital ledgers. When you deposit money to your bank account, the bank updates its internal ledger to reflect your new balance. You can usually then withdrawal this money from any branch of the bank (sometimes as well as other banks), spend it with your debit card, and wire it to others. There are however a number of flaws in traditional systems that Bitcoin aims to solve.
When you keep money at a bank, the bank is essentially issuing you an IOU. In other words, you’re entrusting the bank will make good on its promise to safeguard your funds and allow you to use them how you please. Unfortunately, banks don’t always fulfill this promise, even if you’re a law-abiding citizen.
- IRS Sizes Bank Accounts From Innocent Americans
- Major Banks Ban Buying Bitcoin With Your Credit Card
- Banks Can Freeze Accounts for Unpaid Debts, “Suspicious Activity” (whether proven or not), or Illegal Activities
Sending value around the world is slow and expensive with banks. While we pay most of our employees and contributors at Unhashed (my cryptocurrency news website) in Bitcoin and other cryptocurrencies, we also offer the option of traditional methods of payment. Here’s a comparison of two recently made transactions using both a bank transfer and Bitcoin:
- Sent $50 to someone’s bank account in another country using our bank account. Options of a $30 fee for a same day wire, a $10 fee for a next day ACH transfer, or a $3 fee for a three day ACH transfer.
- Sent $3590 worth of Bitcoin for an $0.11 fee that was received by the recipient in a few minutes.
- Sent $3590 worth of Bitcoin for an $0.11 fee in a few minutes.
Now you could argue PayPal and Venmo have solved the issues with speed and fees, but like banks, these companies control your money.
While banking is bad, a far larger issue in my opinion is flaws in traditional currencies themselves.
While I believe the United States has plenty of faults, I feel incredibly fortunate to have been born here for all its awesomeness. Inflation and manipulation of the U.S. dollar supply is one such major fault I see, however I’d like to focus on more extreme cases of governments manipulating their countries currencies.
Remember, Bitcoin is a truly global phenomenon with the power to change all areas of the world. Also Remember, just because the following examples aren’t happening in your country doesn’t mean they won’t happen in the future.
At the time of writing this, Venezuela hyper-inflation is heading for 1,000,000%. To illustrate how absurd this truly is, one U.S. Dollar can buy 925,000 Gallons of Premium Gasoline in Venezuela. The country’s Bolivar currency is so useless, that a huge number of people can no longer afford to buy food or medicine. Supermarket shelves are bare, as its essentially impossible to do business.
The situation is far to complex to fully get into, but the takeaway is Venezuelans have been screwed, largely due to their governments manipulation of their currency. Specifically, they’ve been screwed to the point that they’re throwing “Poop Bombs” in protest and rioting in the streets.
While the situation in Venezuela is the hot shit show at the moment (I had to), it’s not the only noteworthy example of a government manipulating its currency supply, negatively effecting the savings of its citizens, or cutting off its citizens access to their money.
- Greek Debt Crisis – Indirect taxes doubled between the beginning of the crisis and 2017, banks were closed for several weeks.
- A lot more government shenanigans from multiple countries – Hyper-Inflation and major currency devaluations in Mexico (1970-80s), Poland (1980s), Yugoslavia (1980-90s), Romania (1990s). Zimbabwe (2000s), North Korean (2010s) to name a few more recent events.
Now that I’ve covered the issues with traditional currencies and financial systems, let’s get back to the basics of how Bitcoin works. In the section following this one, I’ll discuss how Bitcoin can solve the above problems.
Bitcoin’s public ledger (blockchain) is maintained by a peer-to-peer network of “miners”.
As transactions occur, they’re combined into groups called “blocks”. Miners process and verify these blocks, adding them to the public blockchain.
The mining process involves computers (miners) from around the world competing to solve a Proof of Work computation. Miners are essentially attempting to guess a correct answer, until one miner solves it. The first miner to solve the problem broadcasts it to the other nodes of the network to validate that it’s true. A valid block is then added to the chain and added to the ledger stored on all nodes.
Miners who successfully mine a block are given a “block reward” and the fees of that block. The current block reward is 12.5 Bitcoins, though it halves every 210,000 blocks. The initial block reward for the first block was 50 Bitcoin. There will only ever be 21,000,000 Bitcoins created. This is estimated to take place around the year 2140. At that point, miners will only be rewarded transaction fees.
Whereas bank ledgers are controlled by a central authority, Bitcoin’s public ledger is powered by a decentralized global network of nodes. Thus, nobody can be stopped from making Bitcoin transactions, so long as they’re valid.
Bitcoin’s distributed global network eliminates central points of failure, which greatly cuts down on attack risks. To make changes to the Blockchain, one entity or malicious group would need to control at least 51% of the network’s “hash power” (mining power). Bitcoin has never suffered from a “51% attack”.
Mining and block rewards also eliminate one central authority from being able to manipulate Bitcoin’s supply. Governments can simply print more money, but Bitcoin’s inflation rate is predetermined and trends downward. Currently the inflation rate is 3.89% and will be roughly 1.8% after the next block reward halving.
Bitcoin’s fixed total supply limits availability, which theoretically should lead to increasing prices over time, so long as there’s increased demand.
Lastly Bitcoin transactions are generally cheaper than traditional methods of transferring value. This is particularly true when sending funds across borders.
The easiest way to buy Bitcoin (BTC) is to use a cryptocurrency exchange. Cryptocurrency exchanges are trading platforms specifically used for fiat-to-crypto trading (USD:BTC) and/or crypto-to-crypto trading (ETH:BTC).
While this may all sound confusing, you can buy Bitcoin very easily.
For newcomers, I’d recommend using Coinbase as it’s incredibly simple to use. After creating an account, all that’s required is to enter the amount of Bitcoin you want to purchase. The fees to be charged are clearly displayed prior to placing your order.
If you’re looking to trade a large variety of other cryptocurrencies, check out Binance. Binance is a crypto-to-crypto exchange with hundreds of different cryptocurrencies available to trade. You can learn more in this Binance Review.
The entire point of cryptocurrency is to control your own money. Rather than trade a centralized bank for a centralized cryptocurrency exchange, you should store your cryptocurrency in a wallet you control. This means withdrawing it from an exchange to one of the wallets discussed below.
While you can use a free mobile, desktop, or online wallet, I’d strongly recommend investing in a hardware wallet if you hold any significant amount of money in cryptocurrency. A hardware wallet is a physical device that stores your cryptographic private keys (you can think of this like a password used to communicate with the blockchain) offline on the device. This eliminates the risk of hacks associated with most other wallet types.
I’d recommend either the Ledger Nano S (Ledger Nano S Review) or the Trezor (Trezor Review) as the most secure wallet options. To learn more about the different type of wallets (both free and paid), read the Best Bitcoin Wallets.