The Beginner’s Guide to Bitcoin – All You Need To know

Iulian Lesanu

@Iulian

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Bitcoin is a groundbreaking invention that spurred a new financial revolution with long-term consequences globally.

Bitcoin could very well be the most important invention since the creation of the internet. Economy experts see it as the dawn of a new age in which electronic cash and virtual transactions will reshape our understanding of currencies, investments, and financial intelligence.

Bitcoin in a nutshell:

• Issued in 2009, Bitcoin is the first decentralized digital currency.
• Bitcoin gives financial power back to the people.
• Owners in a peer-to-peer network regulate Bitcoin.
• Bitcoin transactions are more secure than actual money transfers.
• Governmental institutions and banks do not have control over Bitcoin.
• You can exchange real cash for Bitcoin.
• You can use Bitcoin or get paid for certain products and services.
• The creator of Bitcoin is yet unknown.

What is Bitcoin?

Despite their graphic representation as golden coins with a large “B” on top, physical Bitcoins do not exist. They are not coins or printed bills that you can store in your pockets. Instead, the entire Bitcoin units are available only in virtual form.

Bitcoin is digital cash you can transfer online in a peer-to-peer network with others who hold this electronic currency.

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Bitcoin is a digital asset with decentralized value, meaning it is not regulated or controlled by governments or financial institutions.

When you possess Bitcoins, you enter an international community of Bitcoin owners. Similarly to all these owners, your presence there is anonymous to a certain extent. Therefore, your account cannot be tracked by standard identifying features such as your name, address, or social security number.

Bitcoin is the first-ever form of cryptocurrency – a combination of blockchain technology and cryptography. It is electronic cash that users can transact without the oversight of governmental authorities or traditional banking institutions.

So, let’s break Bitcoin apart, understand cryptocurrency, discover its benefits, and open the door to new and exciting investment opportunities!

A brief history of Bitcoin

The origin story of Bitcoin is shrouded in mystery. The first official reference to it was made on October 31, 2008, through a whitepaper that explained some of its features and benefits. However, a few months later, on January 3, 2009, a person or group under Satoshi Nakamoto announced its release.

There are several theories about whom Satoshi Nakamoto is or whether someone by that name exists. Still, none can trace the invention of this new electronic cash system to a single entity. The person or persons identified under this name disappeared in 2011, shortly after sharing the source code and the community’s domains around the revolutionary cryptocurrency.

What is Blockchain technology?

As a neophyte to cryptocurrency, you can better understand Bitcoin if you know a thing or two about how blockchain technology works.

Blockchain is an unalterable sequence of transactions that rely on each other to validate their authenticity. These transactions can hold any data, but most feature economic values. They create a long string (chain) of records (blocks) that can grow endlessly without accepting data modifications.

A blockchain does not need an external authority’s supervision to certify its records’ accuracy. Instead, all blocks are connected through high-security cryptography that includes unchangeable data pointing to the previous record, such as transaction details and timestamps.

One block allows for recording information that cannot be altered without changing the previous block’s data in the chain (a.k.a. the parent block). Blockchain technology enables safe and permanently verifiable transactions in a peer-to-peer network. It can serve for secure cloud data storage in various industries and activities, such as:

• Businesses can use it as part of a decentralized platform for tracking shipping goods.
• Institutions may use it for digital id protection or establish a secure digital voting platform.
• Social media networks can use blockchains to protect their users’ data.

Regarding Bitcoin, blockchain technology enables virtual money transfer between peers in a perfectly secure transaction and as part of a fully decentralized ledger that does not require the guidance and control of external financial institutions.

How does Bitcoin work?

Bitcoin works as part of a relatively straightforward process. People who possess Bitcoins can transfer them to a peer-to-peer network. Each transaction becomes an encrypted record in the giant, ever-increasing blockchain (ledger) that includes all the Bitcoin transfers ever made.

The system ensures that all the transactions are valid. If one file is invalid or corrupt, the ledger dismisses it without affecting the structure of the entire blockchain.

The ledger keeps a strict record of how many Bitcoins are in circulation and how many results from mining. There are over 19.2 million available Bitcoins, just 2 million short of the 21 million arbitrary supply cap set when the cryptocurrency was initially released.

The lack of a central authority that validates transactions may seem like a risk for anyone new to virtual cash systems. However, the strict peer-to-peer verification system, which involves all the network members, makes Bitcoin much safer than traditional banking transactions.

What are Bitcoin wallets?

Bitcoins are a bit different from having a classic bank account where you store regular cash units. The ownership that you have over cryptocurrency is a bit illusory. You don’t have actual Bitcoins but units stored as Unspent Transaction Outputs (UTXO) on the blockchain.

The UTXO appears in your account, which you can store in a secure deposit, also known as “wallet” software. Your account is established and accessible through two digital keys:

The Public Key is the number of your traditional bank account you can give others to send you payments or invoices.

The Private Key – think of it as the secret PIN that you never reveal to anyone. If someone else finds out about your private key, they will have direct and easy access to your Bitcoin wallet. Once they infiltrate it, they can transfer, sell, and steal your cryptocurrency. As you don’t have a central authority to address the theft, there you can ever do can do ever to get that virtual cashback.

The first step to owning Bitcoin involves having a virtual wallet to store them in. There are several forms of Bitcoin wallets to choose from, and they include:

Exchange Platforms

Several websites offer exchange platforms where you can trade money for Bitcoin or trade Bitcoin for other cryptocurrencies. However, they often have a high-security risk but are still susceptible to hacker attacks. 

The most renowned case of a successful virtual heist happened in 2014 when hackers attacked the Tokyo-based platform MtGox stealing 850,000 Bitcoins valued at over $350 million. Since then, exchange platform security protocols and measures have improved considerably.

Some famous examples include:

• Coinbase | Robinhood | Bittrex

Wallet Platforms

Even if the banking system regards cryptocurrency as a potential threat to the present global financial structure, some banks offer clients the possibility to store their cryptocurrency in a regular bank account. But, unfortunately, frequent hacker attacks make these wallet platforms the least safe alternative for storing your Bitcoin.

Some popular examples include:

• Electrum | Exodus | Mycelium | Coinomi

Hard Wallets

Hardware wallets are offline wallets in the form of USB sticks. Most Bitcoin users prefer this storage method since it keeps their UTXO offline and outside the exchange system. In addition, this physical “wallet” holds both your keys and they are impossible to hack.

The only way that you can lose your Bitcoin is if someone steals your USB wallet or if you misplace it. A simple Google search will reveal hundreds of stories of people who lost up to a few million Bitcoins because they forgot where they left their hardware wallets.

Some popular examples include:

• Ellipal | Trezor | Ledger

Remember, you cannot access your account without the private key, and you can never recover your UTXO! Anyone can access your ledger or hardware wallet if they have the app’s login details (the pin and password).

Experts in the industry estimate that nearly 4 million Bitcoins have been lost forever because people misplaced or had their private keys stolen.

How to own Bitcoin

You can own Bitcoin by either mining it or buying it online. The method of acquiring digital money depends on how much you are willing to invest. Additionally, you can opt for purchasing cryptocurrency offline for real cash from a trusted source.

How to mine Bitcoin

You might have heard of terms such as “Bitcoin mining” and “Bitcoin miners” whenever cryptocurrency pops up in a conversation. But, as funny as it may look, there are no people wearing miner hats armed with pickaxes that work relentlessly somewhere in a utopian Bitcoin mine.

Here is what Bitcoin Mining and Bitcoin Miners stand for:

Bitcoin miners are high-performance computers connected to a virtual network. They are alert nodes that wait for transactions to be initiated by users. When a certain amount of transactions builds up, they compile it into a new block.

The Bitcoin mining process begins with the miners diving into the new block of transactions. Here, they enter the contest to solve a complex math problem. Getting the correct answer to the puzzle requires them to spend a significant amount of energy, which is why mining requires effective hardware systems. The most popular Bitcoin miners are Application-Specific Integrated Circuits (ASICS) computers that compete in an increasingly grueling race for more Bitcoins.

Once the problem is solved, the block of transactions is added to a ledger based on a Proof-of-Work (POW), which constitutes the amount of energy the miner used in the process. Successful mining rewards computers with a few Bitcoins (referred to as new bitcoins) for their POW.

Once the first miner solves the puzzle, it sends it for validation to all the other miners in the peer-to-peer network. Individual approval from each mining computer certifies the block and legitimizes the transaction. To acquire Bitcoin through mining, you will need a powerful computer and perseverance. However, the possibilities for increasing your virtual wealth are endless.

How to buy Bitcoin

Besides mining, you can buy Bitcoin and even receive them for goods and services. Setting up a virtual wallet and acquiring cryptocurrency takes just a few minutes. Numerous companies facilitate this process, and over 100,000 merchants accept digital cash as a payment method. You can easily use an exchange platform that hosts virtual wallets to start storing, tracking, and spending your digital cash.

Alternatively, you can purchase Bitcoin in an offline (or tête-à-tête) meeting with a trusted owner where you can exchange real cash for virtual money. In this case, you do not need a mitigating authority to complete the transaction. So, you venture into it at your own risk.

You can also purchase Bitcoin on Over-the-Counter platforms, such as:

• Octagon Strategy | Genesis Trading | FBG Capital | OKEX | Circle

How much is Bitcoin worth?

The network gives Bitcoin’s worth. Its value oscillates depending on the mining activity and the viral rate of real cash conversions into cryptocurrency. As with most virtual currencies, the earlier you invest in digital money, the bigger the chance to gain an overwhelming return on investment (ROI) later down the road.

In Bitcoin’s early days, you might have heard stories of people who used thousands of Bitcoins to buy pizza and coffee. Back in 2010, $5 would buy you 2,000 Bitcoin. Today, the same amount of digital money would be worth more than $5 million. Still, it is not too late to invest in virtual currency and boost your profits as this revolutionary invention increases in popularity and use.

The initial price of Bitcoin was just $0.008 in July 2010. It hit $1 in February 2011 and exceeded the $100 barrier in April 2013, when it peaked at  $266. After a short drop during the summer, its value grew steadily for the next four years, oscillating monthly between roughly $450 and $1,000.

Bitcoin value became a global discussion in 2017, which is its most successful year so far. During the first three months of the year, it oscillated between $850 and $1,290, only to reach a record peak of $2,000 on May 20, 2017.

It followed an ascending rate up to $19,783.06 on December 17, 2017, only to lose one-third of its value in just 24 hours, dropping below $14,000. After that, Bitcoin’s value set a new record in 2021: $69,000 in November 2021. 

Bitcoin’s overall market capitalization rose from nearly $1.02 in 2013 to almost $1T billion in 2021.

The Benefits of using Bitcoin

Bitcoin is a newcomer in the financial world. However, its network grows constantly and attracts new investments made with real money, increasing its value. Some of the benefits of using this cryptocurrency include the following:

• Decentralization – People can opt to make transactions that do not require governmental or banking supervision.
• Ease of Use – The real cash value of Bitcoin that you can use, send, or carry over an international border is limitless.
• Security – Blockchain technology ensures optimal protection for Bitcoin transactions. Additionally, the user’s personal information remains anonymous and less prone to hacker attacks.
• Low Transaction Fees – While banks charge commission fees for most intermediate transactions, Bitcoin transactions only require a tiny fraction of their value.

The Risks of using Bitcoin

Although Bitcoin is ushering in a new age of financial understanding at a global scale, it’s still in its early development stages, which means that it still poses a few minor risks, such as:

• Liquidity – You can never have physical Bitcoins, and the oscillating value of cryptocurrency could have you to lose a great deal of your investment in times of crisis when you would be forced to sell it at a low price.
• Volatility – Bitcoin value increases due to the networking effect. The more people use it and talk about it, the more powerful it becomes. However, news of governmental or banking actions regarding cryptocurrency can diminish its value and affect the entire system’s integrity.
• Hacks – While most present-day exchange platforms employ high-security measures, owners still fear the possibility of a hacker funneling into transactions and making billions of dollars worth of Bitcoin disappear in milliseconds.

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Final Thoughts

Bitcoin is the first and, rightly so, most popular cryptocurrency on the market. At first, it may seem a bit difficult to grasp its power and potential, but the more you discover about it, the easier it gets.

You can get a deeper insight into Bitcoin by becoming part of the network and exploring the numerous opportunities offered by a decentralized, accessible, and people-backed financial system.

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If this is your first time investing in digital assets, Bitcoin is the one you should start with. A large and solid community is growing around this digital coin, and it is only a matter of time until we see it reach global scale expansion.