Bitcoin Beginner Guide
What is Bitcoin?
Throughout our history, people have been searching for a tangible and verifiable currency that would ensure the value they create can be stored for months or years. Gold has emerged as one of such assets but the yearly increase in supply and more companies mining it makes future price hard to predict. Bitcoin surfaced as an idea and became a sensation in less than 10 years. Bitcoin is defined by many as hard money thanks to the fixed supply that is written in the code. There can never be more than 21 million Bitcoin and once the total supply is mined not a single individual or institution can create a new one. So what exactly is Bitcoin and why would you put your trust in a few lines of code? Hopefully, this beginner’s guide to Bitcoin will answer those questions.
Who created Bitcoin?
Cryptographer David Chaum first proposed a blockchain-like protocol in 1982 but it never really became popular before Bitcoin. It took some 26 years before an individual (or group of people) under the pseudonym Satoshi Nakamoto popularized this new technology and used it as a ledger for the first-ever cryptocurrency – Bitcoin. The identity of this individual or group remains a mystery to this day. Before introducing Bitcoin to the world, Satoshi created Bitcointalk, a forum that was used for creative discussions regarding the future of Bitcoin and possible use cases that would drive worldwide adoption. The mysterious figure known as Satoshi was very active in these discussions before completely disappearing in 2010. Gavin Andresen, a well-known developer that worked on the Bitcoin project received an email from Satoshi in 2011 which that marks the last verifiable communication attempt from Satoshi. Many investigations were conducted since then but everyone seems to agree that this email is the very last verifiable trace of Satoshi Nakamoto that can be found on the internet.
How does Bitcoin work?
If you want to learn how to get started with Bitcoin you first need to understand how Blockchain technology works. If you compare this new technology to the way we keep our financial records today, it is hard not to assume that Blockchain is a more reliable and secure alternative than traditional banking. What banks do is keep a record of your spendings in a centralized database. In theory, if you could access that database, you could change a lot of information and make your bank think that you have millions in your account. They would have no other option than to pay you out.
With Blockchain, things are a bit different. Rather than storing all of the data in one place, it is distributed to all nodes (miners) for verification. There is only one ledger and everyone can see it. If you try to change the values in this ledger, the rest of the network will signalize that this is an error and that one change will become obsolete. If 51% of the network says you don’t have Bitcoin in your wallet, the whole network will accept this as the default state. Think of this ledger as a giant record book that every miner on the network owns. Once a transaction is submitted it is written in every single book that is mining Bitcoin. This ensures that you can’t double spend your Bitcoin or trick the network in any other way.
How does Bitcoin Mining work?
Since there is no bank to process your transactions someone has to do that job and this is where the miners come in. Once a transaction is created it is sent to the network for further distribution. Every miner on the network is notified about the transaction and their ledger is automatically updated. For example, if you had 1 Bitcoin in your wallet and spent 0.1 on a purchase or any other transaction, the network will update your new balance to 0.9. Unless you control 51% of the network there is no way you can change this balance, even if you are the best hacker in the world.
Mining is also a process that ensures Bitcoin is distributed equally and fairly. The total supply of Bitcoin is 21 million but not all coins are in circulation because they need to be mined. Every block that is being processed contains some BTC rewards. Currently, miners are getting 6.25 Bitcoin for every block they mine and this amount is distributed based on the hash power contribution.
Is the Bitcoin network secure?
BTC network uses the SHA-256 algorithm for encryption and security. This algorithm belongs to the SHA-2 cryptographic hash functions designed by the NSA. The more miners there are on the network, the more secure it becomes. Currently, this security is measured in hashing power. Every time a new miner starts mining Bitcoin their hashing power is added to the total value making the network even more secure and almost impossible to tamper with. Now, what about those 51% attacks and how they can affect security? In theory, if one group or individual controls enough hashing power they could perform a 51% attack and change the ledger as they please. This was possible in the past but as more miners flock toward Bitcoin, the harder it gets. If it was possible to perform such an attack today, it would cost a bit over $700,000 per hour.
Why doesn’t everyone mine Bitcoin?
At first, Bitcoin could be mined with minimal hardware requirements. Although there was no simple Bitcoin tutorial to get you started, many figured it out on their own and mined a couple of Bitcoin a day using only their CPU power. This was mainly possible during the early days of Bitcoin (2008-2010) when BTC was trading for less than $1. Nowadays the mining equipment has evolved and manufacturers are competing with new products every year. With each new model, more hashing power is available to miners so the overall value keeps going up. Since block rewards are distributed based on your total hash power, mining Bitcoin is almost always not profitable for small miners running home equipment. Around 150 blocks are mined every day. This adds up to ~315 Bitcoin rewards daily and it may sound a lot but when you calculate the total percentage of your home equipment compared to the total hash power on the BTC network, you will probably struggle to cover the power costs.
What happens when all 21 Million bitcoins are mined?
While everyone is caught up in price talk and the technical aspect of Bitcoin, not many “Bitcoin for beginners” guides offer a clear answer to what happens when all BTC is mined? At first, it may sound like a flaw in the tokenomics since miners will stop getting block rewards but this design was intentional. After all block rewards are distributed miners will still be able to mine Bitcoin thanks to transaction fees. Every transaction made on the BTC network comes with a fee. Depending on the usage of the network these fees may vary. If the network is loaded with transactions that are waiting to be processed the fees will be higher. This model incentivizes miners to continue mining after the rewards are distributed and also creates a competitive network where those that are in a hurry need to pay more to be first in line. Such bidding mechanism ensures that mining rewards are still distributed well after 21 Million Bitcoins are mined.
Why was Bitcoin created?
The global economy relies on debt, meaning that people need to owe money in order for the economy to thrive. This is done with loans that are issued by your local bank rf an even bigger institution like the IMF. Once a loan is issued it comes with interest which in turn creates inflation. If there is only $1000 in the bank and you loan all of that with %10 interest where will you get the money to pay off the loan? It needs to be printed by a centralized entity such as the Central Bank of America. Giving a centralized entity full control over our monetary system became a problem in the long run. More money printing is starting to inflate currencies worldwide while the whole process completely devalues your earnings over time. The historical value of US dollars is a great example of this problem.
The idea behind Bitcoin is to have one decentralized currency that is not controlled by any individual. This currency also has a fixed supply and can’t be inflated even if we wanted it to.” Code is law” is a term you will probably hear a lot in the crypto community and this phrase couldn’t be more true. Everything about Bitcoin is predictable and definitive. This includes the number of coins that will be minted, block rewards, and wallet balances. Everything is public and set in stone.
Who can use Bitcoin?
The beauty of Bitcoin is that it has no limits when it comes to using it. Any beginner’s guide to Bitcoin will provide you with an easy way to create a wallet and store your bitcoin. Blockchain.com is a good place to start as it offers an easy way to create your Bitcoin wallet. It is important to note that it doesn’t matter what software solution you use since the wallet is also stored on the blockchain. Once you are done setting up your wallet, you will be given a recovery phrase that consists of 24 random words. This phrase is unique and only works with your own wallet. The random arrangement of words ensures that wallets can’t be unlocked with brute force. Even if you have a supercomputer it would take you years to break into a single wallet. Quantum computing does seem like a threat for such a security system but as technology advances so will the algorithms. If quantum computing becomes a threat for Bitcoin and blockchain, new security protocols will be implemented easily.
How do you buy and store Bitcoin?
This is a question that can be answered in a million different ways. If you don’t want to participate in mining or get paid in Bitcoin, there is a possibility to purchase it directly on an exchange. This process requires you to deposit fiat currency on a centralized exchange such as Coinbase, converting it to Bitcoin and sending it to your BTC wallet. The fees included in this process can be annoying if you are buying small amounts but they are necessary to keep the exchanges running while also keeping the miners happy. When it comes to storing your Bitcoin, there are a few ways to do so:
- Keep it on an exchange
- Store on a hardware wallet
- Store with a custodian
- Store it in your bank
Now let’s’ discuss all options in detail.
Should you keep your Bitcoin on an exchange?
There are a few advantages to storing your BTC on an exchange but there are a lot of disadvantages as well. First, most exchanges offer nice returns on your BTC deposits. This is possible due to the lack of liquidity most centralized exchanges are struggling with. To solve this problem, they offer you to deposit your Bitcoin on their platform (just like saving with your local bank) and share some of the fees that they accumulate. The APY percentage can range from 2-3% to 10-20% in some cases depending on the credibility and liquidity of the exchange. Although it may sound great to earn even more Bitcoin with your initial investment, it is good to remind yourself why Bitcoin was created in the first place. Putting your trust in one centralized entity can be a disastrous decision if the exchange gets hacked or compromised in any way. In 2014, Mt. Gox, a well-known BTC exchange at the time, got hacked and the total value of funds that were lost was well over $600 million. Investors that lost their money are still waiting for the epilogue of this story and it seems that they will have to wait even more.
Should you store your Bitcoin on a hardware wallet?
A hardware wallet is probably the safest place to store your Bitcoin but they aren’t impenetrable as they may seem. While they offer the most security, you as an individual are always a weak link between a hacker and your funds. If you are unfamiliar with hardware wallets, have a look at Trezor and their product. Essentially, it is like storing your BTC on a flash drive but with added security. It will be up to you to keep your recovery phrase safe and secret. Entering it anywhere on the internet can compromise the safety of your funds. If you chose to go with a hardware wallet make sure that it is as far as possible from the internet and always ensure that your recovery phrase is safe and recoverable. Out of all the options out there, this one has proven to be the safest and most convenient.
What is a Bitcoin custodian?
In the early years, when Bitcoin wasn’t valued in thousands of dollars, BTC users weren’t as careful as today. A lot of recovery phrases were lost or thrown away resulting in an irreversible loss. Some researches indicate that over 1500 Bitcoin is lost every day and this is a trend that keeps repeating since the creation of cryptocurrency. Bitcoin brings a lot of great things to the table but it does require responsibility. That is why custodians are becoming more popular by the day. Their job is to offer complete security for your funds at a cost. It’s like an insurance company but they also take care of your funds. Once you determine which custodian you want to choose, your Bitcoin is deposited to their address for safekeeping. If anything happens to it, they are legally obliged to cover your losses.
Can you keep your Bitcoin in a bank?
This question highly depends on your geographical location. Regulation regarding Bitcoin is coming out on a daily basis but not all countries are drafting and implementing crypto-related laws at the same pace. That is why there aren’t many banks that offer custody over your crypto investment but the numbers are growing by the day. Soon enough you will be able to store your Bitcoin in a bank of your choice just like you can open a savings account today.
How to use Bitcoin and where can you spend it?
Bitcoin transactions are resolved directly on the network and without any third party interference. This means that you can only send BTC directly to another address. In simple terms, if a merchant is accepting crypto they should have their own wallet address already set up. Customers then spend Bitcoin at their store and send their payments directly to the merchant’s address. Currently, there are millions of stores worldwide accepting Bitcoin payments with a lot of big tech names on the list as well. The simplicity of use has brought a lot of attention toward blockchain tech and BTC in general but the transaction fees can cause problems sometimes. If you want to buy a cup of coffee with BTC you surely don’t want to spend $10 on the transaction fee but this is something that is to be expected in these early stages of development. Regarding purchases in general, Bitcoin is not used that much due to the already mentioned transaction fees. However, there are solutions that offer fast and cheap transactions like the Lightning Network but they also need more work before they become ready for mass adoption.
Is Bitcoin a good investment and am I too late to the party?
This is a question that is not answered easily. Bitcoin has emerged as an alternative store of value and a lot of institutional investors are eying it with every passing day. The sole fact that it has gathered such a following and spiked above $20k a piece should create a sense of certainty from an investment perspective. Many people will debate that BTC can’t have intrinsic value because it doesn’t exist in the physical world but the same could be said about cash. Would your local currency have value if all stores just stopped accepting it? Bitcoin is a currency only because enough people believe that it is a currency and that number is growing every single day. More and more people around the globe are discovering the possibilities that come with BTC in turn driving the price up even more. Investing should be an individual choice and it is always advised that you conduct your own research before putting any money into the crypto markets. Since the whole industry is still in an infancy stage, almost all financial experts are suggesting that you should only invest what you can afford to lose. Regulation regarding BTC and crypto-assets is still unclear and it could have a negative effect on the markets sometime in the near or distant future.
Regarding the timing, there isn’t much to say. Rough estimates are showing that there are far less than 100M BTC wallets in existence. Comparing that number to our total population that is counted in billions should provide you with a viable answer. If you are just getting into Bitcoin, it is safe to assume that you are among the early adopters. It will take years before BTC takes off and sees mainstream adoption due to scaling issues and unclear regulations.
Will Bitcoin’s price keep going up?
As with any other market, the crypto market is run by supply and demand. The more demand for BTC is, the higher the price. The creator of Bitcoin had this in mind and implemented an event called “halving” that takes place every four years. This event drops block rewards in half and decreases the number of Bitcoins created over time. The last time this happened was on May 11th, 2020 when the block rewards went down from 12.5 BTC per block to 6.25. In 2024 only 3 BTC will be mined from every block meaning that miner supply will dry up and probably drive the price even higher than today. As less Bitcoin enters the market and less sell pressure is put on the markets, it is to be expected that buyers will outway the sellers. Note that this is a projected estimate that relies on the technical preferences of Bitcoin. It doesn’t guarantee that the price will keep going up because one single unforeseen event can shake the whole market up and drop the prices instantly.
What does FOMO mean?
FOMO is a term that refers to the psychological state of the market and has been around for a long time. It stands for Fear of Missing Out representing the mental state of someone that is rushing to buy Bitcoin due to a recent price spike. If you participate in online discussions regarding crypto and Bitcoin you will hear this one a lot. Other terms that you will most certainly encounter are:
- FUD – Fear, uncertainty, and doubt. When someone expresses their uncertainty due to a downward movement in price.
- HODL – Hold on for dear life. A typo that quickly turned into a meme.
- Moon or Mooning – Parabolic price action of any given crypto asset.
- ATH – All time high. It is the highest point that Bitcoin reached in USD value at any given time.
Where can I talk about Bitcoin?
There are many online communities that mainly focus on Bitcoin. One of them would be the BitcoinTalk forum that is still active today. Even though Satoshi disappeared, the community that was left behind is still thriving and sharing new ideas that could make BTC even better in the future. Another place where you can ask questions and get more information is the Bitcoin subreddit that currently has over 1.8 million subscribers. This is a place where traders, investors and developers share their thoughts on the future of bitcoin, where the price may be heading and what you can expect in the near future. All important news regarding the development of this digital asset are shared on Reddit and similar forum-like websites.
What can you expect from Bitcoin in the future?
The future of Bitcoin does look very bright but it still depends on regulation and further adoption of BTC in the global markets. The initial idea behind Bitcoin was to become a peer-to-peer cash that can be transferred anonymously and almost instantly. The network is experiencing a heavy load for the past few years so payment transactions are almost unused when it comes to BTC. As we already discussed, the transaction fees are often bigger than the actual purchase so Bitcoin took on a new role – store of value. It is now recognized by many well-known investors as a future store of value that can serve as a hedge against inflation. While other national currencies keep increasing in numbers driving inflation to new highs, Bitcoin will always have a fixed and reliable supply. It is this aspect that keeps the dream about Bitcoin alive all these years. Since one unit can be divided into 18-digit fragments, flexibility becomes another advantage that is exclusive to BTC and crypto. There is a general misconception that owning less than 1 Bitcoin is meaningless but don’t forget that your investment grows in percentage, not by unit price. If you invested $100 and the price goes up by 30% you will have a net profit of $30 regardless of the price for a single unit.
Further development on the Lightning Network and other projects that aim to bring speed and scalability to the BTC network is needed but it is also very realistic. Right now Bitcoin can’t compete with Visa and Mastercard when it comes to TPS (transactions per second) but the community is working on that issue more now than ever before. In the long run, the goal is to create a global currency that is easy to use, spend and send with minimal fees. The only important factor is time.
Is Bitcoin a safe investment?
Investing, in any shape and form, comes with certain risks. Since Bitcoin has no CEO or representative, by investing in it you are investing in the creative capabilities of the community behind it. In other words, BTC can only be successful if the community sticks together and continues to work on the network. This is the main reason why it is advised to invest only what you are willing to lose. You never know when things can take a wild turn and go wrong for some reason.
By investing small amounts you ensure less risk for your capital and since you are still early there is no need to go big right from the start. Educating yourself on the possible risks and spending time in the community will give you enough information to make a rational and informed decision. It is in your best interest to learn as much as you can about Bitcoin before investing in it.
The looming economic crisis is pushing more and more people toward alternative investment opportunities. Before cryptocurrency, investing in Gold when the economy isn’t looking healthy was a no brainer. Today, things look different because we can’t really know how much gold there actually is in the market, and counterfeiting isn’t as rare as one may think. If Bitcoin can beat Gold in any aspect it would be this one. You can create fake gold and make it look just like the real thing but you can’t fake Bitcoin. Every coin on the network is unique and you can’t have more or less than you actually have. As long as the miners keep supporting the network there will be no need to even consider a possibility of a counterfeit Bitcoin.
The current price volatility may be attractive to some because 30% gains on a daily basis aren’t anything new in the crypto markets but downswings are just as bad. If you want to invest and ignore volatility consider averaging your purchases. Monthly spend limits on Bitcoin are far better than one big investment that could go down in value over short time periods. Think long term and set your price goals. Discipline is highly rewarded in emerging markets and this one is no exception.