What is Bitcoin? A Step-By-Step Guide For Beginners
An in-depth guide by BlockGeeks
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 very first chunks of digital currency.
What is Bitcoin in a nutshell
Puny wonder that Bitcoin emerged in two thousand eight just after Occupy Wall Street accused big banks of misusing borrowers’ money, duping clients, rigging the system, and charging boggling fees. Bitcoin pioneers desired to put the seller in charge, eliminate the middleman, cancel interest fees, and make transactions see-through, 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 brief time. All over the world, companies, from REEDS Jewelers , a large jewelry chain in the US, to a private hospital in Wa rsaw, 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 mitt, people in third world countries may find Bitcoin their most reliable channel yet for providing 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 sixteen 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 permits 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.
Bitcoin Transactional properties:
1.) Irreversible: After confirmation, a transaction can‘t be reversed. By nobody. And nobody means nobody. Not you, not your bank, not the president of the United States, not Satoshi, not your miner. Nobody. If you send money, you send it. Period. No one can help you, if you sent your funds to a scammer or if a hacker stole them from your computer. There is no safety net.
Two.) Pseudonymous: Neither transactions or accounts are connected to real world identities. You receive Bitcoins on so-called addresses, which are randomly seeming chains of around thirty characters. While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real world identity of users with those addresses.
Three.) Prompt and global: Transaction is propagated almost instantly in the network and are confirmed in a duo of minutes. Since they happen in a global network of computers they are downright indifferent of your physical location. It doesn‘t matter if I send Bitcoin to my neighbour or to someone on the other side of the world.
Four.) Secure: Bitcoin funds are locked in a public key cryptography system. Only the holder of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers makes it unlikely to break this scheme. A Bitcoin address is more secure than Fort Knox.
Five.) Permissionless: You don‘t have to ask anybody to use cryptocurrency. It‘s just a software that everybody can download for free. After you installed it, you can receive and send Bitcoins or other cryptocurrencies. No one can prevent you. There is no gatekeeper.
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 certain the exchange to occur as expected.
Bitcoin uses public key cryptography and an innovative treatment to bookkeeping to achieve the authorization, balance verification, prohibition on dual 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 sophisticated enough that it would take the best computer longer than the earth has existed to crack it. In other words, it’s essentially unhackable.
– Director of Communications at Overstock.com and Chief Evangelist at t0.com
Where can I find Bitcoins?
Very first, we would recommend you read this in-depth guide for buying Bitcoin.
You can get your very 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 Bittylici o us in the UK.
- A Bitcoin ATM (or cryptocurrency exchange) where you can switch 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 LocalB i tcoins .
- You could sell a product or service for bitcoins. Resources: Sites like Purse .
Caution! Bitcoin is famous 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 comes in 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, movie and talk 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 twenty one million. There is therefore no way for a central bank to issue a flood of fresh 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 attempting out Bitcoins. She’d sign up for a cryptocurrency wallet to put her bitcoins in.
The Bitcoin Wallets
There are three different applications that Alice could use.
- Utter client – This is like a standalone email server that treats all aspects of the process without relying on third-party servers. Alice would control her entire 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 substitutes Alice and operates her entire transaction.
You’ll find wallets that come in five main types: D esktop, 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 inbetween 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 comeback 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 inbetween Alice and Bob
What is Mining?
Mining, or processing, keep the Bitcoin process secure by chronologically adding fresh transactions (or blocks) to the chain and keeping them in the queue. Blocks are chopped off as each transaction is finalized, codes decoded, and bitcoins passed or exchanged.
Miners can also generate fresh bitcoins by using special software to solve cryptographic problems . This provides a clever way to issue the currency and also provides an incentive for people to mine.
The prize is agreed-upon by everyone in the network but is generally 12.Five 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 immobilized total number of twenty one million bitcoins (or BTCs) in circulation by the year 2040, so the “puzzle” gets increasingly tighter to solve.
What do I need to know to protect my Bitcoins?
Here are four lumps of advice that will help your bitcoins go further.
As you’d do with a regular wallet, only store petite 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 (albeit, unluckily, 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 permits a transaction to require numerous independent approvals to be spent.
Spending some time on these steps can save your money.
We recommend the Nano Ledger S – Hardware Wallet
Nano Ledger S is just as secure as the other two hardware wallets. It is popular because of its relatively low price of $65 compared to its competitors. Being smaller than KeepKey, it is more portable and lighter to carry around. It is a hardware wallet that comes at a very competitive price.
What else do I need to know?
Protect your address: Albeit your user identity behind your address remains anonymous, Bitcoin is the most public form of transaction with anyone on the network witnessing your balances and log of transactions. This is one reason why you should switch Bitcoin addresses with each transaction and safeguard your address. You can also use numerous 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 ten 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, Fresh 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 three 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 witness 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 prevailing market rate (e.g. 1-2% interest per day) while redirecting your money to the thief’s wallet. They also tend to duck and emerge 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 suggest to mine shocking 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 showcase for it, either).
- Bitcoin Exchange Scams: Bitcoin Exchange Scams suggest features that the typical bitcoin wallets don’t suggest, such as PayPal/Credit Card processing, or better exchange rates. Unnecessary to say, these scams leave you in the string up 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 lodge 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 see-through, so you know what is happening with your money. You can begin 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 request a refund.
It’s petite wonder that users call Bitcoin “Money Two.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.