There were a lot of exciting things that happened 11 years ago. For the techy geeks, it was the launch of Apple’s iPhone 3GS; for the kid gamers—and some kids-at-heart—it was the release of the Plants vs. Zombies video game. But for the folks in the fintech space, it was the introduction of once a small idea turned game-changing innovation called Bitcoin.
But what is Bitcoin all about and how does it work? Here’s a beginner’s guide to the ins and outs of Bitcoin. Let’s get started!
What is Bitcoin
Bitcoin (BTC) is the leading cryptocurrency in markets since 2009 in terms of price and market capitalization. It’s a new kind of money developed and introduced by the mysterious individual Satoshi Nakamoto—who could either be a single person or a group of crypto geeks. To this day, no one still knows who created Bitcoin.
At the time of writing, BTC’s price is at over 10,000 USD, with a market capitalization of more than 188 billion USD. It has a supply limit of 21 million and has a current circulating supply of over 18 million BTC.
Bitcoin is divisible by eight decimal places, which means it’s possible to buy fractions of it—you’ve read it right, you don’t need to buy one whole Bitcoin! Not unless you have the means, of course. Its smallest unit is called a Satoshi, named after its mysterious creator. One satoshi is equivalent to 0.00000001 BTC, which is more or less 0.00010 USD.
How does Bitcoin work
The next question you probably have in mind is, “How does Bitcoin work?” The process may sound intimidating to some, but you’ll be surprised to know that it’s not as complicated as you think.
Since BTC is a digital currency, it works solely with a robust and new technology called blockchain. It’s a shared public ledger that records all confirmed Bitcoin transactions. Blockchain is like your passbook from a traditional bank where your account balance and transactions are tracked and recorded.
The main difference is that transactions on the Bitcoin blockchain are available and accessible to everyone on the network. This shared public ledger paves the way for high transparency levels since anyone on the network can view a BTC transaction’s source and destination address. Pretty impressive, right?
Perhaps you’re asking — can bitcoin transactions be traced? Are bitcoin transactions anonymous? While the information about a transaction and the people involved in it are kept private and secured, the public can still see that someone on the network is sending an amount to someone else—without them knowing who these parties were.
To keep a transaction (we’ll talk about this later on) from being linked to a specific owner, Bitcoin’s privacy model uses a new key pair. However, with many transactions entering the network, linking is sometimes unavoidable and can reveal that the inputs or transactions were owned and made by the same owner.
Bitcoin’s whitepaper reads, “The risk is that if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.” With this, we can assume that Bitcoin is not anonymous, but rather pseudonymous.
Another notable fact about the network is that it’s decentralized. Unlike commercial banks, other financial institutions, and government-issued money regulated and monitored by central banks and other government agencies, BTC and the Bitcoin network operate independently.
Bitcoin doesn’t need an agency or governing body to run its systems and processes. It doesn’t have a central authority. Instead, it works via peer-to-peer (P2P) transactions—gone are the days of waiting in long queues or lengthy processing times in banks and other money services providers!
Transactions and private keys
Now let’s talk about bitcoin transactions. A transaction is defined as “a transfer of value between crypto wallets.” When you withdraw cash from ATMs or cashout via mobile apps, you confirm cash release by inputting your PIN. It’s the same with BTC transactions, but instead of a PIN, you’ll be asked to provide your private keys.
Just like your bank account’s PIN, a private key is a confidential piece of information that you shouldn’t share with anyone. It’ll give access to your Bitcoin wallet and allow your funds to be spent, so be extra careful for it not to fall into the wrong hands! Private keys are stored either on a personal computer or remote servers, depending on your wallet.
How to get Bitcoin
There are many ways to get your first fractions of Bitcoin. Your options include mining, buying on cryptocurrency marketplaces online, and more. Let’s explore and learn about these two.
Like the precious metal and highly-valued commodity known as gold, Bitcoin is also acquired through a process called mining. However, Bitcoin mining, just like its signature coin, is a fully digital process. Instead of using heavy-duty equipment and chemicals, Bitcoin miners use high-powered computers and equipment, specialized software, a reliable and robust Internet connection, and high electricity levels.
Bitcoin mining is deemed to be one of—if not—the most expensive processes of acquiring Bitcoin. It also uses very complex algorithms, which are solved by miners. The mathematical problems are complicated and can’t be solved mentally, making the process expensive and intricate.
Miners get paid for every block they solve or confirm on the blockchain, but the competition starts to get tighter as more and more aspiring crypto miners are entering BTC’s digital cave. If you’re up to do some BTC digging, be sure to take note of the needed mining resources we mentioned earlier. Bring out not only a bunch of money for top-of-the-line equipment but also a handful of patience and competitive spirit in the mining market!
If you don’t want to dip your toes into the Bitcoin miners’ pool, there are thousands of cryptocurrency marketplaces online where you can buy BTC. Among the things you need to bear in mind when scouting for a reliable exchange includes the following:
- Reliable security features – We’re talking about your BTC funds and personal information here, so better look for a platform that enables layers of security features like two-factor authentication (2FA), for example.
- Geographical limitations – Some countries and jurisdictions are still struggling to embrace the uses of Bitcoin, thus the limitation. Find a platform that will allow you to maximize your digital asset!
- Liquidity of assets – Look for an exchange that will let you convert your BTC into your desired fiat currency without breaking a sweat—yes, that’s possible. You’ll find lots of those on the web.
- Transaction charges – Fees for buying, selling, depositing, or withdrawing BTC vary per exchange, so try to compare which ones have low fees.
- Platform authenticity and reputation – Do your research and verify whether the company is legitimate or not. You can search on the web and reach the company via an email or a call.
This might seem like a lot of work, but these are the most crucial factors you need to consider before entering a crypto market. Trust us, you won’t regret this. In fact, you’ll even thank yourself later.
Where to store Bitcoin
BTC is digital money. It has no physical representation and exists solely with the use of technology. There are no BTC bills to fold and no coins to hold inside your physical purses or wallets, but instead uses a storage known as a Bitcoin wallet.
A Bitcoin wallet or digital wallet is a unique and secure means of storage. It also uses the blockchain, the smart technology behind the cryptocurrency’s network. What makes it more fascinating is that you can do a bunch of things with it—yup, it’s not just for keeping your funds. If you use a mobile Bitcoin wallet, you can also receive BTC from other wallets, send funds or complete payments, and check your balance in real-time.
There are many types of cryptocurrency wallets, but most of them fall under two main categories:
- Hot wallets – storage accessible through an Internet connection. These include web and mobile wallets.
- Cold wallets – physical devices that don’t need Internet access. Examples are hardware wallets, desktop wallets, and paper wallets.
Some peer-to-peer marketplaces and online exchanges, like Paxful, offer a free Bitcoin wallet after creating an account. We told you, it’s really not hard to jumpstart your BTC adventure at all!
If you sign with a pen and paper when completing transactions in banks and other financial institutions, Bitcoin transactions, on the other hand, use a digital signature. It’s a cryptographic and “mathematical proof” that the BTC came from the wallet’s owner and not from anywhere and anyone else. A digital signature also allows you to know whether the BTC has been sent to someone else.
While everyone on the network can see that your signature matches a particular Bitcoin transaction, there’s no way for anyone to figure out your private key. Bitcoin uses very complex processes and features that are hard to compromise, so there’s no need to worry about getting your hard-earned funds stolen—that is as long as only you have access to your private keys!
What is Bitcoin used for
Initially, Bitcoin was known only for making direct, cheap, and borderless payments. But as its adoption rate increases, people from around the world and different industries are starting to discover Bitcoin’s remarkable uses. These include:
- Payments for everyday purchases
- Donations for charitable initiatives and kickstarters
- Preserving wealth
- Transferring money in and out of the country
- A gift for your friends and family
You can do all these things with just a few clicks on your mobile Bitcoin wallet anytime and anywhere you want. Say hello to convenience and efficiency!
To buy or not to buy
After all the great stuff we’ve discovered—from what are Bitcoins to how they work—we’re pretty sure you’re now itching to experience what other wonders it can bring about (if you still haven’t yet). Just a friendly note, this chunk of information is only one of the many galaxies in the cryptocurrency universe. There are still lots of things to discover and explore in the crypto space!
Are you ready to take on the adventure? Launch your Bitcoin rocket today and let your crypto journey begin!