Bitcoin is one of those things that in the past several years has created a lot of buzz around the globe. Be it Brexit, or Donald Trump as the new US president, or India demonetizing their currency, dramatic economic events can be viewed in terms of Bitcoin.
In this beginner’s guide to Bitcoin, you will learn all of the basic, yet essential stuff related to Bitcoin.
There are many ways by which you can understand what Bitcoin is. Let me explain it to you with the help of an example.
For such money transfers (remittances), you end up paying a lot of fees:
- Currency conversion fees.
- Service fee to the bank for keeping a record of your money & ensuring safety.
- If you’re using a payment gateway such as Stripe, 2Checkout, PayPal, or any other, you will pay transaction fees. Some of them also deduct conversion charges.
Technically, you are paying money to the bank for securing & transferring the money on your behalf. In reality, everything is monitored on a ledger (bank records) & money is just transferred digitally from one account to another.
This is not like the physical delivery of goods; money is not moved physically. However, even though it’s digital, we pay a large chunk of the transfer amount (2% to 10%) as “service” fees. Let’s say you transfer $100 from one country to another, anything between $2-$10 is given up because of these fees.
Even though everything is done digitally, why are you losing so much money? Well, this is how banks & remittance services like PayPal and Payoneer have been mining hard earned money from users like us.
But there’s a solution to this problem of cross-border transactions (aka remittances):
Unlike fiat money (INR, US Dollar, Euro & other paper currencies), Bitcoin is not regulated by any country. It’s kind of like the official currency of the internet & anyone with an internet connection can own it. This makes it independent of any corporate monopoly because everything about Bitcoin is governed by the huge community of users like me, you, and all of the others who are using it.
The best thing about Bitcoin is how easy it is to transfer all over the world with very low fees.
For example, transferring any amount of bitcoin from the United States to India or Europe will cost only $2-3 or less.
Your transaction also remains anonymous. Only the sender and the receiver know who is involved with the transaction.
As the world is slowly adopting & accepting Bitcoin, individuals & businesses are saving a lot of money while doing business globally.
In a minute, I’ll tell you about the history of Bitcoin, and many interesting facts, but for now, here’s an
“official” explanation of Bitcoin.
What is Bitcoin?
Bitcoin is a digital currency (cryptocurrency) which is independent of any country or geographical entity & can be used by anyone who is connected to the internet.
Like the way you store your money in your wallet or a bank, bitcoins are stored in “Bitcoin wallets”. Everything is done electronically & no fiat money (like the US Dollar, INR, YEN, or any other paper currency) is involved.
To spend or receive bitcoin, you use your Bitcoin wallet. Every Bitcoin wallet can have one or more “wallet address”. This is a unique internet address to ensure the anonymity of transactions which helps keep you safe. You can use a unique wallet address for every transaction you make.
You can install a Bitcoin wallet on your computer or mobile phone. Upon installation, it will generate a Bitcoin wallet address & you can use that address for receiving bitcoin from anyone and anywhere in the world.
How do Bitcoins work?
I know it may be hard to understand what Bitcoin is in one go, but don’t worry because CoinSutra will help you understand everything there is to know about Bitcoin technology & help you get started by purchasing your first bitcoin.
Bitcoin works on blockchain technology. The blockchain is a shared public ledger on which the entire Bitcoin network relies. Any confirmed transactions (including newly added bitcoins) are added into blockchains.
When any user initiates a new transaction (send or receive bitcoins), the transaction is verified using blockchains. Here is a video that explains how Blockchain technology works. This is a must watch video as think of Blockchain as internet & Bitcoin as email service that operates on the Internet.
Think of this like the physical ledger that is maintained by banks. The only difference is, in this case, it’s maintained by the public & anyone can use the ledger to match a transaction.
Bitcoin uses Public-key cryptography. This system uses two pieces of information to authenticate messages.
When you set up your Bitcoin wallet for the first time, you are asked to set up a private key (also known as a “seed”). This is the most important part of Bitcoin security. The ideal thing to do is to write down your seed keyword on a piece of paper & keep it somewhere safe.
Important: Never write down your private key (seed) online & don’t share it with anyone!
We will look into the security of Bitcoin in an upcoming section & we have a dedicated section for understanding how Bitcoin wallets work.
Important Bitcoin Terms:
- Altcoins: Alternative cryptocurrencies to Bitcoin.
- Examples: Ethereum, Litecoin, Dogecoin, etc.
- Bit: A sub-unit of bitcoin. 1 bitcoin (BTC) = 1,000,000 bits.
- Note: You can always buy and sell less than one bitcoin.
- Bitcoin: When the B is capitalized, it represents the overarching concept of Bitcoin: The technology, the community, the protocol, and the software.
- bitcoin: When the b is not capitalized, it is describing the unit of currency.
- XBT and BTC: Common abbreviations for bitcoin.
- Note: There is no difference between these two abbreviations.
- Confirmation: When a Bitcoin transaction happens, the blockchain confirms the transaction’s validity. The confirmation is done by “miners” & it can take 1 minute to 1 hour to confirm a transaction.
- Note: There will be multiple confirmations & you should wait for at least 2-3 confirmations before calling a transaction “successful”.
- Mining: The process of computer hardware doing mathematical calculations for the Bitcoin network to confirm transactions and increase security. Users who use their computers and/or rent resources for mining are call miners.
How does Bitcoin help an ordinary user like you & me?
Well for starters, no individual or bank is maintaining our transaction ledger. The ledger is available to everyone & transactions are linked to our Bitcoin address.
Unlike normal transactions where we have to enter our personal details, the only thing anyone will see is your Bitcoin wallet address. This ensures anonymity & safe online transactions.
When you make a Bitcoin transaction, your Bitcoin software signs the transaction with your private key. This cryptographic signature is the mathematical mechanism that allows someone to prove ownership.
When was Bitcoin first introduced? What’s the history of Bitcoin?
Who founded Bitcoin is still a mystery. In the month of October 2008, a paper was published on The Cryptography mailing list. This paper was published under the pseudonym “Satoshi Nakamoto“. Until today, the real identity of Satoshi Nakamoto is unknown.
In January 2009, when the first open source Bitcoin software was released, the first ever bitcoin was issued. The mining of the first block of Bitcoin (named “genesis block”) gave a reward of 50 bitcoins.
Bitcoin for Beginners:
Here are some common words that you will hear when dealing with Bitcoin:
- Bitcoin Address
- Double Spend
- Private Key
- Wallet (Hardware, Software, Mobile wallet)
I will be covering all of the above terms in detail in the upcoming days. For now, you can refer to this page to learn about the most commonly used words around Bitcoin.
Note: Bitcoin transactions are not 100% anonymous. However, you can ensure 100% anonymity using a few tricks that I will share with you in the coming days.
Learn: What is Bitcoin?
I have collected some of the best videos on the web that explain what Bitcoin is & how it works:
Here are some of the best & official resources for Bitcoin enthusiasts:
- Bitcoin course on KhanAcademy
- Bitcoin Sub-Reddit
- Bitcoin Block Explorer
- Coinbase: A popular site in the U.S. that lets you buy/sell bitcoins & other altcoins.
- Localbitcoins: The best site to buy bitcoins using cash. This site has never failed me.
- Unocoin: Popular Indian site to purchase bitcoins.
- Purse: Service to buy Amazon products using bitcoins.
You should subscribe to our email updates for learning everything there is to know about Bitcoin & other Altcoins.
For now, let me know if you find anything about Bitcoin hard to understand. In upcoming sections, you will learn important aspects of Bitcoin, such as securing your Bitcoin wallet & how to make your bitcoin transaction anonymous.
Here are a few hand-picked articles that you should read next:
- How To Purchase Your First Bitcoin Using Coinbase
- From India? Learn How To Buy Your First Bitcoin
- Learn How To Purchase Bitcoin Using PayPal
If you found this beginner’s guide to Bitcoin useful, do share it with your friends & family!