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 first pieces of digital currency.

Bitcoin Explained: IMPORTANT… Watch the Videos!

Bitcoin in a nutshell

Small wonder that Bitcoin emerged in 2008 just after Occupy Wall Street accused big banks of misusing borrowers’ money, duping clients, rigging the system, and charging boggling fees. Bitcoin pioneers wanted to put the seller in charge, eliminate the middleman, cancel interest fees, and make transactions transparent, 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 short time. All over the world, companies, from REEDS Jewelers, a large jewelry chain in the US, to a private hospital in Warsaw, 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 hand, people in third world countries may find Bitcoin their most reliable channel yet for giving 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 16 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 allows 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.

2.) 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 30 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.

3.) Fast and global: Transaction is propagated nearly instantly in the network and are confirmed in a couple of minutes. Since they happen in a global network of computers they are completely 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.

4.) Secure: Bitcoin funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers makes it impossible to break this scheme. A Bitcoin address is more secure than Fort Knox.

5.) 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.

 

Judd Bagley: What is BlockchainThe 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 confident the exchange to occur as expected.

Bitcoin uses public key cryptography and an innovative approach to bookkeeping to achieve the authorization, balance verification, prohibition on double 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 complex 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

Where can I find Bitcoins?

First, we would recommend you read this in-depth guide for buying Bitcoin.

You can get your 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 Bittylicious in the UK.
  • A Bitcoin ATM (or cryptocurrency exchange) where you can change 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 LocalBitcoins.
  • You could sell a product or service for bitcoins. Resources: Sites like Purse.

Caution! Bitcoin is notorious 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 enters 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, video and chat 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 21 million. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.”

What is Bitcoin? A Step-By-Step Guide For Beginners

How can I store my bitcoins?

To see how the system works, imagine someone called Alice who’s trying 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.

Full client – This is like a standalone email server that handles all aspects of the process without relying on third-party servers. Alice would control her whole 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 replaces Alice and operates her entire transaction.

You’ll find wallets that come in five main types: Desktop, 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 between 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 return 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 between Alice and Bob

What is Mining?

Mining, or processing, keep the Bitcoin process secure by chronologically adding new 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 new bitcoins by using special software to solve cryptographic problems. This provides a smart way to issue the currency and also provides an incentive for people to mine.

The reward is agreed-upon by everyone in the network but is generally 12.5 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 fixed total number of 21 million bitcoins (or BTCs) in circulation by the year 2040, so the “puzzle” gets increasingly harder to solve.

What do I need to know to protect my Bitcoins?

Here are four pieces of advice that will help your bitcoins go further.

As you’d do with a regular wallet, only store small 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 (although, unfortunately, 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 allows a transaction to require multiple 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 easier 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: Although your user identity behind your address remains anonymous, Bitcoin is the most public form of transaction with anyone on the network seeing your balances and log of transactions. This is one reason why you should change Bitcoin addresses with each transaction and safeguard your address. You can also use multiple 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 10 minutes before you make your purchase. Different wallets have their own reading.

What is Bitcoin? A Step-By-Step Guide For Beginners

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, New 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 3 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 watch 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 offer to mine outrageous 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 show for it, either).

Bitcoin Exchange Scams: Bitcoin Exchange Scams offer features that the typical bitcoin wallets don’t offer, such as PayPal/Credit Card processing, or better exchange rates. Needless to say, these scams leave you in the hang 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 settle 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 transparent, so you know what is happening with your money. You can start 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 demand a refund.

It’s small wonder that users call Bitcoin “Money 2.0” or that Bill Gates called it “a techno tour de force.”

Tyler Winklevoss, co-creator of Facebook, summed it up when he said:

  Bitcoin Currency Converter
Amount of BTC to convert
1BTC =

Ledger Wallet protects your bitcoins

“We have elected to put our money and faith in a mathematical framework that is free of politics and human error.”
Tyler Winklevoss, co-creator of Facebook

“Bitcoin will do to banks what email did to the postal industry.”
Rick Falkvinge, Founder of the Swedish Pirate party

“You can’t stop things like Bitcoin. It will be everywhere and the world will have to readjust.”
John McAfee, Founder of McAfee

Why Bitcoin Is So Important

When most people hear about Bitcoin, whether for the first or the tenth time, they ask one simple question: “What is it?”

Like an automobile, Bitcoin is technically advanced, and it can appear complicated, depending on how much you want to know about it. But also like an automobile, it doesn’t require you to be a technical expert in order to use it—and for it to change the way you interact with the world.

Here’s what you need to know. Generally speaking, Bitcoin is two things:

  1. A payment network (“Bitcoin”);
  2. The currency unit used on that network (“bitcoins”).

Thus, as both a payment network and the specific currency used on that network, you use “Bitcoin” to receive and send “bitcoins” to and from other people.

The Real Magic of Bitcoin

The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence. To clarify, take a look at the relationship between PayPal and U.S. dollars. PayPal is a payment network, but not a currency. In contrast, the U.S. dollar is a currency, but not a payment network. You use the PayPal payment network to make transactions in U.S. dollar currency.

The PayPal payment network is operated and centrally controlled by one company (PayPal Inc.), and the U.S. dollar is created and centrally controlled by one organization (the U.S. federal government).

Here’s where things get important, and revolutionary—and a little weird.

Bitcoin: A Payment Network and the Unit Used On That Network

The Bitcoin network is like file-sharing: it’s a network of computers that talk to each other, but nobody controls the network itself (there is no central server).

The bitcoin currency unit itself is similarly not created or controlled by any central party. Bitcoins are created by the network itself over time, in a process that distributes the new coins to those computers that are supporting and operating the network. The number of coins created in this way is limited according to a clear mathematical schedule. As of this writing, there are roughly 14 million bitcoins in existence, and this will continually increase over time to a maximum of 21 million bitcoins many years in the future.

Unless you care about how Bitcoin accomplishes this, the above is really all you need to answer the question, “What is Bitcoin?” It’s a payment network, and a currency used on that network, which are controlled by no central party. People control their own bitcoins. The number of bitcoins in existence is limited by the rules of the protocol.

Every Person Can Now Have Financial Sovereignty

For the first time in human history every person can have financial sovereignty. Private property can now truly be controlled by the owner, and nobody else.

Perhaps the more important question is, “Why should I care?”

While computer engineers and mathematicians might find Bitcoin’s technical details fascinating, most people don’t really have the time for those complexities—just as most people don’t spend time worrying about exactly how the Internet works. We trust that it does, we enjoy its benefits, and we know enough about it to use it.

And while it’s true that Bitcoin permits financial transactions that have essentially zero cost, that can occur instantly anywhere in the world, these consumer benefits are not really what’s important, either.

The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence.

The fact that Bitcoin is decentralized, with no controlling entity, has fundamental implications. Because there is no central control, the power of the currency and its payment network belong entirely to the people who use it. And this power is tremendous indeed.

Bitcoin enables any two people, anywhere on earth, to transact with each other freely. They cannot be censored. The only rules of their exchange are those they set between themselves.

With Bitcoin, there is no third party presiding over the economic activity of the users. With Bitcoin, you don’t need anyone’s permission when you make a financial decision. This means people can contribute to causes they believe are important, with no government agency or financial company able to cut off the payment flow. It means an entrepreneurial child can start an Internet business before he or she is 18. It means a rural African farmer can receive payment for crops from a neighboring city, even with no bank account. It means a citizen of a tyrannical nation can hide his financial assets from seizure. It means the wealthiest and the poorest of the world now have the same authority over their money – beholden neither to banks nor bureaucrats. It democratizes finance just as the Internet democratized speech.

Bitcoin allows any 2 people, anywhere to transact with each other freely

With Bitcoin, economic relationships are set and regulated by markets instead of politicians. By the individual, not the collective. The value of one’s savings now cannot be reduced through monetary debasement (i.e. inflation). Trade between individuals is now the business of only those individuals.

Certainly, some of these implications are controversial. Indeed, they will have a profound impact on human society, just as all great technological achievements do. A good way to think of it is that Bitcoin represents the separation of money and state—the ability to “practice one’s own economic behavior” without the permission of anyone else. It offers privacy in an age of surveillance, and honesty in an age of manipulation.

So what is Bitcoin? It is a payment technology, sure. But more than that, it is a social and economic experiment. It is a project that, if successful, will change the relationships between humans on a fundamental level. Its implications have just barely been explored.

Like any experiment, it can fail, but the genie is now out of the bottle. While this genie goes about its business, many things you take for granted will likely change. The changes will be beneficial, especially if you know something about them in advance. Remember the dawning of the Internet. And educate yourself now on the phenomenon that is Bitcoin.