What Is Bitcoin? A Beginner's Guide

The Bitcoin world is buzzing with both excitement and curiosity and the opportunity for the potential to skyrocket. Everyone from everyday Joes to reputable experts bets on Bitcoin's success.

It has been 8 years since the release of Bitcoin. Most notably, we saw headlines of people who happened to buy bitcoin early on turning into child millionaires. Given the enormous potential of new cryptocurrencies, our attention often turns to Bitcoin as the quintessential example of what's to come.

We've designed this guide to teach you about Bitcoin so you're up to speed and ready to enter the crypto world.

What is Bitcoin?

Released as open source software in 2009, Bitcoin is often credited as the world's first cryptocurrency and is best defined as a digital currency that exists only electronically.

Bitcoin is decentralized, which means it has no central issuer or political organization that controls the amount of bitcoins in circulation. But the Bitcoin platform is far from anarchy.

The whole process is quite simple and organized: Bitcoin holders can transfer bitcoins through a peer-to-peer network. These transfers are tracked on the Wikipedia blockchain, commonly known as a giant ledger. This ledger records every bitcoin transaction ever made. Each contiguous block in the blockchain is built on a data structure based on an encrypted Merkle tree. This is especially useful for detecting fraudulent or corrupt files. If a single file in the chain is corrupted or deceptive, the blockchain prevents it from corrupting the rest of the ledger.

Instead of relying on the government to print new money, Bitcoin's blockchain programming processes when bitcoins are created and how much is produced. It also keeps track of where the bitcoins are and ensures the transactions are correct.

There are currently about 17 million bitcoins in circulation. There is no central regulator or government that controls the supply of bitcoins, meaning the supply is controlled by design. The total supply ever created is capped at 21 million bitcoins.

This limit makes an argument that Bitcoin may have scaling problems. However, since Bitcoin is essentially infinitely divisible (meaning a user can transfer as little as 0.00000001 bitcoin), this doesn't really create a scaling problem. The magic number 21 million is arbitrary.

It is believed that Bitcoin was designed to be a deflationary currency to counter the government's use of inflation as a hidden tax to redistribute earned wealth. Many people praise Bitcoin for empowering the people by overthrowing the money-printing power of fleeting politicians.

How does Bitcoin work?

One of Bitcoin's most appealing features is its ruthless verification process, which minimizes the risk of fraud. Since Bitcoin is decentralized, other volunteers are known as existing miners. Once a specific amount of transactions is verified, another block is added to the blockchain and business continues as usual.

What is mining?

Instead of a single central server verifying every transaction, essentially everyone else on the network verifies each transaction.

Bring out the miners.

Let me simplify the process so that we all understand: Miner is presented with a complex math problem and is the first to solve the math problem adding blocks of transactions already verify in the ledger. Calculations are based on Proof of Work (POW) or proof that a minimum amount of energy has been used to get the correct answer.

No real human hunches over a calculator with a notepad and a calculator doing pre-calculations; hardware used to perform Bitcoin mining.

Bitcoin's built-in reward system compensates successful miners with an amount of bitcoin. Bitcoin’s programmatic time-varying rewards and block rewards halve every four years. The current reward for each new block of verified transactions is around 12.5 bitcoins.

Mining processes have become increasingly sophisticated. The most common method uses ASICS Application-Specific Integrated Circuits. ASICS are hardware systems similar to CPU computers built for the sole reason of bitcoin mining.

Bitcoin mining takes a lot of work and power, and the amount of fierce competition makes it very difficult for newcomers to enter the race and make a profit. A new miner not only needs sufficient computing power and knowledge to use it to outmaneuver the competition, but also the large capital needed to finance operations.

A simple Bitcoin transaction example

While the underlying technology of Bitcoin may seem elusive, using Bitcoin is not that difficult. Here is an example of a simple real-world Bitcoin transaction.

Bitcoin Wallet: How to Store Your Bitcoins

So you've got this digital currency. You really can't chuck it in your pocket. Let's go over some useful definitions before we jump into crypto storage:

  • Exchange platform: where you trade coins for cryptocurrencies like Bitcoin, Ethereum or Litecoin. You can also trade another cryptocurrency.

  • Wallet Platform: basically a bank account where your cryptocurrencies are kept.

  • Hardware wallets: online offline wallets that are not linked to the network.

  • Public cryptographic key: your account number. Similar to how someone would deposit money into your bank account through your account number, your public cryptographic key is the information you give someone to receive cryptocurrency.

  • Private cryptographic key: a key that allows you to spend Bitcoin and other cryptocurrencies. You protect this with your life. If someone has access to it, they can transfer (steal!) your Bitcoins.

Now that we've covered that, we can discuss better Bitcoin wallets.

When you hear about bitcoin being hacked, you've probably heard about a hacked network exchange. Since Bitcoin's blockchain structure makes it difficult to hack (there are no borders), it is considered very secure.

Exchanges, however, are a different story. Perhaps the most notable Bitcoin exchange hack was the Tokyo-based MtGox hack in 2014, where 850,000 bitcoins worth over $350 million suddenly disappeared from the platform. This does not mean that Bitcoin itself was hacked; it just means that the exchange platform has been hacked. Imagine a bank in Iowa was robbed: USD was not robbed, the bank did.

The industry surrounding Bitcoin is new and not without their kinks. Respected Bitcoin advocate and venture capitalist Marc Andreessen states, “Mtox must die for Bitcoin to thrive.” Its previous role from Bitcoin's early days has been replaced by better, more powerful entities.

Although most wallet platforms are considered extremely secure, the prospect of hackers leaves many users paranoid.

That brings us to hardware wallets. Hardware wallets are essentially USBs that allow users to store cryptographic keys offline and disable exchange. Your cryptographic keys only exist on your hardware wallet and cannot be hacked (unless someone physically steals your hardware wallet).

Hardware wallets are so secure that there are countless stories of people accidentally misplacing hardware wallets full of crypto and never being able to recover thousands, hundreds of thousands, or millions of bitcoins.

Some users opt for a user paper wallet, which is essentially your cryptographic key on a piece of paper stored somewhere safe like a bank vault. While paper wallets are not recommended, they can be done using an online key generator (not recommended due to malware threats) or handwritten.

Why use Bitcoin?

  • Bitcoin is often hailed as the future of the monetary world for several reasons.

  • It is decentralized and gives power to the people. Launched just a year after the 2008 financial crisis, Bitcoin has attracted many who consider the current financial system unsustainable. This element has won the hearts of those who view politicians and governments with suspicion. No wonder there is a large community of active thinkers building, buying, and working in the crypto world.

  • Freedom. The concept that one person can carry millions or billions of dollars of Bitcoin across borders, pay for it at any time and without waiting for bank delays is a big selling point.

  • Protect. Bitcoin payments are not necessarily tied to a person's personal information. Since personal information is removed from transactions, users do not face threats such as identity theft. Bitcoins can also be backed up and encrypted to keep your funds safe.