Bitcoin Basics: A Step-By-Step Guide For Beginners

Crypto

Bitcoin is a cryptocurrency, but it is also a concept and an idea. A single bitcoin is currently worth about $19,400, with a total market cap value of just over $371 billion (updated January 13, 2023).

bitcoin logo

Its value has increased many times over since its inception. There are over 19 million bitcoins currently in circulation, and more are being mined every day.

But Bitcoin isn’t just money — it’s fundamentally changing how money works.

How did Bitcoin get started?

Bitcoin is, at its root, a math-based digital currency. Its value is based on scarcity versus demand and its governing body in the world.

Bitcoin was created in 2009 by an individual or group of individuals going by the pseudonym Satoshi Nakamoto. The identity of Satoshi Nakamoto has never been revealed and remains unknown to this day. However, his idea quickly caught on within the cryptocurrency community.

Satoshi made it very specific when he published a white paper on how a free, global currency could work. In January 2009, the Bitcoin network went online.

The idea was to offer a worldwide currency not issued by any particular government and not controlled by any institution. It would use a peer-to-peer network to send, receive, and verify funds and transactions. It is an idea that cuts out the middleman, governed and manipulated by no one. It’s offered as a tradable commodity and as an alternative to our entire banking system.

Early Adoption and Development

In the years following its creation, Bitcoin gained a small but dedicated following of people and businesses who saw the potential of a decentralized digital currency. However, it wasn’t until 2013 that Bitcoin witnessed a surge in mainstream adoption, due to heightened media coverage and the availability of user-friendly wallets and exchanges.

Recent Mainstream Adoption and Growth

Bitcoin has continued to grow in popularity and is now accepted by a number of major businesses and institutions. Despite some volatility in its value, it remains a valuable asset for numerous individuals. Its success has inspired the creation of multiple other cryptocurrencies modeled after it.

How does Bitcoin work?

To put the idea into practice, Nakamoto and other developers invented a system that could move money from place to place without going through a centralized bank or institution. They did this with the use of something called the blockchain.

A blockchain is a ledger of every Bitcoin transaction made from Bitcoin’s inception. Instead of having only one ledger, like a bank, the blockchain is housed on millions of computers worldwide. When a payment is made using Bitcoin, those computers verify the payment, and the transaction is stored in the ledger.

Bitcoins can be stored on your phone or on your computer in a Bitcoin wallet.

This is a digital vault designed to keep your Bitcoins safe. With a Bitcoin address, you can trade and make purchases with bitcoin without revealing your identity.

Setting Up a Bitcoin Wallet

Before you can buy or sell Bitcoin, you’ll need to set up a Bitcoin wallet to store it in. Several types of wallets are available.

Software wallets can be installed on your computer or mobile device, while hardware wallets are physical devices designed to hold Bitcoin securely.

Some wallets are designed for a specific type of device or operating system, so be sure to choose a wallet that is compatible with your device.

Where can I buy Bitcoin?

bitcoin logo

Bitcoin can also be traded on markets, similar to stock markets, called Bitcoin exchanges.

One of the most popular and safe exchanges in the United States is called Coinbase. There you can buy and sell Bitcoin and several other digital currencies.

Binance is another popular Bitcoin exchange that allows users to trade many other cryptocurrencies that are not available on Coinbase.

However, Binance does not allow you to buy Bitcoin with US dollars. To trade on Binance, you have to buy Bitcoin elsewhere and then transfer it to your Binance wallet.

When you’re purchasing Bitcoins, you don’t have to buy them in full increments. At around $17,000 apiece these days, not many people could afford to. Luckily, each Bitcoin can be broken down into 1/100th million.

Think of it as a penny to the dollar, only in this case you can purchase over 17,000 of them for about a buck. This unit, named after the father of Bitcoin, is called a Satoshi. There are two quadrillion one hundred trillion Satoshis, to be exact.

What is Bitcoin mining?

Bitcoin transactions require verification and recording in the blockchain. This is performed by Bitcoin miners. They use their computers to monitor the ledger and validate each transaction. In exchange, they earn new Bitcoin.

This is how new coins are introduced into circulation. The number of newly issued coins decreases yearly, allocated through a lottery system at set intervals. Early on, a single laptop could mine hundreds of Bitcoins every few days, but now the computing power and electricity needed to mine Bitcoin has become extensive.

room full of servers

Only one Bitcoin is mined every ten minutes, and the total supply is capped at 21 million, with 80% already mined. Based on the gold standard, the scarcity of a limited supply creates demand, and Bitcoin’s release is set to end in 2140. However, the cost of Bitcoin mining may be too high, unless the price continues to rise.

How did Bitcoin become so valuable?

In the early days of Bitcoin, data mining and currency trading were largely done by software developers, cryptographers, and libertarians (we kid you not). The programmers loved Bitcoin because of its potential to revolutionize the world and the technical challenges it posed.

Libertarians loved it because it was a snub to authority. It was a form of money that no government-issued, tracked, or controlled.

The first exchange rate for Bitcoin was published in October 2009. They claimed that 1,309 Bitcoins were worth exactly $1. That single dollar from Bitcoin today is worth almost $8 million dollars.

There are plenty of people who got rich off the early days of Bitcoin, like this kid, who dropped out of high school after becoming a millionaire. Or there’s this guy who bought in when Bitcoin was valued at fifteen cents and now travels the world, staying in luxury hotels on an endless vacation.

How did Bitcoin gain popularity?

To tell a couple of get-rich-quick stories does not explain the determination that it took or the strangeness of the story. In 2010, after a request from the federal government banks, financial institutions such as Bank of America, Visa, Mastercard, and PayPal all cut off WikiLeaks from receiving any traditional forms of funding.

WikiLeaks

Nakamoto, in one of his last emails before disappearing, is quoted as saying, “It would have been nice to get this attention in any other context. WikiLeaks has kicked the hornet’s nest, and the swarm is headed towards us.”

WikiLeaks brought worldwide attention to the cryptocurrency known as Bitcoin and people beyond developers and Libertarians began investing. Then in 2011, Ross Ulbricht, also known as the Dread Pirate Roberts, realized that if you combined the anonymity of Bitcoin with the dark web you could create the world’s largest open drug market.

The Silk Road

A few months later, the Silk Road was born. This is not the sort of media attention the creators and investors of Bitcoin were hoping for and while it did drive up the value, it also opened Bitcoin up to increased scrutiny.

silk road marketplace

The federal government began weighing in and New York State imposed some of the heaviest regulations in the country on the new industry and business popping up around Bitcoin. Due to new regulations and the collapse of one of the world’s largest Bitcoin exchanges, Mt. Gox, in 2013 the value of Bitcoin plunged.

Ross Ulbricht is now serving a life sentence in prison and Julian Assange, the founder of Wikileaks, is locked inside the Ecuadorian Embassy in London avoiding extradition charges. Although Assange did recently thank the federal government for forcing them to become early adopters of the technology.

Using Bitcoin for Transactions

Sending and Receiving Bitcoin Payments

One of the main benefits of using Bitcoin is the ability to send and receive payments instantly and without the need for a third party, such as a bank.

To send a Bitcoin payment, you’ll need the recipient’s Bitcoin address, which is a unique string of letters and numbers. You can then send the payment directly from your wallet to the recipient’s wallet. Receiving a Bitcoin payment is just as easy – you’ll just need to provide the sender with your Bitcoin address.

Using Bitcoin for Online and In-Person Purchases

In addition to sending and receiving payments, you can also use Bitcoin to make online and in-person purchases at a growing number of businesses that accept it. This can be a convenient and secure way to pay.

Bitcoin eliminates the need to provide sensitive financial information or wait for a bank transfer to clear. However, keep in mind that not all businesses accept Bitcoin, and it may not always be possible to use it as a payment method.

What are the risks associated with Bitcoin?

In many ways, Bitcoin is still operating in the wild west. With very little regulation or oversight, there are no financial protections when investing in Bitcoin. The CEO of J.P. Morgan, Jamie Dimon, called Bitcoin, “a fraud that will eventually blow up.”

Of course, that’s coming from the guy whose company had to agree to pay the federal government $13 billion to settle investigations into its business practices pertaining to mortgage-backed securities.

Since then, Bitcoin has done a lot of growing. There are still conflicts over how Bitcoin should be used or regulated, which is one of the main reasons there’s so much volatility with the currency.

China recently banned investments in Initial Coin Offerings (ICO) which cause the value of many currencies to slide. While there are several alternatives to Bitcoin, the most respected are Ethereum, and Litecoin.

bitcoin on one hundred dollar bills

Any new medium, especially one as volatile as this, has the capacity to fail. The market may crash for any number of reasons. If you are looking to seriously invest in any cryptocurrency, first look at the people behind it.

Due to the popularity of Bitcoin, there are a lot of other cryptocurrencies on the market today — over a 100 with a value of $100 per share or more. With that has come a lot of fraud.

The other issue in cryptocurrency? Hackers.

They try to break into bank accounts, customer lists, and credit reporting companies. From Target to Equifax, it seems like everyone is getting hit today. One other favorite target for online thieves is Bitcoin wallets.

Bitcoin is untraceable, so if they’re stolen, it’s nearly impossible to get that money back.

How is Bitcoin valued?

If you ask most people, they’ll likely say that Bitcoin is based solely on speculation and hope. While there’s some truth to that, the real value of Bitcoin can be found in the developers and software designers. It’s the people building safe currency exchanges.

The value is also found in the millions of people who support it, from the miners to Satoshi Nakamoto, to the people at the Bitcoin Foundation. They all constantly work to improve and support the technology.

That being said, the value of Bitcoin is not tied to anything but, then again, neither is the U.S. dollar. Whether you should invest in Bitcoin is not one that anyone can answer for you.

Five years from now, everyone will look back and with perfect hindsight to give you their opinion. Will Bitcoin go up? Will it go down? Is a crash coming? Is this just the beginning?

The truth is that nobody knows. However, that’s true whether it’s Bitcoin, the stock market, or any other investment. Bitcoin’s success or failure isn’t written yet, but it really doesn’t matter. It’s the technology behind Bitcoin that’s changing the world.

What’s next for Bitcoin?

The underpinning technology behind Bitcoin is so revolutionary that most people can barely comprehend it, let alone understand how to use it. Banks and other large institutions are starting to experiment with blockchain technology to improve trades and secure account information. The federal government is looking at it as a way to enhance data security and encryption.

In essence, Bitcoin is a technology that can help put power in the hands of everyone — not just a few.

Will Bitcoin survive?

If you look at what it’s up against, it’s hard to say yes. If you look who’s behind it, it’s hard to say no. The fight for where this technology goes, who controls it, and what it becomes is just beginning.

There are certainly going to be ups and downs throughout the future. So if you’re going to invest in cryptocurrencies, don’t just do it for the money. When you buy Bitcoin, you’re not just purchasing currency, you’re hopefully investing in a better future for all of us.

Bitcoin FAQs

How many Satoshis are in one Bitcoin?

One Bitcoin is equal to 100 million Satoshis. Satoshi is the smallest unit of Bitcoin and is named after the creator of Bitcoin, Satoshi Nakamoto.

What is proof of work?

Proof of work secures the Bitcoin network by verifying and adding new transactions to the blockchain through complex mathematical problem-solving, called mining. Miners compete to solve the problem first and create a new block, earning a reward in Bitcoins. This helps secure the network and maintain its security and validity.

Proof of work is a crucial aspect of the Bitcoin network. It’s one of the main ways that the network is able to maintain its security and integrity.

What is the Bitcoin blockchain?

The Bitcoin blockchain is a secure, decentralized ledger that records all transactions. It consists of a sequence of blocks linked chronologically and securely. Each block holds a group of validated transactions, which become part of the permanent and unalterable record once added to the chain.

The blockchain operates through a decentralized network of nodes that collaborate to validate and record transactions. Nodes validate new transactions, add them to a block, and the block is then added to the chain.

The decentralized nature of the blockchain makes it resistant to tampering and secure, as altering the record would be hard for an individual or group to go unnoticed by the other nodes on the network. This makes the blockchain vital for maintaining the integrity and security of the Bitcoin network.

How can I start mining Bitcoin?

There are a few steps you can take if you want to start mining Bitcoin:

  1. Get a Bitcoin wallet: Before you can start mining, you’ll need a place to store your mined Bitcoins. You can do this by setting up a Bitcoin wallet.
  2. Choose a mining method: There are a few different ways to mine Bitcoin, including using a dedicated computer or joining a mining pool. If you decide to use a dedicated computer, you’ll need to purchase or build a powerful machine with a fast processor and a lot of memory. If you join a mining pool, you’ll work with a group of other miners to pool your resources and increase your chances of finding a block.
  3. Get the necessary equipment: Depending on the mining method you choose, you may need to purchase additional equipment, such as a specialized Bitcoin mining machine or a high-powered graphics card.
  4. Download and install mining software: Once you have all the necessary equipment, you’ll need to download and install mining software that allows you to connect to the Bitcoin network and start mining.
  5. Join a mining pool: As mentioned earlier, joining a mining pool can increase your chances of finding a block and earning Bitcoins. There are many mining pools to choose from, and it’s a good idea to do some research and compare them before deciding which one to join.

Keep in mind that Bitcoin mining requires a significant amount of computational power and can be a complex and expensive process. It may not be feasible for everyone. Additionally, the amount of Bitcoins you can earn through mining may not be enough to offset the costs of the equipment and electricity required.

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