Bitcoin 101 — a beginner’s guide — Matjaz Skorjanc
Everyone’s heard of Bitcoin but if you’re looking to get a bit more involved in the world of cryptocurrencies, you need to get the full lowdown on the original.
So here’s my beginner’s guide to bitcoin. Below you’ll find out what it is, how you can carry out bitcoin transactions, how to sell bitcoin and why there are some excellent reasons to trade bitcoin.
But first, let’s go back to basics.
When and how did Bitcoin appear?
Go back a few years and you will undoubtedly have noticed Bitcoin in the headlines. Its price soared to $20,000 in December 2017 from $900 in January 2017.
For lots of us, this brought virtual currency into our lives for the first time. But for bitcoin investors who have been involved since the beginning, these price fluctuations were part of a volatile storyline.
We need to go all the way back to 2009 for the advent of bitcoin. This is when it became available to the masses online, and it is regarded as the very first virtual currency in the world.
Virtual currencies are also called cryptocurrencies and are best described as digital assets that are secured through complex algorithms (cryptography). Bitcoin was the first, and since then thousands have hit the market.
Who created bitcoin?
It’s not known exactly who was responsible for creating bitcoin. Known as Satoshi Nakamoto, the creator is anonymous and might even be a group of people.
The Bitcoin Whitepaper gives detail about the virtual currency directly from Satoshi Nakamoto, who states that its goal is to provide a “peer-to-peer electronic cash system. Crucially, the system is totally decentralised and has no central authority or regulation.
It’s likely that bitcoin emerged from the wreck of the global financial crisis in 2008. At a time where the global economy collapsed due to the machinations of central authorities and big banks naturally paved the way for a more egalitarian financial system.
And this is why people are consistently attracted to bitcoin and other digital currencies. Putting financial power into the hands of individual users who suffer when the traditional system fails is a logical step.
How do bitcoin transactions work?
A digital currency, bitcoin works by operating on a decentralised network of blockchain technology.
Each transaction using bitcoin is recorded publicly on a block of information. This log of information cannot be retrospectively changed and it is available for everyone on the network to see. The idea is a truly transparent form of currency.
Traders can sell bitcoin or carry out a bitcoin transaction and remain anonymous. Each block of data has an encrypted key attached to it. Account holders use this encrypted code to access their assets.
Bitcoin users can therefore purchase bitcoin and make transactions without any form of financial institution involved. There is no need for a bank to manage the transaction, as it is managed directly on the block chain network.
There is the added bonus of not needing the same kind of account numbers and personal data that’s necessary to hold an account with central banks.
Bitcoin mining — how bitcoins are created?
Bitcoin units are nothing like the physical form of paper money. As they are digital virtual units, they are mined by powerful computers.
When the decision was made to produce and trade bitcoin, Nakamoto decreed that there would only ever be 21 million bitcoins created.
While this makes it sound simple, bitcoin mining can be an expensive process. This is because you need expensive processing power, which in turn takes a lot of electricity. Miners need to strike a balance between the cost of mining bitcoins and how much they get back for the work they do.
For each new bitcoin mined, the user is rewarded with bitcoins. Currently, this reward is 12.5 bitcoins, which equates to a decent amount of money. This is the clear incentive for miners of bitcoin, and it’s why a new token is created roughly every ten minutes.
How to carry out a bitcoin transaction
To buy or sell this digital currency, you need to find a cryptocurrency exchange. These platforms allow users to buy and sell bitcoin using a number of different currencies.
A popular example of cryptocurrency exchanges is Coinbase. It’s a very well-known and widely used exchange and cryptocurrency wallet that is designed to be user friendly.
If you are concerned about the security of these cryptocurrency and bitcoin exchanges, think of it as no different to a regular bank. A central bank stores your personal data, password and information. In the same way, a cryptocurrency stores your transaction data and private encrypted key to your bitcoin wallet.
Other commonly used cryptocurrency exchanges in the US and UK are Bitfinex and Etoro. And of course, NiceHash has its own exchange where you can trade 50 different cryptocurrencies, including bitcoin.
While security is tight, these cryptocurrency platforms are not immune to the possibility of being hacked. For example, in 2016 Bitfinex was hacked and bitcoins worth $72 million were stolen.
This means you must be extremely careful how and where you store your bitcoins.
Storing bitcoins in cryptocurrency wallets
When you’ve decided to go ahead and buy bitcoin, you must then follow bitcoin protocol and store them in a digital wallet.
All virtual money should be stored in a crypto wallet, whether it’s connected to the exchange or is a hardware wallet.
A cryptocurrency wallet is a safe place to store the keys and addresses that will allow the user to unlock the funds stored within it. Whether you choose online wallets or a hardware wallet, the principle is the same.
Think of the bitcoin wallet as the virtual equivalent of a bank account. Using the wallet to store your digital assets means you can the go ahead and receive or send bitcoins. You can use BTC to pay for services or goods and services.
However, the major difference between traditional currencies and crypto currencies is the overall responsibility for keeping it safe. Financial services, such as central banks, are responsible for the security of fiat currencies stored there, but with Bitcoin wallets, you as the owner hold ultimate responsibility.
Digital wallets have different security levels
Digital wallets vary, with each different type offering a differing level of security. Depending on the wallet type that you choose, you must be aware of how secure your personal information is.
Types on offer include web, desktop, hardware, mobile and paper wallets.
Mobile wallets will store the whole history of your Bitcoin usage, so that you can track transactions. You can also use this type of wallet to send bitcoin or to implement transactions on crypto exchanges. An example of this kind of web and mobile wallet can be seen with Coinbase, which is entrusted by the user to keep every digital asset safe on their behalf.
If this doesn’t feel secure enough, then users can keep their virtual money safe by using a desktop wallet. This enables downloadable software which is installed on the user’s own laptop, so that their virtual currencies are under their own control.
Paper wallets and hardware wallets are widely considered the most secure way to store bitcoin. Hardware wallets store the user’s private encrypted keys totally offline, meaning that their digital assets are safe from any kind of threat. Examples of hardware wallets that many bitcoin users utilise include Ledger Nano and Trezor.
Paper wallets create a totally new public address and private key and is another way to store digital assets offline. The downside to this is that the user must keep their private key details and the printed paper wallet somewhere totally safe — and remember where it is.
If you are using a paper wallet and you forget or lose your private key, then there is no way to retrieve it. Unlike traditional financial services and banks, there is no-one storing your details other than you. Therefore, if you lose your encrypted private key in physical form, your bitcoin could be locked away on a server and essentially lost.
What kind of tech underpins bitcoin?
You will probably have heard of the most well-known form of the distributed ledger technology (DLT) that drives bitcoin — blockchain technology.
It sounds complex, but if we think of a blockchain as literally a linked chain of blocks that contain data. Each block on the chain records details of the bitcoin transactions (or other cryptocurrency transactions). This is publicly accessible and transparent for everyone else who is also on the same bitcoin blockchain network.
Blockchain technology is revolutionary because it can’t be altered after the fact. The idea is that each block when uploaded onto the network cannot be changed and is therefore totally secure. This indisputable proof of each transaction is designed to stop any money laundering or double spending of bitcoins or cryptocurrencies.
Blockchain technology is spreading to other industries
Block chain or DLT is now used in other industry sectors in the financial world and outside of it. For example, it is now used within real estate and property to manage fractional ownership. It’s also utilised within the energy industry for P2P trading.
DLT is only at the beginning of its journey to revolutionise and transform all kinds of business sectors. It has enormous potential to change the way the world operates.
Investing in bitcoin — what are the benefits?
Bitcoin is still very volatile as an asset, and so comes with its own risks. As the cryptocurrency sector remains mostly unregulated (although this is beginning to change), bitcoin traders must accept the risk that they could lose their investment.
However, there are many benefits to trading digital currencies. It’s accessible to everyone around the world and offers the ideal of financial freedom to people who feel let down by traditional financial services.
Before we go into trading this digital currency on a bitcoin network, let’s quickly review the history of bitcoin prices from the very beginning.
Bitcoin prices have been volatile from the start
When the person or group of people using the pseudonym Satoshi Nakamoto implemented bitcoin, it wasn’t yet clear how far the idea of cryptocurrency would go.
We know that bitcoin emerged from the ideal of a decentralised currency. Designed to be exchanged and using cryptography to manage its development, the idea of a digital currency totally outside of the control of central banks was revolutionary.
Since its inception in 2009, bitcoin’s price has been extremely volatile. However, in 2021 there is no doubt that this digital currency is the lead in a new world of financial services that are mostly unregulated.
From the middle of the 2010s, bitcoin began to be accepted by major companies alongside traditional currencies. And while it’s not yet totally mainstream, digital assets like bitcoin are moving in that direction.
How far back does cryptography go for digital currencies?
Before bitcoin made its appearance in the form of a digital asset, there had already been lots of debate and discussion about digital cash technology.
Using cryptography (that is, solutions to computational puzzles worked out by a powerful processer) goes back to 1992, when Moni Naor and Cynthia Dwork proposed it as something of value.
In 1997, hashcash was developed by Adam Back. This is the basis of the proof-of-work schemes used now by bitcoin miners. Then it was for controlling spam. This was further developed into a reliable and reusable proof-of-work scheme that uses hashcash.
Jump forward to 2008 and a domain name was registered for bitcoin. This was shortly followed by the Whitepaper from Satoshi Nakamoto, explaining the P2P network to generate a system of online transactions that secures itself through mutual mistrust.
On 3 January 2009, the bitcoin network officially started. Nakamoto mined block number 0 with a proof of work reward of 50 bitcoins.
It’s though that bitcoin was launched as a direct consequence of the financial crash of 2008 and people’s frustration with fractional reserve banking.
A timeline of the growth of bitcoin
New cryptocurrencies began to appear, all of which used bitcoin’s open source code.
The Bitcoin Foundation launched, with the remit of speeding up growth of bitcoin through promotion, protection and standardisation.
In November of 2021, WordPress began accepting this digital currency.
Coinbase, the payment processor based on bitcoin sold one million dollars’ worth of bitcoins in a single 30 day period. The price was $22 per each smallest unit.
Also in 2013, as the price of bitcoin was fluctuating, the Financial Crimes Enforcement Network (FinCEN) in the US began devising regulatory guidelines for bitcoin and other digital assets and virtual currencies.
This basically categorised bitcoin miners in the US as Money Service Businesses (MSB), which would then be subject to legalities in the same way that businesses using traditional currencies are.
In October 2013, the first bitcoin ATM in the world was established in Canada. This made it possible for people to use the bitcoin ATM to purchase bitcoin and exchange the currency in a coffee shop.
At the same time as various countries, such as Thailand, made cryptocurrencies illegal, others began to allow users to buy and sell bitcoin on exchanges.
Some hospitality properties in the US began to accept bitcoin at their restaurants and hotels.
In February, Mt Gox one of the original exchanges and larger than most exchanges file for bankruptcy after 744,000 bitcoins were stolen.
By December, companies including Dell, Newegg and Microsoft allowed bitcoins to be used to buy some products and services.
Despite all of this success, and the sector gaining more power, billionaire Warren Buffet openly called bitcoin a “mirage”.
Coinbase raised $75 million, the most ever raised in funding for a bitcoin or cryptocurrency company.
UK based exchange Bitstamp was forced to go dark for a few days to investigate a possible theft. However, the platform reopened quickly enough with new security measures and extra measures to protect user’s personal information and transaction history.
By February, more than 100,000 merchants around the world were accepting bitcoin. There was also the emergence of more bitcoin ATMs to make it more accessible.
In March, Japan officially recognised people’s right to buy bitcoin and that digital assets have a similar role to play as traditional currencies.
Bitcoin was attracting more academic interest at this point, with the establishment of academic journal about bitcoin and every other digital asset called Ledger.
Businesses around the world accepting bitcoin continued to increase.
The digital currency gains more credence among legal financial companies, with Russia and Japan legitimising the use of cryptocurrencies including bitcoin.
Exchange trading exchanges continued to spread and their usage increase.
South Korea banned the right to remain anonymous when using bitcoins.
Bitcoin becomes more and more mainstream as it becomes available on the Frankfurt Stock Exchange.
PayPal started to allow its clients to buy bitcoin, send bitcoin and sell bitcoin on its platform. However, users can’t deposit or withdraw bitcoins and must use traditional currencies or bank transfers.
In June, El Salvador announced plans to adopt bitcoin as legal tender. This would make El Salvador the first country in the world to accept a digital asset as legal tender in place of bank-controlled cash.
This timeline doesn’t, of course, capture every detail of this cryptocurrency and its rise from a niche online currency to something that is now starting to rival cash and bank-based traditional currency.
Blockchain technology and its ability to put financial control directly into the hands of the user without a centralised bank controlling the coins, remains an attractive alternative to the federal reserve bank system.
Bitcoin, with its private keys and encrypted accounts, allows the user to control their money and trade on an exchange without recourse to any authority.
Each transaction is secure thanks to the random letters generated for private keys, and anyone can buy bitcoin by starting an account.
When this is verified, the user then must transfer money in some form or another in order to buy the bitcoin. Once they have done so, they can send bitcoin over an exchange with no processing fee via secure blockchain technology.
Debit cards, a credit card, a checking account or cash can be used to put currency into the account in order to buy virtual coins.
How has the value of bitcoins varied?
Having read the above brief summary of just some of the events that have taken place since blockchain technology emerged to allow the trading of bitcoins, you won’t be surprised to hear that its value compared with fiat money has also fluctuated.
From 2009 to 2010, bitcoins were worth negligible amounts of cash compared with the US dollar. No exchange was in existence and the only people using bitcoins were tech and cryptography fans who were basically conducting the odd transaction as a hobby.
In May 2010, the first transaction was made in the real world (so not an online exchange between two hobbyists) when two pizzas were bought for 10,000 BTC. The value of this by April 2021 would have been $600 million, but at the time there was no knowing how much more power bitcoin would amass. Each bitcoin was then worth less than one cent.
Between February and April 2011, the bitcoin achieves the same value as the US dollar. This means for each transaction bitcoins were worth $1 each.
From October to November 2013, the value of a bitcoin increased from $150 to $200 and on to achieve $1,242.
Its value fell by April 2013 to a low of $340, partly due to the financial crisis in Cyprus and Greece.
March 2017 saw bitcoin being traded on an exchange for at least $1,290 per bitcoin.
By May 2017, a new high had been reached for the blockchain based bitcoin at more than $2,000.
The price only went on to achieve more power and break through $5,000 per bitcoin by September 2017.
November 2017 saw bitcoin exchange trades reach more than $8,000 per bitcoin. Experts believe that this sharp increase in price was linked with the coup in Zimbabwe in the same year.
By December 2017, the price of one bitcoin based on blockchain tech reached $19.783.06. During this time, bitcoin’s price increased by 5% in just 24 hours.
Just as quickly, the value of one bitcoin dropped by 50% in just 16 days. This put it at less than $7,000 in February 2018.
The 31 October 2018 marked the tenth anniversary of the appearance of bitcoin, and its price held steady at more than $6,000.
Twelve months after its massive high, December 2018 saw bitcoin value drop by 76% since then with its new value at $3,300. This also marked a 15-month low for the currency.
In March 2020, the COVID-19 pandemic meat that the price of these coins dropped by 50%, to sink below $5,000.
By July, the coins had recovered from the pandemic related crash and bitcoin was once again worth more than $10,000.
The currency continued to rise in value throughout 2020, until it reached $19,850.11 in November.
Every transaction during this time gives bitcoin more power, and this was reflected in January 2021. On 8 January, the value of one bitcoin reached $41,971. And although this was followed by a drop in value for bitcoin, it levelled at $33,400.
A month later in February 2021, there was another surge in value for bitcoin due to billionaire Elon Musk’s announcement that Tesla is investing in bitcoin and will accept bitcoin as payment in lieu of a credit card or cash. Due to this, the price of bitcoin surged to $44,200.
By 16 February, its value reached $50,000 and in April more than $60,000 when payment processor Coinbase went public.
However, by 19 May there was speculation that Tesla would drop its investment in bitcoin. This, along with new regulations from China amounting to a severe crackdown on crypto currency, led to the price of bitcoin falling to below $30,000.
At the time of writing (July 2021), one bitcoin is worth $32,343.80.
Originally published at https://www.matjazskorjanc.com on August 4, 2021.