Bitcoin 101: Beginner Guide for Bitcoin

This guide will explain what Bitcoin is, who invented it, how you can acquire Bitcoins, how you can store them, what you can use Bitcoin for, why Bitcoin is so disruptive and so much more that may be uncertain in the space.

As we delve deeper into this space I will try to explain all these in the simplest way possible.

What is Bitcoin?

I am sure you have heard all sorts of stories about what exactly Bitcoin is. There are so many misconceptions that revolve around Bitcoin and the most common one is that it is a scam.

We cannot deny that Bitcoin is used in so many scams such as social engineering and phishing scams. But, just like the fiat currency (traditional currency that you know), Bitcoin is also susceptible to being used in illegal activities.

A general rule that we apply in the crypto ecosystem is DYOR (do your own research). If a project sounds too good to be true then it is best if you are skeptical about it.

Another common misconception is that Bitcoin is anonymous. At first, Bitcoin might appear like it’s anonymous, but actually, it’s rather pseudonymous. The Bitcoin blockchain is accessible and visible to the public. Anybody can view the Bitcoin addresses but the users’ names are not disclosed.

Bitcoin has also been likened to periods such as the dot-com boom by several economists. It’s no longer a surprise when people refer to Bitcoin as a speculative bubble. The dramatic shift in the price of Bitcoin is attributed to its decentralized nature (we will discuss more on this).

This makes the price of Bitcoin fluctuate depending on the market supply and demand. Since Bitcoin is limited in terms of supply, it’s speculated that in the long term, demand will exceed supply.

Since the crypto market is quite small, Bitcoin and other cryptocurrencies are volatile assets at times.

People think that Bitcoin uses encryption. No, this is just a mix-up. Bitcoin’s blockchain does not make use of encryption. Instead, it functions using hash functions and signatures to enable all peers to access their transactions information for valuation.

Although other technologies incorporated in the system such as crypto wallets use encryption to offer security to users’ passwords.

Bitcoin is the first-ever digital cash to come into existence. Digital cash means it has no physical form as it is completely operated through computers. With access to the internet, one can transfer Bitcoin from one point to another.

Once you own Bitcoin it will be stored on digital addresses that are decentralized on the internet.

Bitcoin is decentralized in nature meaning there is no government or Central banks involvement either in managing Bitcoin’s functioning or validation of the transactions.

The interesting part about Bitcoin is that the funds cannot be spent more than once. Transactions can also be made at any time from any point across the globe.

Who invented Bitcoin?

Here’s the craziest part- nobody knows!

The true identity of Bitcoin’s creator remains unknown. Only the pseudonym identity of Satoshi Nakamoto exists. Satoshi introduced Bitcoin and wrote its white paper, Bitcoin, a peer-to-peer electronic cash system. The whitepaper was then released on 31st October 2008 and Bitcoin was later launched in 2009.

So many people have claimed to be Satoshi Nakamoto, though they haven’t provided evidence about their identity.

Bitcoin had no monetary value for the first two years after its release. However, as its community continued growing and becoming more active the coin has been receiving updates and leveraged for more use cases.

If the creator is unknown, then who controls Bitcoin?

As mentioned earlier Bitcoin is decentralized, meaning it is not controlled by any entity. Rather,  Bitcoin gives the users complete control of all our assets globally.

Satoshi Nakamoto created Bitcoin intending to give ordinary people full control of their finances and not rely on financial elites (the centralized financial systems).

How is Bitcoin different from fiat and other cryptocurrencies?

As mentioned earlier Bitcoin cannot be regulated by a central authority.  No specific bodies can come and print Bitcoin or produce more Bitcoins causing inflation as in the case with fiat currencies.

This is where the main difference stands out. Fiat currency, which is the traditional money, relies on centralized organizations such as Commercial Banks, Governments, Central Banks, and payment service providers like MasterCard, and Visa. These bodies determine if your transactions can be executed, to whom you send money and the maximum amount you can transfer or receive.

Fiat money involves rigorous scrutiny and monitoring. Individuals need to share their data during the transfer of their assets. it’s just a whole level of micromanaging for approvals.

For a currency to be recognized as a legal tender it has to meet some qualifications these qualifications include;

• Security – reduces any cases of counterfeiting.
•  Easy transferability – easy to send from one person to another
•  Portability – users can move anywhere with it.
•  Scarcity –  should not be able to be produced without no end.
•  Fungibility –  each identical piece has the same value
•  Non-consumable –  can only be utilized as an exchange of value.
•  Divisibility –  can be divided into smaller pieces for micropayments
•  Durability –   should be able to withstand time without depreciating.
•  Recognizable –  widely accepted as a means of transaction.

Another outstanding difference is that Bitcoin, unlike fiat money, is not sovereign. The King Coin is not affected by any economic or political contributions.

Also, Bitcoin is highly programmable. Bitcoin can be configured to function in a specific way based on a set of criteria. Transactions through Bitcoin can be executed by the use of smart contract technology. smart contracts improve security, transparency, autonomy, cost-savings, accuracy, and speed of a currency.

Bitcoin versus other cryptocurrencies

Bitcoin is not the only cryptocurrency that exists. Many more cryptocurrencies have been created since Bitcoin was introduced.

There are over 18,000 cryptocurrencies as of March 2022 and they exist as either coins or tokens.

How Bitcoin works

Bitcoin runs on a blockchain, which is simply a distributed ledger that creates a safe and secure environment for Bitcoin transactions. Every other cryptocurrency runs on a blockchain. Some have their blockchains such as Ethereum, and Near among others.  While others are native to other blockchains such as tether with runs on the Binance Smart Chain.

Blockchain makes it easy for the public to access information concerning transactions that have been executed. It simply provides standard transparency to the general public.

Every participant in the blockchain network has an identical copy of recorded transactions on their devices. New info is often synchronized by the participants.

Immediately after a new payment is made, the participants are distributed to the entire blockchain network. Remember no Central Banks or any sort of entity verifies transactions here.

The Bitcoin blockchain uses a particular mechanism to add new data. It is through this mechanism, the mining process, that new blocks are added to the blockchain. Once information is recorded on the blockchain it can’t be altered in any way whatsoever.

What determines the value of Bitcoin?

Investors and traders are attracted to Bitcoin due to its decentralized nature, security, borderlessness and its ability to resist censorship (Bitcoin funds cannot be spent more than once).

Many people buy and hold on to the bitcoins they buy. This is referred to as holding. As they hold on to Bitcoins, they tend to believe that the value of Bitcoin will continue growing. Thereby adding value to their investments.

Due to its limited supply, Bitcoin has been labeled as a bar of digital gold. To some investors, it is an exemplary store of value. Its scarcity and difficulty in production make it comparable to gold.

Many holders believe that Bitcoin’s outstanding characteristics make it an almost perfect tool for storing wealth for long periods. Its availability globally and high levels of liquidity make it even more adaptable.

How are Bitcoins created?

As mentioned earlier, Bitcoin has a limited supply. However, not all Bitcoins are in circulation. More Bitcoins continue to be created day by day. They are created through a process called mining. Yes, this is the same mechanism that is used to add new blocks to the blockchain network.

The maximum supply of Bitcoin is 21 million coins and as of  2020, 90% of these coins were already created.

Bitcoin creation involves a block halving process, which is responsible for the reduction of the speed at which new Bitcoin units will be generated.

Significance of the Bitcoin mining process

We mentioned earlier that Bitcoin mining enables participants to add new blocks to the blockchain. These participants (miners) are required to solve complex cryptographic puzzles.  And, the miner who manages to get a valid block will receive a block reward.

The reward constitutes a transaction fee and a bonus of the block created. as new coins are mined,  they add up to the number of coins in the total supply.

It takes about 10 minutes to mine a new block, though the time frame fluctuates from time to time.

How to obtain Bitcoin

• You can get your Bitcoin through mining.

By now it is clear how the mining process works. As one mines, they are rewarded with the newly mined  Bitcoins. The rewards make the mining process a good source of income.

• You can also get Bitcoin through trading on exchange platforms

Crypto exchanges are simply platforms through which sellers and buyers meet to trade their Bitcoin with other cryptocurrencies.  They usually charge fees based on the type of assets.

Some famous crypto exchanges are Binance, Gemini, and Coinbase. These platforms offer excellent and user-friendly purchasing options at a convenient cost.

As a beginner, choose an exchange platform that allows the purchase of cryptocurrency with fiat currency. Some exchanges limit users to buying cryptocurrencies using different crypto only.

• Buy Bitcoin from crypto brokers

Cryptocurrency brokers have user interfaces that are easy to use. What the brokers simply do is interact with exchange platforms on behalf of the trader or investor. Some of these brokers charge higher fees, while others can be free. Robinhood and SoFi are well-known crypto brokers.

Brokers can be convenient though restricting users from transferring their crypto holdings from the platform. For instance, SoFi and Robinhood do not allow transfers out of their accounts. It might not be a good deal for futuristic investors who prefer to use crypto wallets for extra security-hard wallets for this case.

• You can also get Bitcoin from airdrops

New crypto projects often run airdrop campaigns, where they send free tokens to their communities to encourage project adoption. Here, newly-minted tokens are sent to several wallet addresses to make the recipients more inclined to engage with the projects. As a crypto beginner, you may use this alternative to learn how to convert the free tokens into something.

What can you buy?

A while back it was difficult to find a merchant who accepted Bitcoin as a payment option. However, today there are several merchants who accept Bitcoins as they can transfer them into fiat currency if need be.

A few things that you can purchase using bitcoin include

• Real estate
• Foods and drinks
• Clothing
• Online subscriptions
• Booking hotel rooms
• Air tickets
• Gift cards

How to keep your Bitcoins safe

We mentioned earlier that in the Bitcoin ecosystem there are no banks or any financial institutions that are involved to manage or keep your Bitcoin assets safe. The safety of your Bitcoin assets entirely depends on you the owner or the user.

You can use the crypto exchange platforms to store your Bitcoin assets. Although this is not recommended. Storing cryptocurrencies on an exchange platform is risky, as they are susceptible to hacking. So you can use the crypto exchange platforms to hold your assets only when trading.

Traders and investors use the crypto wallet to store their Bitcoins.

A crypto wallet is simply a physical medium, device, service, or program that stores public or private keys used for transacting Bitcoins.

The public key functions as the wallet’s address, and a private key is used to sign off payments. In any case, the wallets do not hold Bitcoins, rather, they hold the private key.

• Hot wallets

These wallets use the internet to connect to tablets, computers, or phones and are managed by custodians who can help recover the critical code to your account if you lose your private key. They are convenient for executing frequent transactions that only entail minimum amounts of cryptocurrencies. Examples of hot wallets include Coinbase wallet, Metamask, and Edge wallet.

• Cold wallets

These wallets do not rely on the internet for connection. They are in the form of external devices like a USB drive or a hard drive. They are very fragile since there s no recovery of the private key once it gets lost or if the device used for storage breaks or fails. Examples of cold wallets include USB wallets and paper wallets.

Pros and cons

Bitcoin allows for effective and efficient implementation of projects through tracking of financial expenditures, payments, and ease of access to different parties involved. A consumer-friendly cryptocurrency will ease access to digital transaction services for its citizens, who are currently excluded from the financial matrix.

However, Bitcoin also comes with its criticism. One major con of Bitcoin is that it generates a huge waste of computational resources.

The transactional costs with Bitcoins also raise an eyebrow as most financial institutions claim a lack of knowledge with regards to the cost mechanics which may disguise transactional costs as free.

Other critics imply that Bitcoins will eventually outlaw criminal activities such as money laundering through the establishment of black markets.

What to expect in the future

With the economic and technological development agenda in place, the world is strongly pivoting toward the 4th Industrial Revolution. The World Economic Forum (2019) through a survey, suggested that about 10-12% of the world’s GDP will be under blockchain management systems and cryptocurrencies as of 2027.

Bitcoin is yet to be fully recognized as a medium of exchange or as a store of value by the Central Bank and the government.

Though there are few countries that we are seeing legalizing Bitcoin to function as the country’s legal tender. Countries like El Salvador from Latin America, which is currently constructing the Bitcoin City.

The Central African Republic from Africa is also among the leading countries that have accepted Bitcoin as legal tender. Both of these countries adopted bitcoin to improve their deteriorating economies.

Through the integration of Bitcoin and other cryptocurrencies, global spending is expected to rise to nearly 14 billion by 2023. Blockchain is keen to foster growth and innovation while providing access to infrastructural development in emerging markets through the decentralization of Bitcoin and other cryptocurrencies.

We have set straight some misconceptions about Bitcoin and now you know what Bitcoin and its ecosystem are all about.  If you are interested in contributing to the Bitcoin ecosystem you can check out the Bitcoin website.

Be sure to catch more of our guide articles as we learn more about the crypto ecosystem.