According to one recent report, 16% of Americans have invested in, traded, or used some form of cryptocurrency. Are you interested in joining those ranks?
If so, then you’re bound to have plenty of questions. Though cryptocurrencies like Bitcoin are growing in popularity, there’s still a ton to learn about them. Thankfully, it’s not too difficult to break down the basics.
Today, we’re sharing a comprehensive Bitcoin for Beginners guide. Read on to discover everything you need to know as you get started with this alternative form of investing.
What Is Cryptocurrency?
Before we dive into how to use Bitcoin, let’s start with an even broader question. What is a cryptocurrency, and how does it work?
In short, this term is used to cover a range of different types of digital or virtual currencies. Most cryptocurrencies are established on decentralized networks that use blockchain technology. The blockchain is an electronic, distributed ledger maintained by a widespread and disparate network of computers.
Unlike a traditional bank or credit union, cryptocurrencies are not issued by a central authority. This means there is no third party to contend with, which can make transactions simpler, easier, and less expensive to complete.
Bitcoin is a specific type of cryptocurrency. Others in this realm include:
While there are different coins and tokens entering the race, Bitcoin remains one of the most popular types of digital currencies. Let’s take a closer look at how it works.
What Is Bitcoin?
Now that we’ve covered cryptocurrency for beginners let’s discuss its star player: Bitcoin!
Bitcoin is a type of digital currency that is generated when users manage to solve pre-designated mathematical algorithms. When they solve the challenge, the network will distribute the coins into their cryptocurrency account.
Each mathematical problem refers to a 64-digit hexadecimal number. This number is called a “hash.” The answer to each equation will be less than or equal to the overarching target hash.
Why do users have to perform such complicated measures to simply access Bitcoin? This process helps verify each transaction and keeps the greater Bitcoin network secure. If someone wants to make a new transaction on the network, they must play and win this game before they can do so.
This measure prevents the ledger from falling victim to unscrupulous hackers who simply want to cause damage to the network and access the digital coins for themselves.
Put simply. Bitcoin is a number. It doesn’t carry any intrinsic value, which means that its worth can change at any time. This helps to explain why the cryptocurrency market as a whole can be so volatile.
Coin and token values are largely dependent on public perception. When feelings about the economy are high, then Bitcoin values are likewise inflated. However, when economic concerns loom heavily, values can drop.
The History of Bitcoin
Between 2008 and 2009, many prominent global banks, such as Lehman Brothers, began to collapse. This was referred to as the Global Financial Crisis.
When this happened, governments had to take action. Bailing out the financial institutions required the use of taxpayer money, which raised mass concern. This movement shone a spotlight on the structural inadequacies of the modern financial system.
Individuals began to realize how fragile the system was and how prone it could be to disaster. Soon, it became evident that decentralization was necessary. The idea was that if consumers could minimize their reliance on major banking systems, their money would ultimately be more secure.
A person by the name of Satoshi Nakamoto issued a paper describing their vision of how the new system would work. The premise? A new peer-to-peer (P2P) system would be created, wherein users could access and trade funds without any type of third-party confirmation.
In time, Nakamoto argued in a detailed whitepaper that this new system would lessen our reliance on traditional banks. The network would be called the “blockchain,” and it would be based on a network-type ledger.
Bitcoin and the Blockchain
As mentioned, Bitcoin isn’t issued by any type of central bank or backed by a specific government. Rather, it’s issued on the blockchain.
Each unit of data within the blockchain is called a “block.” Each block contains detailed information about each Bitcoin transaction. Some of the key points listed include:
- Buyer name
- Seller name
- Time and date of transaction
- The total value of the transaction
In addition, each block will also reveal a unique ID code associated with the exchange. As users continue to buy and sell Bitcoin across the blockchain, those entries are added to the network in chronological order.
This forms an ongoing, always-evolving digital “chain” of individual blocks. The first block on the blockchain was mined on January 3, 2009.
Another important aspect of the blockchain is that its details and records are public. This serves as a type of accountability standard, allowing users to work together in an effort to spot inconsistencies, errors, or potential hacks. Before a new transaction is added, it must be approved by a majority of active miners.
To verify the transaction, miners will check to make sure that the user’s wallet and transactions all appear to be legitimate. They’ll double-check the ID codes against the designated encryption patterns to confirm that everything lines up. Note that because these codes are so long, it’s nearly impossible to counterfeit them.
Likewise, anyone can edit the blockchain by adding a new transaction.
When a change occurs at any time, everyone’s copy of the blockchain simultaneously updates. In this way, you can think of the blockchain as a Google Doc, with user permissions turned to “Editor.” If you make one change, everyone with that link will see the new information in real-time.
Public and Private Keys
At its core, Bitcoin is a public-key system. The network is encrypted and decrypted via sets of public keys, each of which requires a separate digital signature.
Public keys are essentially user addresses. The strings of letters and numbers are randomly generated and difficult to replicate. Users rely on their public key as a sort of identification system, similar to an email address or social media handle.
If a Bitcoin miner wants to send coins to another user, they must use their digital signature to sign a hash of the transaction. Then, they’ll enter the next owner’s public key, adding those numbers to the end of the coin. When the payee receives the coins, they will confirm this chain and verify the signatures.
In addition to public keys, a key pair also includes a private key. Once they receive funds via their public key, they must use a private key to send those funds somewhere else. Unlike public keys, private keys are confidential and should remain that way.
By protecting this code like a password, miners can ensure that no one else can access their Bitcoin earnings or send them to someone else without permission.
Transformation Over Time
In the first few months of its existence, Bitcoin had zero monetary value. Rather, miners would simply solve those complex equations to find the coins on the blockchain.
Then, once they uncovered new coins, they would exchange them for fun. The early activity also centered around monitoring Bitcoin transactions, with miners in place to verify that each one was accurate and legitimate.
On May 22, 2010, a miner actually used Bitcoin as an alternative form of currency for the first time. On that day, a Florida man named Laszlo Hanyecz used his earnings to purchase two Papa John’s pizzas. The purchase cost Hanyecz 10,000 Bitcoin or around $40 U.S. dollars.
As commercial entities weren’t yet accepting Bitcoin as a form of payment, Hanyecz couldn’t actually spend the digital coins himself. Instead, he traded them across the blockchain to a user named Jeremy Sturdivant. In return for receiving the Bitcoin, Sturdivant agreed to purchase and send the pizzas himself.
Now, those 10,000 Bitcoins are worth around $365 million! Each year, on May 22, miners and cryptocurrency enthusiasts pay homage to the event, declaring it Bitcoin Pizza Day. Today, a growing number of retailers and entities are allowing users to purchase their goods and services through digital currencies.
In fact, you can even purchase Bitcoin postage! This system allows you to exchange your Bitcoin to buy and print shipping labels for the U.S. Postal Service (USPS), United Parcel Service (UPS), and more.
Learn More About Bitcoin for Beginners
The world of digital currency can be challenging to navigate. However, it doesn’t have to be overwhelming. Once you know a little more about how these transactions work, you can be well on your way toward pursuing them!
As you mine, trade, and spend your coins, refer back to this guide on Bitcoin for beginners. We’re here to keep you updated on this topic, as well as other tech trends you need to know. For similar guides, check out our other cryptocurrency articles!