Bitcoin for beginners

Most people have read or heard something about bitcoin. But what exactly is bitcoin? What makes bitcoins so popular? What can you do with bitcoin? And maybe the most important question, how do you get bitcoins? Before we start to explain the power of bitcoins and the blockchain technology, you should know that there are thousands of coins. Almost every day a new coin hits the market. Some are great, most are crap, and some are just scam or for fun. 

In this article we will focus on bitcoins and the underlying technology called the blockchain. You will learn:

  • How the bitcoin blockchain operates
  • Bitcoin mining and sending bitcoins
  • How to get your own bitcoin bank account (wallet)
  • How to buy and trade bitcoins
  • What you can do with a bitcoin
  • Other coins and upcoming updates

1. The blockchain

The blockchain is the underlying technology of bitcoin. But not only bitcoin, almost every cryptocurrency coin uses the blockchain to function. Some coins use the bitcoin blockchain technology (copy of the bitcoin blockchain). Other coins are implementing new features and provide different services. Blockchain technology can be used for many things:

  • Storing rental contracts
  • Storing all kinds of reports
  • Thousands of decentralized applications
  • Can function as a currency and much, much more.

All these things normally require an intermediate party to function. For example, you need a bank to transfer your money. And the bank needs payment processors to transfer this money. If you want to store things like contracts or financial statements you need a notary. With the blockchain, these intermediate parties are no longer needed. Blockchain technology isn’t just something new. It is revolutionary, like the invention of the internet. Blockchain technology will be used for many things in the near future. It has no boundaries and in the case of bitcoin no owner. 

2. One big database

To explain what the blockchain really is we'll take a look at our current monetary money system. Every bank in the world has a database which stores every transaction they make. All these databases are essentially connected to central banks and sometimes governments. You could say that central banks are in charge of all the money. They can decide which transactions are valid or not. Banks and governments also have the power to reverse transactions or to block your account for whatever reason. Even though you are the owner of your hard earned money, these “institutions” have the power to deny access to your money. Every transaction that takes place needs to go through some intermediate parties. For example, a bank needs a payment processor to handle the money. If you want to transfer money to another part of the world you money will flow through a lot of intermediate parties and systems before it arrives in the destination bank account. 

The blockchain operates fundamentally differently. The blockchain is one big database everyone has access to. The data in the blockchain is visible to everyone and cannot be changed. Every new transaction that takes place is publicy visable in the blockchain. Banks and intermediate parties are no longer needed to send money around the world. There are no dedicated parties who control or own the blockchain. The blockchain is decentralized. This is a revolutionary new way of transferring money.

Source:  Wikipedia

This is an example of the bitcoin blockchain. The green square is called the genesis block. This is the first block in the chain. The black squares are the current blockchain. The purple squares are orphaned blocks. Orphaned blocks are blocks no longer being used (for example when the blockchain gets an update). You'll learn more about future updates later on.

3. Printing money and interest

You probably know the phrase “borrowing money costs money”. But that is only half of the truth. “Borrowing money creates money” is a much better phrase. Because that is exactly what happens when you borrow money for a mortgage. The interest you need to pay for your mortgage is money that does not exist. It’s created out of thin air. Our monetary money system is nothing but an accumulation of debts. Without debt, money does not exist. Every dollar, euro or any valuta you own is the debt of someone else. Because money is created out of thin air, every dollar and euro will decrease in value over time. To counter this, central banks print money and try to regulate inflation/deflation. With inflation, everything gets more expensive over the years. There is no limit on how much money can be created. An example of today (2021) is the FED and European central banks buying up assets with billions of dollars and euros trying to control inflation. 

With bitcoin this is fundamentally different. There are a maximum of 21 million bitcoins. There can never be more than 21 million bitcoins in circulation. That means no bitcoins can be created out of thin air.  You can still lend out bitcoin with interest. Only the person who needs to pay the interest needs to pay this interest with one of the 21 million bitcoins available. 

4. Bitcoin mining and sending bitcoins

The bitcoin blockchain operates on the POW algorithm. POW stands for Proof of Work. In order for a new block to be accepted by the blockchain users, bitcoin miners must complete a proof of work which covers all the data in the block. This proof is hard to produce but easy to verify. Bitcoin miners are “mining” the blockchain. As a reward they may find a new block. This new block contains a specific amount of bitcoins. The miner(s) who completes the proof of work successfully will earn these bitcoins. But completing the proof of work and finding a new block is very difficult. The amount of miners corresponds with the difficulty of the network. That means the more miners there are, the higher the difficulty will be. That's why most miners join a mining pool. A mining pool is a pool of many different miners (people) around the world mining together to increase the chance of finding a new block. If a new block is found, the coins will be divided based on the hash power the miners provided.

Finding new blocks is one important part. But miners also handle transactions on the network. If you want to send bitcoins to someone else, this transaction needs to be validated by miners. But mining costs a lot of money (hardware and electricity). That's why you need to pay a transaction fee. The more transaction fee you pay, the faster your transaction will be validated. At bitcoin fees you can see how much fee you need to pay. If you are not in a hurry then it might be a good idea to save some bitcoin by paying less transaction fees. It might take a few hours before your bitcoins arrive but can save you money.

Bitcoin miners have mined 16.5 million bitcoins since 2009 (at this time of writing in 2017). That means there are still 4.5 million bitcoins waiting to be mined. When the last bitcoins will be mined is hard to say. It might take a few hundred years. Mining difficulty will increase when more people are mining bitcoins. The demand will increase when the price goes up. There are basically only 21 million people in the whole world who can hold 1 bitcoin. Because there are simply only 21 million bitcoins. On blockchain.info you can look up bitcoin addresses, find transactions and much more.

4.1 Bitcoin halving

Every 210.000 blocks the reward from mining a bitcoin block is halved. Meaning miners only get 50% of the reward after the halving took place. The last halving took place in 2020 and the next halving is expected in 2024. Currently you get 6.25 BTC per block and will be reduced to 3.125 BTC in 2024.  Important for miners is checking if mining operations are still profitable. Mining hardware costs a lot of money. Back in 2009 you could find thousands of bitcoins with just a single computer. Now you need a complete storage facility full of hardware just to find one. The price of power is a strong factor. It costs a big amount of current to power all the hardware. The price you have to pay per kilowatt hour is very important. The price is expected to rise after each halving but it becomes increasingly difficult to mine as more and more people start buying and mining bitcoins.

5. Your own bitcoin bank account

To use the bitcoin blockchain you need to have a bitcoin bank account. This personal bitcoin account is called a wallet. You can install a wallet on your computer/laptop or smartphone. There are also services who can manage your wallet for you. A wallet is just a piece of software that connects to the bitcoin blockchain. Some wallets are lightweight. That means that they can operate without downloading the complete blockchain. Some wallets do require you to download and store the complete blockchain. Make sure you have enough free space on your device. You should be very cautious before choosing the right wallet. You are the only one responsible for your wallet. If you lose your passwords or secret key you lose everything. And there is no way to get your bitcoins back. 

The key to your wallet is called the private key. The private key enables you to always get access to your wallet. Even if your computer breaks down. You can simply install a new wallet and import the private key to get your coins back. The best way to remember this:

“If you do not own the private key, you do not own your bitcoins”

Third party services may save your bitcoins for you. But they also keep your private key. If for any reason these third parties stop to exist you will lose everything. Sometimes you need to store your bitcoins in a wallet without owning the private keys. For example, if you want to trade bitcoins in an online exchange you need to transfer your bitcoins to the exchange wallet. You'll learn more about this later on.

6. Exodus bitcoin wallet

Exodus is a great way to store your bitcoins locally. You can also store multiple other coins in your exodus wallet. Exodus is lightweight and does not require downloading the complete blockchain.

In this example, this person's wallet consists of bitcoins and EOS tokens with a total value of $512. From your wallet you can transfer bitcoins to other bitcoin wallets:

Exodus is very simple to use. And you have complete control over your private keys. Backups are created automatically. You’ll receive an email when a new backup is created. But where can you buy bitcoins in the first place?

7. How to buy and trade bitcoins

Now you have a local bitcoin wallet installed and ready. You can buy a bitcoin in a few ways:

  • On an bitcoin exchange
  • Bitcoin trading website
  • Buying from friends, relatives or strangers

7.1 Bitcoin exchange

A bitcoin exchange is a place where you can trade a lot of different coins with other people. Some exchanges also trade in fiat money like dollars, euros and yuan. These are the main currencies used on almost every exchange. There are a lot of exchanges you can choose from. Many people use coinmarketcap to find the cheapest exchange or the one with the most volume. If you select bitcoin and select the “markets” tab you will see every tradable pair:

You can select on pair listing and then you can quickly see the best exchanges to buy bitcoins:

As you can see there can be a big price difference. For example, at LiteBit.eu you need to pay $4563 for one bitcoin. At kraken you need to pay $4118 for one bitcoin. Also notice the volume on each exchange. Buying bitcoin at exchanges is overall probably the best way to go. But you need to set up an exchange account first. There are easier ways to buy bitcoins but that comes with a price.

7.2 Bitcoin trading website

The most simple way to buy your bitcoins is on a local bitcoin trading website. Almost every country has a local website in your native language where you can buy bitcoins. Now it’s impossible to list the best bitcoin trading website for every country. In the Netherlands, you can buy bitcoins at bitonic. You can pay with ideal, put in your bitcoin wallet address and you receive bitcoins quite fast. It's easy and reliable. We would advise you to seek out the best local trading website for your country. 

Although this is the most simple option, it's also the most expensive one. Bitcoin websites like bitonic are asking a high fee for every purchase. You'll always pay more than bitcoin is worth at that exact moment. So if you want to save some money, it's best to buy bitcoin on exchanges. For example, coinbase is a very reliable exchange to buy bitcoins with dollars or euros. But never trust anything you read online. Always check out the website where you want to buy bitcoins first. Cryptocurrency is new and hot, there are many websites around trying to scam you. If there are no local bitcoin trading websites, then we strongly advise you to buy your bitcoins at a trusted exchange. You can use coinmarketcap to find the biggest exchanges:

At this time of writing (2017), bitfinex is by far the biggest exchange where you can buy and trade bitcoins with USD. The volume of the market is very important. You can see the total volume on the right side in $. The prices can vary a lot. It’s best practise to just buy your first bitcoins at a big trusted exchange. Once you get the hang of it you can try other exchanges. 

7.3 Trading bitcoins

Basically, buying bitcoins with USD or EUR is called trading. You swap fiat money for bitcoins or the other way around. You can also buy other coins with your bitcoins. There are hundreds of coins you can buy with bitcoins. Just go to coinmarketcap and you'll find the top 100 best coins based on the market cap. Market capitalization means how much money there is in the market. For example, the current market cap (2017) for bitcoin is 67.7 billion. The currency circulation is 16.5 million bitcoins. The market cap is based on the current supply of the coin times the current price. The current price of bitcoin is $4102 x 16.5million bitcoins = 67.6 billion market cap. At this time of writing, bitcoin is still by far the biggest coin:

You can buy any of these coins on most exchanges. If you want to know where you can trade a specific coin, just click on the coin and select the “markets” tab. You’ll see an overview of all exchanges where you can buy the coin:

 

How you should trade, read charts and order books is out of the scope for this blogpost. But if you are interested in trading you should read our blog posts regarding this subject:

8. What can you do with bitcoin?

Is there any purpose for bitcoin? Many people say there is no real world application for bitcoin at this moment. And they are correct. There are a lot of companies accepting bitcoin as payment. But behind the scenes they just swap your bitcoins for fiat money like dollars or euros. Because the price of bitcoin is very volatile, there is no big company in the world who can risk losing all their money. For example, at some point in july 2017 the bitcoin price was at $1800. One month later the bitcoin price reached an all time high of $4500. Prices can also tumble the other way. But bitcoin can become a new currency in the future.

Today, bitcoins are mostly used for trading and making money. You can earn money in many different ways with bitcoins. You could just buy some bitcoins and hold them for a few years. One bitcoin might be worth a lot of money someday. There are some estimations out there that bitcoin might reach $50.000 - $1.000.000 in a few years. And actually that could happen. Because there are only 21 million bitcoins available. When the demand rises the price will go up. It’s impossible to raise the bitcoin cap. No bitcoins can be printed. If the demand is high enough, the price could go well beyond $1.000.000. But for now, most people use bitcoins for trading. Other people just buy and hold and hope the price will go up in the long term. 

Update 2021: Bitcoin reached $67.000 this year. 

9. Other coins and upcoming updates

As mentioned before, there are a lot of different coins. Bitcoin was the first but there are some very innovative new coins. Ethereum is at the time of writing the second biggest coin with a market cap of 28 billions dollars. Every coin uses the blockchain as the core algorithm. But Ethereum is fundamentally different from bitcoin. For example, Ethereum uses smart contracts as one of their biggest features. A smart contract is like a virtual contract. There are many real world examples that can benefit from this. Because smart contracts are stored in the blockchain, everyone can see and validate these smart contracts.

Let’s say someone wants to rent a car from you. You send up a smart contract. In this smart contract the duration and payments of the contract are set. This contract will enter the blockchain and will be verified by other users.The first two months you receive your monthly rent that both parties agreed upon in the smart contract. But after month three,  you did not get any payment. The person who rented your car decided to steal your car and stopped paying the rent. As a result, the smart contract is not valid anymore because you did not receive any payments. Once the smart contract is no longer valid the car will shut down and can no longer be used.

This is one of many examples to use a smart contract. You could also use smart contracts for a voting system. Everybody could vote from their homes. Every vote is then verified on the blockchain. These smart contracts are impossible to manipulate. Although a smart contract can have bugs since it's just a piece of software. This is just one example of hundreds of new coins. Every coin has its own unique proposition in the market. Although most coins are just bitcoin alternatives. Be aware that there are a lot of scam coins around. They just exist to make the owner rich. Only buy coins you trust. 

9.1  Upcoming and future updates

Blockchain technology can be very difficult to understand. There are a lot of technical terms and most people have no clue what they actually mean. On 1 aug 2017 a hard fork on the bitcoin blockchain took place. A hard fork is a split of the blockchain. Since bitcoin is not owned by anyone, anyone can make changes to the blockchain and split of the original chain. This can only be successful if enough users and miners support the new blockchain. The following happened on 1 aug 2017:

 

  1. Genesis bitcoin block (the first block in the chain)
  2. The bitcoin blockchain continues (the black squares represent the bitcoin blockchain
  3. Orphaned bitcoin blocks (Old block which are no longer used for whatever reason)
  4. On 1 aug 2017 the bitcoin blockchain was split due to a hard fork into BTC and BCH (Bitcoin cash). 

Before 1 aug 2017 there were some debates about a particular update called SegWit. SegWit stands for segmented witness and has some new features. A large group of companies and particular miners did not want to implement SegWit in the bitcoin blockchain. In the end SegWit did activate on the bitcoin blockchain. This happened 1 aug 2017. Beside all the fuss around this SegWit update, there are other people who are not happy with the current bitcoin blockchain. So they decided to create a new coin called Bitcoin Cash.

This new coin got a lot of attention. And on 1 aug 2017 the hard fork took place and the bitcoin blockchain was split. The original bitcoin blockchain just keeps functioning like before. Only since 1 aug 2017, SegWit has been activated. Bitcoin cash is the new blockchain. This blockchain does not use SegWit. Also the block size on the bitcoin cash is 8 MB instead of 1MB on the original bitcoin blockchain. To summarize:

  • The bitcoin blockchain has split on 1 aug 2017
  • Bitcoin cash was created and now exists next to bitcoin
  • The bitcoin cash blockchain does not use segmented witness and has a bigger block size

So what happened to all the bitcoins after the blockchain split? The new blockchain is essentially just a copy of the original blockchain. That means that everyone who had bitcoins in their wallet before 1 aug 2017 has the same amount in bitcoin cash after 1 aug 2017. For example, you had 100 bitcoins in your wallet before 1 aug 2017. Since the new blockchain is a copy you also have 100 bitcoin cash to be claimed. At the time of writing (2017), 1 bitcoin cash costs around $750 dollars. If you want to know more about hard and soft forks you can read our article: Hard and soft forks for beginners. Do note that not only Bitcoin can be hard forked. Basically any coin can be hard or soft forked and will happen multiple times in the future.

Now you have a basic understanding of bitcoin and underlying aspects.

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