Bitcoin for beginners

An introduction to digital currencies

Introduction

If you're new to Bitcoin and the world of digital currencies, this site is here to help you make sense of it all.


This is for anyone who recognises that money is broken and needs to change. If you are tired of debt, austerity, quantitative easing, corruption and other methods of manipulation and control, you're in the right place. Welcome to a new economy beyond the control of banks and governments.


Forget most of the things you've heard about Bitcoin. Much of the media coverage has been poorly researched and most of the common myths out there are easily debunked. Here we aim to provide an unbiased summary of what Bitcoin is and what it can do. We'll also explain some of the common pitfalls that can arise as a result of the differences between Bitcoin and the kind of money you're used to dealing with.


The first thing to understand is that Bitcoin is not just a currency or an economy, but also a consensus network. It is the first decentralised peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.


The basic concept behind Bitcoin is that there is one sender and one recipient. It uses mathematical encryption, or cryptography, to securely send and publicly record transactions. Cryptography ensures that only the owner of the bitcoins has the authority to spend them. It's like if each banknote in your pocket had a 100-digit combination lock on it that couldn't be removed without destroying the bill itself. Bitcoin is that secure.


But the second way of securing the system, called the blockchain, is the major innovation. The blockchain is a public ledger; a record of confirmed transactions. The blockchain is shared between all users on the Bitcoin network. It is used to verify every single transaction and makes it impossible to spend the same coin twice, or make copies of coins. The blockchain also means that you don't have to be online to receive a payment. Your wallet software will simply update your balance next time you run it.


The Bitcoin network undertakes intensive mathematical calculations to remain secure. The more users Bitcoin has, the faster the network can perform. The hash rate is the measuring unit of the processing power of the Bitcoin network. As of March 2014, the network reached a hash rate of 30 million Gh/s, or giga-hash-per-second. This means it can make 30 trillion calculations per second. Some people make the false assumption that Bitcoin has no intrinsic value, but its value lies in the massive computational power of the network and the usefulness of being able to transport money almost instantly, anywhere in the world.


To use Bitcoin, you need a wallet. You can install wallets on computers, laptops, smartphones or other mobile devices. A Bitcoin wallet is loosely the equivalent of a physical wallet on the Bitcoin network. It allows you to transact with other users. It gives you ownership of a Bitcoin balance so that you can send and receive bitcoins. A wallet can contain multiple addresses, similar to account numbers. An address is the only information you need to provide for someone to pay you with bitcoin. Your address is your public key to allow you to receive bitcoins, but your private key remains securely hidden as it allows you to send bitcoins. Never give out your private key.


An example
of a Bitcoin
address in QR
code format

An address looks like this in text format:
17qK9JftEQoTzEeHxVwnRJLHZhG9k6ezaA


It can also be represented as a QR Code to use on smartphones.


If you wanted, you could send some bitcoin to this address, using either the text format or the QR code. If the private key for this address was also posted, it would be the equivalent of leaving a physical wallet outside on the floor. Anyone could move funds from that address into their own address. But without the private key, only the owner of that address can control the funds contained within it.


Bitcoin isn't the only digital currency out there. You may have heard of other cryptocurrencies, or "altcoins", but they all work in largely the same way. In fact, many of them are based on Bitcoin's open-source code. Once you understand Bitcoin, you'll understand all the others as well.


Why should I be interested in Bitcoin?

People have a variety of reasons for getting into Bitcoin. Some people are just using Bitcoin as a commodity to speculate, buying it cheap in the hope that they can sell it later for a higher price. Others just enjoy the convenience of being able to send money anywhere, cheaply. Many people like the principles behind digital money, seeing it as a tool for social and political revolution in the sense that decentralised money can't be controlled by corrupt governments and banks. Others have moved to Bitcoin out of necessity as their nation's economies are failing and the value of their real-world money is diminishing rapidly.


In most countries around the world, the rate of inflation is much higher than the rate of interest people earn on their savings. In effect, you're getting poorer by the day as the money you have becomes worth less and less. Because of this, it doesn't make sense to keep all your savings in the bank, so people are diversifying some of their funds into other things like digital currencies, physical assets like property and precious metals like gold and silver. A few also believe that the global debt-based monetary system we currently use isn't sustainable and might eventually collapse at some point.


When economies collapse, the first thing a government will do is place restrictions on money supply. Some people already live in places where there are limits on the amount they can withdraw from their bank each week. There are also restrictions on moving money out of the country. Many people believe that they live in places where something like this could never happen, but that isn't a safe assumption in an uncertain global economy. If it does happen to them, they won't be able to easily access their money. With digital money, you'll be able to avoid such restrictions. It's a sensible precaution to have contingency plans in the event of a worst case scenario.


The problem with conventional currencies is that they require trust in a third party to make it work. The central bank must be trusted not to debase the currency. Banks must be trusted to hold our money, keep it secure and transfer it electronically. Governments must be trusted to maintain their own domestic economies and not to meddle in the affairs of other countries.


Bitcoin has no central bank or authority. It's guaranteed instead by the laws of mathematics. Unlike currencies that are "backed" by a central authority, Bitcoin cannot become insolvent. There's no one person who can abuse the system. It doesn't rely on a "trusted" third party to make it work. You are in direct control of your money. Nobody can print more, nobody can re-use the coins simply by making a copy, and nobody can use anyone else's coins without having direct access to their private keys.


What are the advantages of Bitcoin?

Payment freedom - It is possible to send and receive any amount of money instantly anywhere in the world at any time. No bank holidays. No borders. No imposed limits by banks or governments. Bitcoin allows its users to be in full control of their money.


Very low fees - Bitcoin payments are currently processed with either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster confirmation of transactions by the network. Additionally, merchant processors exist to assist merchants in processing transactions, converting bitcoins to fiat currency and depositing funds directly into merchants' bank accounts daily. As these services are based on Bitcoin, they can be offered for much lower fees than with PayPal or credit card networks.


Fewer risks for merchants - Bitcoin transactions are secure, irreversible, and do not contain customers’ sensitive or personal information. This protects merchants from losses caused by fraud or fraudulent chargebacks, and there is no need for PCI compliance. Merchants can easily expand to new markets where either credit cards are not available or fraud rates are unacceptably high. The net results are lower fees, larger markets, and fewer administrative costs.


Security and control - Bitcoin users are in full control of their transactions; it is impossible for merchants to force unwanted or unnoticed charges as can happen with other payment methods. Bitcoin payments can be made without personal information tied to the transaction. This offers strong protection against identity theft. Bitcoin users can also protect their money with backup and encryption.


Transparent and neutral - All information concerning the Bitcoin money supply itself is readily available on the blockchain for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent and predictable.


Depoliticised money - Regulation of money supply needs to be depoliticised. Governments persuing their own domestic interests have little to no effect on Bitcoin. This is beneficial in countries where inflation is having a damaging impact on the public's spending power. Money is often used by governments as a system of control, but Bitcoin allows people to protect themselves from the many corrupt regimes around the world.


What are the disadvantages of Bitcoin?

Degree of acceptance - Many people are still unaware of Bitcoin. Every day, more businesses accept bitcoins because they want the advantages of doing so, but the list remains small and still needs to grow in order to benefit from network effects. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology.


Lack of understanding - Unfortunately, many people have believed the unfounded claims they've read in the media, labelling Bitcoin as a tool for drug lords, money launderers and other illegal activites, but this is just indicative of a lack of understanding. It will take time to shed this unwarranted reputation. The internet itself was largely misunderstood at one point, but it's now used by almost everyone. In time, the same will likely apply to digital currencies.


Price volatility - The total value of bitcoins in circulation and the number of businesses using Bitcoin are still very small compared to what they could be. Therefore, relatively small events, trades, or business activities can significantly affect the price. Consequently, keeping your entire savings with Bitcoin is not recommended at this point. The key to a stable financial portfolio is diversifying. Your investments could include a mix of physical assets, fiat savings, precious metals and digital currencies. Bitcoin should be seen like a high risk asset, and you should not store money that you cannot afford to lose with Bitcoin. In theory, this volatility will decrease as Bitcoin markets and the technology matures. Never before has the world seen a start-up currency, so it is both difficult and exciting to see how it will play out.


Ongoing development - Bitcoin software is still in beta with many features in active development. New tools, features, and services are being developed to make Bitcoin more secure and accessible to the masses. Some of these are still not ready for everyone. Most Bitcoin businesses are new and still offer no insurance. In general, Bitcoin is still in the process of maturing.


Some technical knowledge required - If you aren't comfortable with using computers or the internet, or if you often have issues with viruses affecting your computer, or if you have ever previously fallen victim to a phishing scam and accidentally gave out password or account details, Bitcoin may not be a suitable payment platform for you.


Learning curve - If cash was a brand new invention just made available to the public today, it's almost certain that people would be doing silly things with it and losing their money. The same can easily happen with Bitcoin if you are not careful. It can take a little bit of time to adjust to the differences between digital money and regular money, but we will outline the main things you should know after we've covered some of the basic vocabulary.



Next section ➜ Terminology


Key Points

Bitcoin is open-source
Its design is public, nobody owns or controls Bitcoin and everyone can take part.

Peer-to-peer transactions
Send money almost instantly without the need to use a bank account or credit card.

Worldwide payments
Bitcoin can be used anywhere with internet access, all over the globe.

No Middlemen
Transactions are completed directly between the sender and the receiver via the peer to peer network.

Impossible to counterfeit
The blockchain stores a copy of each transaction, so coins can't be duplicated.

Finite supply
There will only ever be 21 million bitcoins. No one can create more.

Highly divisible
Unlike cash or or precious metals, bitcoins can be divided into small pieces, up to 8 decimal places.

Mobile payments
Send and receive Bitcoin using an app on your smartphone. QR codes can be scanned to make payments.

Zero or low fees
Except for special cases like very small payments, there is no enforced fee to send bitcoins.



Bitcoin Price

The average price of a bitcoin in US Dollars ($) is currently: