Bitcoin for beginners

An explanation of the new vocabulary

Terminology

Some Bitcoin related words you might not be familiar with:


Address
A Bitcoin address is similar to a physical address or an email. You can have as many addresses as you like. Your wallet software will generate unique addresses for you. It is the only information you need to provide for someone to pay you with bitcoin. For the sake of privacy, if you have to give any personal details to purchase goods or services, it is recommended that each address should only be used for a single transaction.

Altcoin
Altcoins are other cryptographic currencies that are based on the Bitcoin protocol, but using their own respective blockchains. Noteable altcoins include Litecoin, Peercoin and Namecoin, but there are hundreds of others. Not all altcoins are worth spending time on. Be sure to research the potential merits and flaws of any altcoin before investing in it.

Block
A block is a record in the blockchain that contains and confirms many waiting transactions. Roughly every 10 minutes, on average, a new block including transactions is appended to the blockchain through mining.

Blockchain
The blockchain is a public record of Bitcoin transactions in chronological order. The blockchain is shared between all Bitcoin users. It is used to verify the permanence of Bitcoin transactions and to prevent double spending.

BTC
BTC is the common unit of Bitcoin currency. It can be used in a similar way to USD or CAD for dollars instead of a dollar ($) sign. Bitcoins are divisible to 8 decimal places, but that isn't particularly easy to read for smaller amounts, so some vendors and websites are moving to displaying prices in 'bits' (sometimes displayed as uBTC or microbits).

1 bit is equal to 0.000001 BTC, so you need a million bits to make a whole bitcoin.

As an example, 0.00075045 BTC is the same as 750.45 bits, which is considerably easier to read.

It could also be displayed as 750 bits and 45 satoshis, or even 75045 satoshis. Satoshis are the equivalent of pennies. 100 satoshis make a whole bit.

But bits will likely be the most common standard, as most people are generally accustomed to having two decimal places for pennies in their existing currencies.

Confirmation
Confirmation means that a transaction has been processed by the network and is highly unlikely to be reversed. Transactions receive a confirmation when they are included in a block and for each subsequent block. Even a single confirmation can be considered secure for low value transactions, although for larger amounts like 1000 US$, it makes sense to wait for 6 confirmations or more. Each confirmation exponentially decreases the risk of a reversed transaction.

Cryptography
Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already uses cryptography. In the case of Bitcoin, cryptography is used to make it impossible for anybody to spend funds from another user's wallet or to corrupt the blockchain. It can also be used to encrypt a wallet, so that it cannot be used without a password.

Double Spend
If a malicious user tries to spend their bitcoins to two different recipients at the same time, this is double spending. Bitcoin mining and the blockchain are there to create a consensus on the network about which of the two transactions will be confirmed and which will be denied. The blockchain makes it impossible for both payments to be confirmed valid.

Exchange
Exchanges are websites that allow you to trade other currencies for bitcoin. Some exchanges allow traditional fiat currencies, like dollars or euros, to be traded for bitcoin. Some just allow trading for Altcoins. Caution should be advised when dealing with exchanges, as they control the private keys for the addresses they use to store your money. Your bitcoins can be lost or stolen if someone else controls the private key. Exchanges are not the safest way to buy bitcoins.

Faucet
Faucets are websites which give away small amounts of bitcoin, known as micropayments, for free. This lets new users experiment and learn how to use Bitcoin before investing any of their own money. We will provide some details and links to faucet sites on a later page.

Hash Rate
The hash rate is the measuring unit of the processing power of the Bitcoin network. The Bitcoin network must make intensive mathematical operations for security purposes. When the network reached a hash rate of 30 million Gh/s, it meant it could make 30 trillion calculations per second.

Micropayments
Because a single bitcoin is divisible to eight decimal places, you can send tiny amounts of money, even fractions of a penny, over the network. This has applications for internet advertising, charging for a particular service by the amount of time used, or charging per visit to a particular website. It also allows Bitcoin faucets to sends small amounts of bitcoin to new users so they can become accustomed to using Bitcoin.

Mining
Bitcoin mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money.

Paper Wallet
A paper wallet is a mechanism for storing bitcoins offline as a physical document that can be secured like cash or anything else of real-world value. Paper wallets are generally created by printing a brand new public address and private key onto paper, and then sending bitcoins from a "live" wallet to the printed wallet's public address for safekeeping. If good security practices are followed, paper wallets are one of the safest ways to to store bitcoins.

Peer-to-Peer / P2P
Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.

Private Key
A private key is a secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. Your private key(s) are stored in your computer if you use a software wallet; they are stored on some remote servers if you use a web wallet. Web wallets are generally less secure than storing bitcoin on your own computer. Caution should be advised when dealing with any third party. Private keys must never be revealed as they allow you to spend bitcoins for their respective Bitcoin wallet.

Signature
A cryptographic signature is a mathematical mechanism that allows someone to prove ownership. In the case of Bitcoin, a Bitcoin wallet and its private key(s) are linked by some mathematical magic. When your Bitcoin software signs a transaction with the appropriate private key, the whole network can see that the signature matches the bitcoins being spent. However, there is no way for the world to guess your private key to steal your hard-earned bitcoins.

Wallet
A Bitcoin wallet is loosely the equivalent of a physical wallet on the Bitcoin network. The wallet contains your private key(s) which allow you to spend the bitcoins allocated to it in the blockchain. Each Bitcoin wallet can show you the total balance of all bitcoins it controls and lets you pay a specific amount to a specific person, just like a real wallet. This is different to credit cards where you are charged by the merchant.


Next section ➜ Security


Reference


Address

Altcoin

Block

Blockchain

BTC

Confirmation

Cryptography

Double Spend

Exchange

Faucet

Hash Rate

Micropayments

Mining

Paper Wallet

Peer-to-Peer / P2P

Private Key

Signature

Wallet



Bitcoin Price

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




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