What is Bitcoin: A Guide For Beginners
Are you new to bitcoin? If so don't worry, we got your covered! Below we put together a simple and easy to read guide that explains what bitcoin is and why it’s so revolutionary.
1. What is "Currency"?
Before we talk about bitcoin and cryptocurrency it's important to define what currency actually is. Currency means “money currently in use”. So everything from the US dollar to the European euros, Russian rubles, Japanese yen and beyond are all government created money known as “fiat currency”.
“Fiat” just means an official order or authorization. Meaning the dollars, or euros or any other currency for that matter have value because the government orders that it be. It’s what is known as “legal tender” – coins or banknotes that must be accepted if offered as payment.
So the value of today’s money actually comes from a legal status given to it by a central authority, in this case, the government. And so the trust model has changed, from trusting someTHING to trusting someONE (in this case, the government).
Fiat money has two main drawbacks:
- It is centralized – You have a central authority that controls and issues it. In this case the government or central bank.
- It is not limited by quantity – The government or central bank can print as much as they want whenever needed and inflate the money supply on the market. The problem with printing money is that because you’re flooding the market with more money the value of each dollar drops, so your own money is worth less. When you see prices rising throughout the years it’s not necessarily that prices are rising as much as that the purchasing power of your money is dropping. You need more dollars to buy something that used to “cost less”.
2. Transitioning to Digital Money
Once fiat money was in place, the move to digital money was pretty simple. We already have a central authority that issues money, so why not make money mostly digital and let that authority keep track of who owns what.
Today we mainly use credit cards, wire transfers, PayPal and others forms of digital money. The amount of physical money in the world is almost negligible and is getting smaller with each year that passes.
So if money today is digital, how does that even work? I mean, if I have a file that represents a dollar, what’s to stop me from copying it a million times and having a million dollars? This is called the “double spend problem”.
The solution that banks use today is a “centralized” solution – they keep a ledger on their computer which keeps track of who owns what. Everyone has an account and this ledger keeps a tally for each account. We all trust the bank and the bank trusts their computer, and so the solution is centralized on this ledger in this computer.
You may not know this, but there were many attempts to create alternative forms of digital currencies, however none were successful in solving the double spend problem without a central authority.
3. What is Cryptocurrency?
Insert cryptocurrencies. The term "crypto" is short for “cryptography”. A simple definition of cryptography is that it is the encryption and decryption of a written message or text message between two parties.
Cryptocurrency is defined as electronic money made with technology to help people do the following:
- Complete control over your money. With cryptocurrency, no government or bank can decide to freeze your account or confiscate your holdings. You own and maintain full control of your digital money.
- Privacy, protection, and transparency. For example, with cryptocurrency every transaction is recorded and verified on a public, digital record (know as a blockchain). The purpose of so many records is to reduce the risk of any single person or group manipulating and falsifying the data.
4. What is Bitcoin?
In October 2008 a document was published online by a guy calling himself Satoshi Nakamoto. The document, also called a white-paper, suggested a way of creating a system for a decentralized currency called Bitcoin.
This system claimed to create digital money that solves the double spend problem without the need for a central authority.
At its core Bitcoin is a transparent ledger without a central authority, but what does this confusing phrase even mean?
Well, let’s compare Bitcoin to the bank. Since most money today is already digital, the bank basically manages its own ledger of balances and transactions. However the bank’s ledger is not transparent and it is stored on the bank’s main computer. You can’t sneak a peek into the bank’s ledger, and only the bank has complete control over it.
Bitcoin on the other hand is a transparent ledger. At any point in time I can sneak a peek into the ledger and see all of the transactions and balances that are taking place. The only thing you can’t figure out is who owns these balances and who is behind each transaction.
This means Bitcoin is pseudo-anonymous – everything is open, transparent and trackable but you still can’t tell who is sending what to whom.
Let’s explain this with an example. Before you can see certain rows from Bitcoin’s ledger. We can see that a certain Bitcoin address sent 10,000 Bitcoins to another Bitcoin address on May of 2010.
This specific transaction is the first purchase that was ever made with Bitcoin and it was used to buy 2 pizzas by a guy named Laszlo. Laszlo published a post back in 2010 asking for someone to sell him 2 pizzas in exchange for 10,000 Bitcoins. Well, someone did, and now the price of these two Pizzas is worth well over 100 million dollars today.
Bitcoin is Decentralized
There’s no one computer that holds the ledger. With Bitcoin, every computer that participates in the system is also keeping a copy of the ledger, also known as the Blockchain. So if you want to take down the system or hack the ledger you’ll have to take down thousands of computers which are keeping a copy of it and constantly updating it.
Bitcoin is Digital
This means there’s nothing physical that you can touch in Bitcoin. There are no actual coins, there are only rows of transactions and balances. When you “own” Bitcoin it means you own the right to access a specific Bitcoin address record in the ledger and send funds from it to a different address.
Why Is Bitcoin Such Big News?
Well for the first time since digital money came into existence we now have an alternative to the current system. Bitcoin is a form of money that no government or bank can control.
Think about the time before the Internet, how centralized the flow of information was. Basically if you wanted information you could get it from a few major players like the New York Times, The Washington Post and others like them.
Today, thanks to the Internet, information is decentralized and you can communicate and consume knowledge from around the world with the click of a button. Bitcoin is the Internet of money – it’s offering a decentralized solution to money.
5. Bitcoin Compared to Banks
Here is why Bitcoin is different than the current banking system.
- As we mentioned before you have and maintain complete control over your money. With Bitcoin, you and you alone can access your funds (how you actually do this will be explained in our next guide). That way no government or bank can decide to freeze your account or confiscate your holdings.
- Cutting out the middlemen. This means that in many cases Bitcoin is cheaper to use when compared to traditional wire transfers or money orders. Also, unlike fiat currencies Bitcoin was designed to be digital by nature, this means you can add additional layers of programming on top of it and turn it into “smart money”.
- No barrier to entry. Bitcoin is accessible to anyone and everyone. Because of Bitcoin millions of people around the world can now receive and send money regardless of how stable or unstable their country's banking system and/or government is. Prior to Bitcoin, those who where underbanked across the world where stuck because of where they live and the reality they were born into. However today, with a mobile phone and a click of a button they can receive money and send money to anyone else in the world by simply using Bitcoin, no permission needed.
Frequently Asked Questions
See below for quick answers to common questions we get about Bitcoin, and feel free to follow and message us on social media for direct answers to any questions you have.
Who accepts Bitcoin?
Today there are several merchants online and offline that accept Bitcoin. You can order a flight or book a hotel with Bitcoin if you like. There are even Bitcoin debit cards that allow you to pay at almost any store with your Bitcoin balance. However the road toward acceptance by the majority of the public is still a long one.
How does Bitcoin Work?
In a nutshell, Bitcoin works through updating a ledger of transactions (aka the Blockchain). Each computer that participates in the Bitcoin network holds a copy of this ledger and verifies every transaction going through it. It’s like we’re keeping tabs on each other and each new transaction is announced to everyone so they can update their own copy of the ledger. If you want a detailed explanation with examples about how Bitcoin works under the hood check out my post about Bitcoin mining.
Why Does Bitcoin Have Value and How is it Determined?
Bitcoin has value simply because people are willing to trade money for it. Meaning somebody finds it valuable and decides to buy it from someone else. At that exact moment Bitcoin gained value.
Whenever people refer to Bitcoin’s “price”, they are actually referring to the price of the last trade conducted on a specific trading platform (e.g. Bitstamp, Binance, Coinbase).
Unlike US dollars for example, there is no single, global Bitcoin price that everyone follows. For instance, Bitcoin’s price in certain countries can be different from its price in the US, since the major exchanges in these countries include different trades. Generally speaking, as more people want to buy Bitcoin (i.e. demand rises) then the value of Bitcoin rises. If less people want to buy Bitcoin (i.e. demand falls), then they won’t be willing to pay as much. In that case Bitcoin’s value will drop.
Can Bitcoin be Converted to Cash?
Yes. Several sites like HodlHodl.com will allow you to find sellers of Bitcoin who accept cash. Additionally there are Bitcoin ATMs that accept bills and dispense Bitcoins in return.
If you’re looking to convert Bitcoin to fiat currency but not necessarily cash (i.e. coins and bills) you can find a variety of trustworthy Bitcoin exchanges online. Checkout our guide here for a list of online Bitcoin exchanges to checkout.
How do I Purchase Bitcoin?
- Get a Bitcoin wallet. View our list here for safe and reliable options.
- Find a Bitcoin exchange. Click here to view our list of trusted and verified exchanges.
- Sign up and verify your identity (US requires this, but other countries may not).
- Deposit money to the exchange and trade those funds for Bitcoin.
- Withdraw the Bitcoins to your digital wallet you set up in Step #1.
That’s it! If you want a detailed guide about the process check out my guide on buying Bitcoin.