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Bitcoin for beginners. The ultimate guide to cryptocurrency

Everything you need to get started in Bitcoin and cryptocurrency.

bitcoin bull

Unless you’ve been living under a rock or marooned on a desert island for the last few years you’ve probably heard of bitcoin. That’s not to say you know what bitcoin is but you will have undoubtedly heard of it.

Depending on who you ask, bitcoin is many things to many people. Libertarians see it as freedom from governments and central banks. Bitcoin investors see it as a speculative asset which has shown excellent returns so far. Technologists think it could be the biggest thing to happen since the internet. Diehard bitcoiners say it is the future of money and will fundamentally change the world. Cynics see it as nothing more than a ponzi scheme.

Bitcoin is one of the most divisive topics in technology today and over the years has been a mainstay in the news cycle usually because of its valuation.

In January 2012 one bitcoin cost around $6. Today, at the time of writing in January 2020, one bitcoin costs around $8,600. Indeed bitcoin is the fastest growing asset in the last ten years.

While it’s a growing asset it’s also a volatile one too. In January 2018 one bitcoin cost around $15,000 while a year later, in January 2019, it cost just $3,800. The adage what comes up must come down certainly applies to bitcoin which is why it’s still considered a high-risk asset.

Most people initially get into bitcoin to try and make some quick money. Some do, others lose but often many who originally came for the money end up sticking around after they go down the proverbial bitcoin rabbit hole.

Below the surface level of what the media covers, bitcoin is about a new kind of philosophy and way of viewing what money is.

In January 2020, bitcoin celebrated its 11th birthday and with each passing year the bitcoin network becomes stronger as new people buy into it, more trading of it takes place and more ways to send and buy with it are introduced.

This is called the Lindy Effect, the concept which says the longer a technology is in use the more likely it will remain in use.

This is the dummies guide to everything you need to know about bitcoin and the wider cryptocurrency industry.

What it is, how it started, where it’s currently at, the people involved, how to buy it, where to store it and more.

First off, let’s get the disclosures out the way first.

  1. This is not investment advice and I am not an investment advisor. Never invest in anything you can’t afford to lose.
  2. I own a little bitcoin so bear in mind everything stated here is through the lens of someone who believes in the future of it.

What is bitcoin?

Quite simply, bitcoin is money.

Bitcoin is first and foremost a new form of money. It’s a new form of thinking about money, storing money, transferring money and dealing with and organising money.

It’s a medium of exchange, like the US dollar or the British pound, but it’s digital and uses encryption techniques to control its creation and to verify the transfer of funds.

Bitcoin was the first cryptocurrency and although there are many more cryptocurrencies, bitcoin is the original and by far the biggest. Cryptocurrency is combination of two words: Crypto and currency.

Crypto is short for cryptography which is a software technology used for securing and hiding information. Currency just means a system of money used.

Put crypto and currency together and what you have is electronic money which has a way of controlling how many units of it can be made which is also securely protected to prevent hacking and duplication.

Bitcoin works peer-to-peer which removes the need for banks to act as the middleman between digital transactions. Instead, you can send money directly to someone else while you both simultaneously record the transaction to the bitcoin blockchain.

The bitcoin blockchain is decentralized which means it’s not hosted from one central location but rather many location points around the world. This is beneficial in a couple of ways. Firstly, it means it’s almost impossible to hack and secondly it means no one owns the bitcoin blockchain much like no one owns email.

Cryptocurrency provides liberty to control your own funds without the need for an institutional middleman like a bank.

bitcoin meme
Mindset shift

The history of Bitcoin

Nobody knows – publicly at least – the identity of who created Bitcoin and it remains a mystery to this day. It was created by someone (or some people) using the pseudonym Satoshi Nakamoto and opinions are divided as to who it is.

Whoever Nakamoto is is rich as he is reported to own 980,000 bitcoins making him a billionaire and one of the richest people in the world today. True to form and maintaining anonymity, Nakamoto has never touched any of the bitcoin he owns.

Embedded in the first bitcoin blockchain block was a quote saying, 03/Jan/2009 Chancellor on brink of second bailout for banks.

This was a headline from a London Times article that was published around the same time as when bitcoin launched. Could the person or people behind bitcoin be British or did they just include it to show the current state of the financial world and the intention of bitcoin’s creation?

Accompanying the launch of bitcoin was the bitcoin whitepaper. Titled, Bitcoin: A Peer to Peer Electronic Cash System which lays out what it’s meant to do, the advantages is has and the philosophy behind it. Reading the whitepaper is always a good place to start when learning about bitcoin.

In 2010, more than a year after its launch, one bitcoin was still only valued at just $0.04. At the time it was used mainly among tech geeks and as an underground payment system for criminals. Eleven years on bitcoin is worth billions and has a vast network of investors and developers focussed on bringing it to the masses.

This time has also spawned hundreds if not thousands of other cryptocurrencies. While a few show promise with genuine use-cases, many are what the bitcoin community call ‘shitcoins.’ Get-rich-quick schemes disguised as cryptocurrencies.

Bitcoin facts and notable events

  • 3 January 2009 the bitcoin whitepaper released. The catalyst of the entire bitcoin industry when Satoshi Nakamoto released the whitepaper.
  • There will never be more than 21 million bitcoins. This was purposely written in the code to ensure it can’t be inflated like regular currency. No one knows why this number is 21 million.
  • A fraction of bitcoin is called a “satoshi”. The unit of measurement is named after bitcoin creator Nakamoto and is equivalent to one hundred millionth (0.00000001 BTC) of one bitcoin.
  • The first recorded Bitcoin transaction was a pizza purchase. In 2010, 100,000 bitcoins were traded for two pizzas making them worth somewhere in the region of $860 million each by today’s value.
  • Bitcoin is now the world’s 11th largest money supply. Behind the Swiss franc, the Indian rupee and the Russian ruble.
  • Bitcoin is notoriously energy intensive. A study found that a single transaction of bitcoin took around 4,000 times more energy to execute as a credit card transaction.
  • As of August 2018, there were more than 22 million cryptocurrency wallets in existence. However, this does not mean there are 22 million individual investors as many hold more than one wallet.
  • Bitcoin has a higher transaction value than Paypal. According to a cryptocurrency analyst, bitcoin surpassed the Paypal payment network in 2017 in transaction value (not volume).

The benefits of bitcoin over other types of money

You might ask why anybody would want to use bitcoin in the first place? Isn’t the money that we have today good enough?

Actually, no, it’s not. When you look at the fundamentals of what bitcoin represents it’s difficult not to disagree with it being the future of money. While it might take years – decades even – it will inevitably happen.

Note: In crypto circles, they tend to use the term ‘fiat’ when talking about a country’s currency. There are many buzzwords and jargon to learn covered in the ‘Crypto terminoly‘ section of this article.

Bitcoin is provably scarce.

There are only 21 million bitcoin and there only ever will. There can never be more. Regular money can be inflated in the form of quantitive easing to increase its volume but decrease its value.

While scarce, it is easily divisible.

One bitcoin can be cut into 100 million pieces and recombined at will. In terms of divisibility, bitcoin wins hands down over both fiat currencies and gold.

Bitcoin is borderless

You can send it anywhere on earth at very little cost. It moves across borders with ease. It has no weight, smell or physical body. It is the only form of money today that can moved at distance without trusting a third party.

Bitcoin is durable.

A Bitcoin exists as a ledger entry, backed up on thousands of computers around the world. In ten years it’s never been hacked and it can never be fraudulently duplicated.

Bitcoin has no single point of failure.

There’s no single piece of hardware or infrastructure or no building you can destroy that bitcoin depends on. There’s no single individual or organisation that bitcoin depends on to function.

Bitcoin does not depend on any banks, governments or countries to function.

Bitcoin is fungible.

Each bitcoin is worth the same as every other and always will be.

Bitcoin is recognisable.

Every bitcoin wallet can quickly attest whether a bitcoin is legitimate or not.

Bitcoin cannot be counterfeited.

Unlike with gold it cannot be filled with tungsten. Unlike with cash it cannot be fraudulently imitated.

Bitcoin is programmable.

It possesses an important attribute that will one day be seen as critical for good money: programmability. Bitcoin can be programmed to all kinds of economic activity often without a middle man, escrow agent or human arbitrage of any kind

Using bitcoin to pay for your coffee

bitcoin
Image via kryptomoney.com

For the moment, bitcoin is considered a store of value by long term investors much like gold is today.

This is because in its current form it simply can’t compete with Mastercard, Visa and Paypal when it comes to processing transactions.

When it comes to paying for your morning coffee at your local coffee shop you are currently better off using your debit or credit card.

Visa and Mastercard use networks that can process 5,000 transactions per second. In comparison, bitcoin currently takes 10 minutes to clear and settle a single transaction.

Plans are in place to speed up bitcoin payments using what is being called the Lightning Network. This is a payment system which is an additional layer on top of the bitcoin blockchain to allow users to make fast payments to one another.

Until the Lightning Network is rolled out, bitcoin is being used as a store of value by most investors who are in the cryptocurrency game for the long term.

How does it compare alongside ‘traditional’ stores of value like gold and fiat currencies? Bitcoin expert Vijay Boyapati put together a comparison of each and how they compare alongside key attributes that make them appealing as a store of value.

Bitcoin vs gold vs regular money

bitcoin vs gold vs fiat
Bitcoin vs gold vs fiat. Via Vijay Boyapati

In Boyapati’s original post, he details each of the key attributes that contribute to making it a good store of value. These being

Durability – how difficult it is for it to perish or be destroyed.

Portability – how easy it is to move and store.

Fungibility – how easy it is to change one specimen with another while still retaining the same value.

Verifiable – how easy the goods can be identified and verified as authentic.

Divisible – how easy the goods are to divide.

Scarcity – how abundant and easy to create it is.

Censorship restraint – how difficult it is for a corporation of government to prevent the owner from using it.

Boyapati’s table above shows the scores he’s market bitcoin, gold and fiat against each key attribute.

And the winner?

Bitcoin.

It’s important to point out that Boyapati’s marking is based on the assumption each attribute has equal weighting but perhaps this is not the case.

For example, should gold having a more ‘established history’ be weighted the same as bitcoin being less likely to be ‘censored’?

My thoughts are no.

Investors want a place to store value and, for now, gold has the best and longest reputation.

Nevertheless, bitcoin is increasingly been used as a store of value and the longer it’s around the more it will be considered so.

Market size

The entire cryptocurrency market is constantly in a state of flux. The market caps of most cryptocurrencies including bitcoin are highly volatile. This volatility is to be expected in a growing market and some argue that volatility is a good thing as it shows a growing asset class.

If bitcoin is to become the newest form of money it will take many years. As investor Naval Ravikant once pointed out, if you can change the definition of money it is the biggest disruption of all. And, of course, f you bought bitcoin early on you will be up on your investment by ten orders of magnitude.

At the time of writing, bitcoin’s market cap is $157 billion according to CoinMarketCap. Here you’ll find the top 100 cryptocurrencies by market capitalization, their current price, trading volume and circulation supply.

coinmarketcap
CoinMarketCap

Bitcoin has the largest market cap by far and has a share of around 67 percent of the entire cryptocurrency market. Many bitcoin purists believe, over time, this share will continue to increase as other cryptocurrencies continue to fail.

Other cryptocurrencies are often called ‘altcoins’ which is short for alternative cryptocurrencies. There are thousands of altcoins on the market (investing.com is currently tracking over 2,500 of them) which claim to have different features to bitcoin and promise to target the perceived limitations the original has.

These new altcoins promise competitive advantages like different economic models or different programming language to build other things like apps on top of.

In reality, most of them are not worth looking at. Most altcoins are rip-offs of bitcoin and likely why 86 percent of cryptocurrencies that have launched over the years are worth less than they were when they were listed.

The ones that are truly different are the most popular and generally have different governance models, philosophies, intended use-cases and communities.

Some of them promise faster processing speed, more security, more privacy than the original and are growing in market capitilization.

Notable pro and anti bitcoin people

Bitcoin and the wider crypto industry are technically complex and it impacts many different industries and disciplines. While the industry is becoming more professional each year, it’s still in some ways in its ‘Wild West’ days.

Before I invested, I researched the industry to understand what key people in tech, finance and business had to say about bitcoin and cryptocurrency in general and if they’d put their money where the mouth is.

There are a lot of well-known people from the world’s of business and technology who have been vocal about bitcoin and the wider cryptocurrency industry.

Some are heavily invested whereas others are more cynical about the industry which illustrates how polarizing it can be.

Here are a selection of pro and anti cryptocurrency industry names.

Pro cryptocurrency

Naval Ravikant – The CEO and co-founder of AngelList is a crypto investor and has been public about his thoughts on the cryptocurrency industry and where it’s heading. This interview with Tim Ferriss provides some interesting insights.

Edward Snowden – The former CIA employee who leaked classified information says he ‘may have’ used bitcoin to buy server space and finds cryptocurrency “interesting”. This video of him covers him talking about the value of cryptocurrency.

Ben Horowitz – The co-founder of venture firm Andreessen Horowitz along with Marc Andreessen, is a big proponent of cryptocurrency. Below is a video of him spelling out his vision of cryptocurrency.

Sundar Pichai – Google CEO, Pichai says his 11-year-old son is an Ethereum miner and he had to explain to the youngster how paper money works.

Jack Dorsey – The CEO of Twitter and Square is “all in” on bitcoin being the future of money.

Eric Schmidt – Billionaire and former Google chairman, Schmidt “is a budding bitcoin and blockchain enthusiast who said Ethereum could be a “powerful platform” whose untapped potential is off-the-charts.”

The Winklevoss twins – Arguably the early founders of what became Facebook, the Winklevoss twins were early investors in bitcoin and own a lot of them. They founded cryptocurrency exchange, Gemini, in 2013.

Alexis Ohanian – Co-founder of Reddit who has publicly stated he is bullish on bitcoin.

Anti cryptocurrency

Bill Harris – Former CEO of Intuit and founding CEO of PayPal and Personal Capital, says bitcoin is “colossal pump-and-dump scheme, the likes of which the world has never seen.”

Nouriel Roubini – The economist Roubini, also known as “Dr Doom” because he predicted the financial crash of 07, has spoken out against bitcoin for years. “It’s just bulls*the says.

Paul Krugman – Economist and New York Times pundit, Krugman said in 2013 that bitcoin is evil and in 2018 confirmed his ‘crypto skeptic‘ status.

Carl Icahn – Billionaire investor, Carl Icahn, said bitcoin and other cryptocurrencies are “ridiculous” and “maybe I’m too old but I wouldn’t touch the stuff.”

Jamie Dimon – CEO of JP Morgan, Dimon, has been critical of bitcoin and cryptocurrencies over the years. In a Bloomberg interview, he said that he has “no interest” in them and that they are a “scam.”

The tech-focussed Silicon Valley entrepreneurs, investors and billionaires see bitcoin as the future whereas the more institutional type of business people do not.

The views may change on either side of the argument as the industry develops because nobody knows for certain and only time will tell.

Anti-bitcoiner, Paul Krugman did say in 1998 the internet would have no more impact on the economy than the fax machine, proving even economists and New York time pundits can’t predict the future.

Buying bitcoin

For bitcoin to really take off, buying and storing it needs to be made easier. Many people equate today’s industry like the internet of the 90s. It was available but it was hard to obtain and not many people were using it. Same as bitcoin today and that’s because of the current technical barriers to entry.

Like all emerging technology it gets easier to use over time. Buying and storing bitcoin gets easier each year and requires less geeky know-how as third-party services make the process easier.

For now however, there’s a process involved that many average consumers are not prepared to go through. Here’s an article on how to buy bitcoin in the UK but it applies to any country you’re in.

When buying cryptocurrency you don’t have to buy one full coin. Buying a bitcoin today is expensive but it’s divisible so instead, you can purchase all the way down to one-hundred-millionth.

To buy bitcoin you need five things:

Bitcoin key – This is your personal unique string of numbers that allows you to receive bitcoin into your wallet.

Cryptocurrency wallet – A secure place to store bitcoin and other cryptocurrencies. Wallets can be a software program that runs online, on your computer or on a hardware key.

Cryptocurrency exchange – A site where you can buy bitcoin and other cryptocurrencies using regular money.

Credit or debit card – To pay for your purchase.

Form of identity – You’ll need a driver’s license or passport for ID purposes.

For an in-depth step-by-step guide on how to buy bitcoin check out this article on savethestudent.org.

Storing bitcoin

When it comes to storing it you have to take care of your own. It can’t be stored with a bank to allow them to take care of it though that may change in the future.

This is what can happen if you neglect how you store your bitcoin.

bitcoin

This is not the only incident of someone losing their bitcoin but it certainly is the most well-known one.

One UK man left 7,500 bitcoins on an old laptop which he threw away in the rubbish and which was subsequently dumped in a landfill site.

At its highest peak so far, the bitcoin he lost would have been worth over $148 million.

Storage is very important.

Some tips on how to secure your cryptocurrency.

Use a hardware wallet. To be as safe as possible, use a hardware wallet instead of a software wallet. A Trezor or Ledger hardware wallet is much safer because your bitcoin is saved offline so it’s much harder to be stolen.

Keep your information secure. One of the more recent types of attacks is hackers moving your phone number to their device so hacking into your email and stealing your phone number they can get your online identity and your crypto. Don’t shout across social media about your cryptocurrency.

Use a new secure email. Use Protonmail specifically for your cryptocurrency accounts as it is encrypted so no one can interfere with your emails.

Use strong passwords. Use 21 characters or more.

Use LastPass to store complex passwords. LastPass uses the same cryptographic technology bitcoin uses and is very secure.

Use two-factor authentication. It adds an extra layer of security and you should use it with everything these days.

Avoid fake websites and emails. Phishing websites and emails that pretend to be legit.

Spread out all your cryptocurrency. If you have a substantial amount don’t save all of your cryptocurrency on one key.

Tell a trusted family member about your crypto. Show them where it is and how to access it in case something happens to you.

Cryptocurrency terminology

With an entirely new industry comes an entirely new terminology you have to learn.

The cryptocurrency industry is full of industry jargon and acronyms and it’s a learning process in itself to understand them all.

Below is some of the words and terminology you should learn if you intend to get involved in the cryptocurrency space.

I intend to update this list as the industry develops.

ATH – All Time High – when a crypto is at its highest point

Altcoin – Alternative cryptocurrency to bitcoin

Bearish – An expectation of decreasing prices

Blockchain – A data system that allows the creation of a digital ledger of transaction on a non centralized network

Bullish – An expectation of increasing prices

Block time – how long a transaction takes from one person to another 

Cold storage – Moving cryptocurrency offline to hardware wallet

Double spend – The risk that a digital currency can be spent twice

Fiat – Currency that is government issued legal tender. E.g. $USD

Fork – When an existing blockchain splits into two separate blockchains

FOMO – Fear Of Missing Out

FUD – Fear, Uncertainty and Doubt

FUDster – An entity that spreads FUD

Hashrate – The speed at which a block is discovered and the rate in which the maths rate is solved

HODL – Hold On for Dear Life (hold on to your coins – don’t sell)

ICO – Initial Coin Offering. A type of crowdfunding

Immutable – When the past record can’t be altered.

Maximalist – Belief that you should maximise your efforts into one coin

Market cap – The market cap = total supply x current price

Mining – The term used for discovering and solving blocks on the blockchain

Mooning – Crypto prices going up extremely high

Privacy coin – Implement functionality to hide your identity when making transactions

Proof of stake – When a person can mine or validate block transactions according to how many coins he or she holds. This means that the more bitcoin or altcoin owned by a miner, the more mining power he or she has

P&D – Pump and dump schemes that attempt to boost the price of a coin

Satoshi – 0.00000001 bitcoins (1 billionth of a bitcoin)

Smart contracts – a digital contract/agreement that doesn’t require a middleman like a lawyer

Stablecoin – A crypto with extremely low volatility sometimes pegged to a fiat like the dollar

Token – Two meanings: a crypto unit or something built onto the Ethereum network

Wallet – Software or hardware – storage for cryptocurrencies

Whales – Big money bitcoin players with a lot of bitcoin

What to do now

Now that you have an understanding of bitcoin and the wider cryptocurrency industry and you if want to pursue it further, your next steps are simple.

Research.

Research.

Research.

There’s no other way.

Learn about the different cryptocurrencies, read the white papers, read the blogs, listen to the podcasts, follow the communities on Twitter, Reddit, Slack and elsewhere.

Buy a hardware wallet, download a software wallet, practice buying small amounts of cryptocurrency and become personally invested if you so wish.

The industry is moving at a rapid pace. Sites like ccn.com are updated 40+ times per day with new developments in the space. I struggle to keep up with it all and I gave up a while ago.

The naysayers and skeptics believe it’s a scam but the sheer hive of activity that is taking place in cryptocurrency around the world proves to me at least it’s a burgeoning industry.

And as I said earlier in this article there’s no other way to get involved other than to buy the ticket and take the ride.

Written by Ste Davies

Stephen Davies is a digital strategist, consultant and speaker. You can reach him here.

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