Bitcoin for Beginners: Bitcoin Definition for Dummies and How It Works

Everyone is talking cryptocurrency, especially Bitcoin. To many of us, Bitcoin is still a relatively new term. Bitcoin is generally defined as a digital currency and share a lot of similarities with other currencies. For those who are new, find out more from this Bitcoin for Beginners and learn how it works in the real world.

Bitcoin for Beginners Bitcoin Definition for Dummies and How It Works


Bitcoin for Beginners

#1 Definition of Bitcoin

Bitcoin is a form of virtual currency, known as a cryptocurrency, which is similar to the former US “Gold Standard” currency, but operates like its own internet and is the world’s first free market, decentralized global currency. That simply means if you have bitcoins, you do not physically purchase goods by handing notes or tokens to the seller.

Bitcoins are generated by using an open-source computer program to solve complex math problems in a process known as mining (will cover this later).

Each Bitcoin is defined by a public address and a private key, which are long strings of numbers and letters that give each a specific identity. This means that Bitcoin is not only a token of value but also a method for transferring that value.

In short, the core innovation that makes Bitcoin special is that it uses consensus in a massive peer-to-peer network to verify transactions.

This results in a system where payments are non-reversible, accounts cannot be frozen, and transaction fees are much lower.

#2 How Does Bitcoin Work?

Let me explain this in a simpler form.

When you trade a physical thing, it is very easy to confirm the transaction. If I put my $10 in your hand, you don’t need confirmation that you are now in possession of my $10. It is in your hand.

However, in the world of cryptocurrency, it is a little more complicated. If I ever need to hand my $10 to you digitally over the internet, anyone can grab it. Hence, it needs someone to confirm that the $10 is meant to be transferred to you. Furthermore, it is also safer if this transfer can be tracked now and in the future.

Bitcoin protocol works like an accountant’s book. Behind the scenes, the Bitcoin network is sharing a public ledger called the “blockchain”. This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction.

The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses.

With that said, all Bitcoin transactions, from the beginning of time, are written down in an enormous, public ledger. When you transfer money from your Bitcoin wallet to another person, you do that by writing this transaction down in the public ledger.

Most importantly, the transaction is transparent.

Everyone is watching this ledger and has their own copies of it, and so they now know that there is less money in your wallet and more money in a friend’s wallet. So everyone knows how much money each wallet contains. This is where your money is stored, in this public ledger with millions of copies that everyone maintains together.

If you have a publicly used Bitcoin address, anyone can tell how many Bitcoins are stored at that address. They just don’t know that it’s yours.

Also, it works faster than any conventional banking system where you can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment.

#3 Who Created Bitcoin?

The first Bitcoin specification and proof of concept were published in 2009 by an unknown individual under the pseudonym Satoshi Nakamoto who revealed little about himself and left the project in late 2010. The Bitcoin community has since grown exponentially.

Satoshi’s anonymity often raises unjustified concerns because of a misunderstanding of Bitcoin’s open-source nature. Everyone has access to all of the source code all of the time and any developer can review or modify the software code. As such, the identity of Bitcoin’s inventor is probably as relevant today as the identity of the person who invented paper.

At the moment, Bitcoin is owned by the community as a whole, as it is an open source initiative, with no single owner behind it. It is a community movement.

#4 Is Bitcoin Legal?

The legality of Bitcoin depends on where you’re located. Bitcoin was legalized as a formal method of payment in Japan this year, and India might be next. In most countries, however, it somewhat operates in a gray zone, with no official ban or approval of Bitcoin.

Earlier 2017, Japan began accepting Bitcoin as legal currency with major retailers backing the new law. Consumer electronics retailing giant Bic Camera began accepting Bitcoin. Bitcoin trading in Japanese yen is the second-most liquid market globally, according to data compiled by cryptocurrency trading platform Gatecoin.

Russia, one of the strongest opponents of Bitcoin is seeking to regulate the digital currency. Russian Deputy Finance Minister Alexey Moiseev told Bloomberg in an interview that the authorities hope to recognize Bitcoin and Bitcoin cryptocurrencies as a legal financial instrument in 2018 in a bid to tackle money laundering.

Meanwhile in the Philippines, Bankgko Sentral ng Pilipinas, hereinafter BSP, is officially regulating local Philippine Bitcoin exchanges as remittance companies and recognizing Bitcoin as a legitimate payment method. For the long-term growth of the Bitcoin industry in the Philippines and mainstream adoption, the transparent and clarified regulatory framework for Bitcoin users and companies will ultimately be beneficial.

#5 What Is Bitcoin Mining?

Bitcoin mining is the process of verifying and adding transaction records to the public ledger (the blockchain). The public ledge is called the blockchain because it really consists of chains of Blocks.

It is the process of assembling the latest transactions, from about up to 10 minutes ago, in a way that they become permanent in the history of chained transactions.

The history of past transactions is called the ‘blockchain’. A block is simply a list of a few thousand transactions (there is a size limit for it!) formatted with a header. Blocks are chained in the sense of having the ID of the previous block in its header and being for that matter a linked list where new blocks get stacked on previous ones.

Miners, specifically, are computers running a piece of software on it. Human users operate the computers, but for the most part, they just sit there and do their thing. The software being run is Bitcoin Core, available for free from the Bitcoin Foundation.

Bitcoin miners listen for transactions that are broadcast to the network. As they receive the transaction, they verify that the transaction is valid and that all inputs to a transaction are completely used.

When such a ‘block’ of assembled transactions is compiled and added to the history, the ones that devoted computer resources to achieve it are rewarded.

Bitcoin for Beginners Bitcoin Definition for Dummies and How It Works

In short and in layman’s terms, bitcoin mining is contributing a computational resource towards the Bitcoin network. This resource would validate the transactions for the network and also keep the network distributed and hence safe. In return of every transaction successfully validated, you would be rewarded a fraction of Bitcoins.

The early days of Bitcoin mining are often described as a gold rush. Bitcoin mining is dead in the year of 2017 as Bitcoin mining depends on pf two factors: electricity and profit.

The Bitcoin network is designed in such a way that no more than 21 million bitcoins will be issued. Hence, the number of bitcoins generated keeps on decreasing.

Mining has also become increasingly difficult. Initially, a person with a desktop and CPU could become a miner. Then, they started using graphic cards instead of CPUs. Now, they have moved on to computers designed specifically for Bitcoin mining known as ASCIs or Application Specific Integrated Circuits.

Remember, to ensemble a very big Bitcoin mining hardware, you will spend a lot of power to cover all your assets, then you might think to do it.

Bitcoin mining has grown from a handful of early enthusiasts into a cottage industry, into a specialized industrial-level venture. If you are a beginner and want to get into the Bitcoin, you can buy them through an exchange like Coinbase.

Bitcoin for Beginners: Bitcoin Definition for Dummies and How It Works

#6 Is It Still the Best Time to Invest in Bitcoin?

The same question appeared back in 2015 and 2016. I bet another person will ask the same next year. Since I am asked by one of the readers whether is it too late to invest in Bitcoin in 2017, my short answer to this is No. “Can I still make money with Bitcoin?”, Definitely.

There are several factors why it is not too late to invest in Bitcoin in 2017.

#1 Bitcoin could hit $100,000 in 10 years, says the analyst who correctly called its $2,000 price

#2 Bitcoin’s acceptance by governments

#3 Bitcoin is going to be part of our lives

#4 Bitcoin is limited

#5 Bitcoin is the most practical payment method available

#6 Bitcoin has advantages over other digital currencies

#7 Bitcoin is almost unhackable

#8 Bitcoin is still not known to majority of people

Further Reading: Is It Too Late to Invest in Bitcoin?

#7 How to Make Money With Bitcoin?

Buy and Hold

The price of Bitcoin has steadily been increasing since its inception. The price is up over 100% in just the last year. That’s a pretty good profit. There was a Norwegian man (Guardian UK article reported in 2013) who bought $27 of bitcoins in 2009 and they’re now worth $980k.

Some analysts have predicted that Bitcoin will exceed $10,000 one day. In part because governments, corporations are now using and learning from the blockchain technology to create secure data, payment, systems, the effect on the industry, business, finance. The Blockchain technology is here to stay and being adopted by the big organizations with a lot of money- for example, it is being used by Goldman Sachs, Barclays Bank, the Estonian government, Microsoft amongst many other places. Venture capital firms are plowing money into Blockchain and Bitcoin startups.

Trade Bitcoin Against Other Cryptocurrencies

This is becoming very popular especially as bitcoin makes new headlines each time it hits a new all time high. The most popular exchange is CEX.IO. Probably the most attractive way out of the here, there’s great profit to be made here as well. If you can read charts or anticipate price movements or both BTC and Alts, you can make money. Margin Trading ups the risk/reward factor even more.

I know people that do both. You could do a mixture of both, e.g. keep 75% held in a wallet, and 25% used to trade.


Additional Reading/Sources:

Is Ethereum the Next Bitcoin? Is It the Next Big Thing After Bitcoin?

How High Will Ethereum Go? Will Ethereum Reach the Price of Bitcoin?

What Is Ethereum and How to Make Money With Ethereum?

10 Reasons Why You Should Invest in Bitcoin. Is It a Good Time to Buy Bitcoin?

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Alex Y

Alex is the owner of Managing Your Finance. He helps newbies start their own online businesses. Sign up for his 7-Day Free training course and learn how to start making a sustainable income online and quit your 9-to-5 job.

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