Bitcoin Basics For Beginners
What are bitcoins?
Bitcoins are decentralized, purely digital virtual coins exchanged directly between two parties online with no middle man. Unlike modern fiat money, Bitcoin, is not controlled or backed by any bank or central government authority.
Are bitcoins anonymous and untraceable?
No, contrary to popular belief, they aren’t. A traceable trail of each Bitcoin transaction is left behind in a public log known as the blockchain. The public record prevents people from spending the same bitcoins more than once.
How does Bitcoin work?
Each bitcoin is a computer file stored in a digital wallet on a computer or smartphone. To understand how the cryptocurrency works, it helps to understand these terms and a little context:
- Blockchain: Bitcoin is powered by open-source code known as the blockchain, which creates a shared public ledger. Each transaction is a “block” that is “chained” to the code, creating a permanent record of each transaction. Blockchain technology is at the heart of more than 10,000 cryptocurrencies that have followed in Bitcoin’s wake.
- Private and public keys: A bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions, providing proof of authorization.
- Bitcoin miners: Miners — or members of the peer-to-peer platform — then independently confirm the transaction using high-speed computers, typically within 10 to 20 minutes. Miners are paid in bitcoin for their efforts.
Bitcoin value follows the law of supply and demand — and because demand waxes and wanes, there’s a lot of volatility in the cryptocurrency’s price.
Besides mining bitcoin, which requires technical expertise and investment in high-performance computers, most people purchase bitcoins as a form of currency speculation — betting that the U.S. dollar value of one bitcoin will be higher in the future than it is today. But that’s difficult to predict.
How to store the Bitcoin?
Bitcoins can be stored in two kinds of digital wallets:
- Hot wallet: Digital currency is stored in the cloud on a trusted exchange or provider, and accessed through a computer browser, desktop, or smartphone app.
- Cold wallet: An encrypted portable device much like a thumb drive that allows you to download and carry your bitcoins.
Basically, a hot wallet is connected to the internet; a cold wallet is not. But you need a hot wallet to download bitcoins into a portable cold wallet.
How bitcoins are purchased?
There are four ways to get bitcoins:
- Cryptocurrency exchanges – There are a number of exchanges in the U.S. and abroad. Coinbase is the largest cryptocurrency exchange trading more than 30 cryptocurrencies.
- Investment brokerages – Robinhood was the first mainstream investment broker to offer Bitcoin and other cryptocurrencies (Robinhood Crypto is available in most, but not all, U.S. states). Tradestation, eToro, and Sofi Active Investing also offering cryptocurrency trading in most U.S. states.
- Bitcoin ATMs – There are more than 7,000 bitcoin ATMs in the U.S.
- Peer-to-peer purchases – True to its original spirit, you can buy bitcoins directly from other bitcoin owners through peer-to-peer tools like Bisq, Bitquick, and LocalBitcoins.com.
- Bitcoin mining – You can earn bitcoins through mining, but the technical expertise required and computer cost put this option out of reach for most.
Which companies accept Bitcoin payments?
Thousands of businesses throughout the world currently accept Bitcoin as a form of payment, including reputable e-commerce businesses like:
Bitcoin is an incredibly speculative and volatile buy. It’s worth remembering that stock trading can give you a similar thrill — and picking stocks of established companies is generally less risky than investing in Bitcoin.