Amateur's Guide to Bitcoin
"Isn't Bitcoin a scam? Only criminals use Bitcoin! Why are you spending real money on fake money?"
If you've ever shown any interest in Bitcoin, you have probably heard this before. And, there is no denying, entering the world of cryptocurrency can be a daunting task. I mean, how do you value something that requires a Ph.D. in computer science to understand.
Fortunately, you don't need to understand all the minutiae mechanics to appreciate the value of Bitcoin and other cryptocurrencies. In this article, we will explain some basic concepts of Bitcoin and cryptocurrencies and how to start buying and trading them. Hopefully, by the end, you'll understand that Bitcoin is available for everyone, even amateurs. *If you want to have a crash course in Bitcoin lingo check out this vocabulary page.
Why Are You Spending Real Money on Fake Money?
Of all the questions mentioned above, this is the most concerning for Bitcoin newcomers. Here's the thing; almost all money is fake. The cash in your wallet is technically worthless, or at least it's worth as much as the quality of the paper it's printed on. What makes that 100-dollar bill worth 100 dollars is the value the U.S. government gives it and your trust in the U.S. government to maintain it. And how often do you use cash? Most government-backed currency in the world exists as one's and zero's, the same as Bitcoin. So what differentiates the money in your checking account to Bitcoin's. The answer is centralized vs. decentralized systems.
Centralized vs. Decentralized
When credit cards, debit cards, and wire transfers began to enter the market naturally, the governments who place value on our currency were the ones tasked with tracking digital currency. However, as the internet grew independently of any governing body, many wanted their money to follow suit. Bitcoin is often considered the currency of the internet.
In a centralized system, you're sacrificing control of your money to a central authority. Every digital transaction must pass through a bank or series of banks, who levy fees for using their service. The government can freeze your account if inclined. Or, as we have seen in many countries, print so much money that the value becomes worthless.
A decentralized system by using peer to peer sharing to create a network of linked computers removes the central authority and gives people control over their money.
The Double-Spending Problem
If digital money is nothing but a few bits of data, what's to stop anyone from copying and pasting it to inflate their wallet and oversaturate the market. This potential scenario is called the double-spending problem, and for a long time, the only answer to it was to use a centralized system that could keep track of the money and who owns it.
Then in 2009, a person using the pseudonym Satoshi Nakamoto invented Bitcoin, a decentralized currency that solved the double-spending problem. Using cryptography, the practice of writing and interpreting secret codes, and where the term cryptocurrency comes from, Bitcoin can keep track of all purchases without a central authority.
In simple terms, every transaction of Bitcoin is made public on a ledger. However, the identity of the users is represented in code.
The image above is a transaction that occurred a few minutes ago. Double spending of this transaction is impossible because it is tracked on the ledger, but the blue code hides the identity of the users. The entire ledger is called the blockchain, and it's stored in decentrally in thousands of participating computers. When you first register for a crypto wallet, you are assigned a randomly generated private key, unique to you. The private key deciphers the blue code above and gives you access to your transactions.
So that is a rough summary of how Bitcoin works. It's enough to get started, and if you get invested in it, you can research Bitcoin mining and alternative cryptocurrencies.
Crypto Wallet for Beginners
The blue code above is the public key. Essentially, it's the address to your account. It needs a private key to get access to it. Crypto wallets are programs that create randomly generated keys that allow you to send and receive cryptocurrency.
One of the most popular crypto wallets for beginners is Coinbase. They have an easy to use app that automatically stores the private key onto your phone, and lets you buy and sell Bitcoin and other cryptocurrencies on mobile.
I find it's a perfect tool for beginners to get a better understanding of the cryptocurrency market. It lets you track live price changes, and lets you convert one cryptocurrency to another. There are dozens of cryptocurrencies available for trade. Additionally, Bitcoin has several offshoots, called forks, such as Bitcoin Cash that can be traded at a lower price. Understanding how they relate to each other is key to thriving in cryptocurrency.
Use Caution, and Good Luck!
I hope this article inspires you to give Bitcoin a try. But warning, while decentralized currency has a lot of upsides, it is still in its nascent stages. Every year more companies, countries, and banks accept cryptocurrency, but at this time, it's mostly used in the exchange market.
Cryptocurrency rates are very volatile, start small when entering the exchange market, until you think you're ready!