Bitcoin: A Beginner’s Guide
And how to get some free cryptocurrency
Bitcoin (BTC) is the world’s first and most well-known cryptocurrency. It’s a digital currency and can only be bought, held and traded electronically.
It’s on everyone’s lips right now because at the time of writing 1 Bitcoin is worth around $40,000. This is a significant increase on its previous all time high in 2017 of around $19,500.
BTC was created by an anonymous person or persons calling themselves Satoshi Nakamoto around 2009–2010. Back then 1BTC was worth less than $0.01. It began gaining steam around May 2011, when the price reached $1.
To put Bitcoin’s meteoric rise into perspective, let’s say you had you had $100 to invest 10 years ago:
- If you’d invested into Apple your $100 investment would be worth around $1400 today.
- If you invested in Microsoft today it’d be worth around $765.
- If you’d invested in Tesla it would be worth around $18,000 today.
If you invested $100 into Bitcoin in 2010 when the price was about $0.01, your investment today would be worth around $400,000,000, or $400million.
This is an exercise in perspective though; you would’ve had to have been in the tech space in 2010 to know it even existed. No one bought $1,000 worth of BTC back then and kept it for 10 years to become a Bitcoin billionaire (not that I know of, anyway). It would’ve been far too tempting to sell when their investment was worth $10k, or $20k, or $100k.
What is Bitcoin?
Bitcoin is a digital currency which can only be obtained, traded and held electronically.
You can use it as money to purchase things online. More and more vendors are accepting Bitcoin and cryptocurrency for payments. The most notable recent service to offer Bitcoin as an option is Paypal.
It can be held anonymously (for now) and holding it doesn’t require any personally identifiable information. Bitcoin is currently being bought by many investors (both retail and industry) as a hedge against inflation and as a store of value.
Bitcoin is a decentralized currency which is held and verified through the blockchain.
What is a Decentralized Currency?
The core principle behind the invention of Bitcoin is decentralization.
Most currencies in the world are controlled by a central bank, like the FED or the Bank of England. The world’s currencies are mostly fiat currencies, which means they’re not backed by an asset with any real value. This means the central authority which controls the currency also controls its money supply, which defines its value.
The FED or Bank of England control the supply of their currencies. They can add or subtract from the total money supply. This affects the value of the currency and therefore the purchasing and saving power of everyone that uses it.
Bitcoin is a decentralized currency, meaning there is no one person or central authority that controls its supply, or could ever control its supply.
The value of Bitcoin it is not open to manipulation from a central organisation, and it does this through the blockchain.
What is the Blockchain?
At the most basic level, the blockchain is list of transactions that can be viewed and verified by anyone. Data can be added to the blockchain but previous data cannot be changed.
Blockchain is a concept in cryptography, which is where the term ‘cryptocurrency’ comes from.
The blockchain is a ledger which can be held and verified by anyone. Everyone using the network holds a copy of the ledger and everyone’s is updated with the same transactions when new ones are added to the chain.
Everyone on the network has to come to consensus that the previous transactions on the block are correct before a new block can be added (more on what this means below). The Bitcoin blockchain is basically the publicly held record of Bitcoin transactions.
As a simple example say you and your friends go out for dinner every week and take turns picking up the bill. Sometimes it’ll be more expensive than other times, so you record all the payments in a spreadsheet you all each have a copy of. Each of your copies is constantly updated with the latest entries when one of your group add them.
Once a transaction is logged, it’s logged. Entries to the spreadsheet cannot be changed once they are recorded and everyone must agree that the entries are correct. The previous entries define who owes what.
This is how the Bitcoin blockchain works. Everyone agrees to the transactions which have passed and therefore with whom Bitcoins reside.
This is quite a simple example. The mechanism for why previous entries cannot be changed has to do with consensus across the network. For an in-depth look into the inner workings of the blockchain and why it’s virtually impervious to manipulation, have a look at this video.
Blocks on the Blockchain
A block in the Bitcoin blockchain is a list of about 2400 transactions. Each block has a unique digital fingerprint called a hash.
The hash is directly dependent on the specific transactions in the block. If even one transaction in the block is altered, the block’s unique digital fingerprint — it’s hash — also changes.
The blockchain is all of the previous blocks chained together. A new block gets added to the chain about every 10 minutes (remember a ‘block’ is simply a list of about 2400 Bitcoin transactions).
Everyone must agree to the previous transactions on the blockchain before a new ‘block’ can be added.
The title of the new block is the hash of the previous block. This way anyone using the system can be sure no previous transactions already on the blockchain are changed.
Remember that changing any transaction in a block completely changes its hash. If even one previous transaction is changed in an existing block in the blockchain, it would change the hash of that block. The title of the next block is the hash of the previous block, so changing any previous transaction would change the title of the block that it’s in, and every block that comes after it. If this happened everyone on the network would know the system had been messed with. This is where part of the trust of the Bitcoin network comes from.
For an in-depth look at what a hash is and why it’s unique, have a look at this brilliant video.
Why Does Bitcoin have any Value?
Value is defined by supply and demand. This is why the value of fiat currencies can be manipulated — the supply of the currency can be changed by its central authority and therefore its value can be affected, like the FED can affect the value of the dollar by adding or subtracting to its total supply.
The Bitcoin supply is finite. There will only ever be 21 million bitcoins in existence and because its creation is decentralized through the blockchain the system is virtually impervious to manipulation. This means the value cannot be controlled by a central authority.
Value is assigned where we as a populous assign it. Money itself doesn’t have any real value. It isn’t backed by any physical asset with actual value, like gold, and we can’t eat or drink money, or use it to shelter ourselves or survive in the wild. Money has value because we all believe it has value, and we trade it between us as if it did.
Bitcoin is similar. Enough people believe it holds value and trade it between themselves, so it has value. And since its supply isn’t open to manipulation, Bitcoin actually has the potential to hold its value far better than traditional currency.
Why will there only ever be 21 million Bitcoins?
Surely if Bitcoin is just non-tangible digital currency created from computer code, can’t more code just be written to create more?
Well, remember I mentioned a new block is added roughly every 10 minutes to the blockchain? This is done by Bitcoin miners; people with powerful computing hardware who add a list of transactions to a block and try to find the block’s hash.
There are thousands of ‘miners’ attempting to find the hash of a new block. Their powerful computers go through millions of trial-and-error style equations to try and find a block’s hash. The first lucky miner that finds it and gets their block added to the blockchain gets a ‘block reward’.
The block reward is a gift of new Bitcoin created by the system to the particular miner who finds the hash first. Every 210,000 blocks (about every 4 years) the block reward is cut in half. It started with 50 new Bitcoins being created and gifted to the miner every time a new block was added. The reward is now down to 6.25 BTC. In around 2024 it’ll halve again down to 3.125 BTC.
With this system it can be calculated that once the halving of the block reward finishes there will only ever be 21 million Bitcoins in existence. This is how Bitcoin’s supply is finite and not-open to manipulation. To create any more would require the agreement of everyone on the network.
Possible Drawbacks of Bitcoin
Say for example two miners find the hash of a block at the same time. They may have different transactions in each of their blocks, so which block gets added to the blockchain?
The Bitcoin system defaults to a concept called Proof of Work, which means the miner who went through more computational work to find their hash has their block added to the chain.
Bitcoin mining requires a lot of power. The computers are huge and suck up huge amounts of energy all day long. If the system defaults to the block with the highest amount of work behind it, it means it rewards more use of energy. In a world where we’re trying to cut down our usage of power and our carbon foot prints, this system might not fit in the best way.
A second drawback is the number of transactions that can be added to a block. With the ever-growing popularity of Bitcoin there are many more than 2400 transactions taking place every 10 minutes.
A low number of transaction-processing capacity coupled with an ever-growing number of transactions means payments will be processed ever-more slowly. It also means transaction fees (which miners charge) can be high. As a comparison, VISA can process 65,000 transactions per second.
There are other cryptocurrencies which attempt to address some of these problems, like Ethereum and Litecoin.
The other glaring issue in the use of Bitcoin is its volatility. It’s difficult to trade in a currency if one unit is worth $13,000 one week and $23,000 the next. Currently BTC is being used more as a store of value than a currency, and there are other cryptocurrencies in existence which are designed to be more stable in value. These are called stablecoins and include DAI and USDC, both of which track the value of the dollar.
Is Bitcoin Worth Buying?
At the time of writing Bitcoin is on a massive bull-run, which means the price is climbing ever-higher and isn’t showing much sign of slowing down.
Its ATH (all time high) in 2017 was about $19,500, it’s now reached close to $40,000.
The rise is probably due to a few factors. First and foremost the amount of institutional investment that has recently gone into it. Big investment firms have been buying up BTC as a hedge against inflation and currency devaluation. This is quite different from the previous few years where it’s thought a lot of the investment into BTC was from retail and relatively small investors.
When large institutions invest in an asset they don’t buy a few thousand dollars-worth like your average joe might; they buy tens or hundreds of million dollars worth. They also buy for the long term and often won’t sell off in a panic when the price dips a bit, like individual investors often do. This means when institutions get involved the price (generally) goes up and stays up, at least compared to what it was previously.
Price is driven by supply and demand, as we all know, and if the supply of something stays the same but the demand keeps rising, the price will rise with it. Bitcoin has a limited supply of 21 million and currently there are about 2.5 million left to be mined. Given that demand stays the same or rises with time, when the supply reaches its limit the price will rise even further.
But don’t take my word for it. This is simply theory — no-one knows how demand will look in the future and where prices will be.
Cryptocurrency is a very volatile asset. There is the danger of losing some or all of your money. Before buying any type of asset do your own research and/or consult a financial professional.
How to Buy Bitcoin
It’s not difficult to buy cryptocurrency as a beginner, you can simply buy it with cash through online centralized exchanges like Coinbase, Coinmama or Etoro.
Beware of fees though. Coinbase, for example, charge 3.99% if you buy with a debit card, but that drops to 1.49% if you deposit money into your account and buy with that instead.
How to Get (some) Free Cryptocurrency
If you’re curious about Bitcoin or cryptocurrency but aren’t comfortable spending money yet, you can opt to get some for free.
Some crypto exchanges offer free currency in exchange for education.
Coinbase Earn is a programme where you can watch videos on different types of cryptocurrencies (other than Bitcoin; like Stellar Lumens or Compound) and then answer questions on what you’ve just learned.
For every right answer you get some free currency — anywhere between $1–3 worth per answer. Just from watching videos and answering questions you can earn around $42 worth of free cryptocurrency, which may take you around 1–2 hours.
You can earn a further $60–80 by inviting friends to do the same thing, if you would like, and they would also get the same crypto reward.
You’re then free to do what you want with your free cryptocurrency. You can:
- Convert it into Bitcoin or another cryptocurrency
- keep it as the currency you earned it in (Stellar Lumens, Compound, CELO etc)
- Withdraw it as cash
Beware though, converting and withdrawing come with fees attached.
Bitcoin is here to stay, whether we like it or not. Blockchain technology has the potential to decentralise the way we hold money and even trade, which means a lot less potential for manipulation from central authorities. Bitcoin and blockchain have the potential to put the power of money back into the hands of those who own it, not those who issue it.
