Bitcoin Basics – Your Guide to Buying & Selling Bitcoin
What is Bitcoin?
Bitcoin is a p2p digital asset, created in 2009 by a person or group of people under the pseudonym, Satoshi Nakamoto. Although there are numerous Digital Assets today, Bitcoin was released as open-source and is essentially the pioneer of this asset class. Due to the fact that it is a peer to peer network, there is no central authority. Instead, transactions are verified through network nodes and are recorded in a public ledger. This ledger is known as the blockchain.
What is the Blockchain?
While originally designed for being a ledger for bitcoin transactions, it has the potential for a multitude of uses. To put it simply, it is an ingenious invention, which records time-stamped data managed by several computers that are not owned by a single person or entity.
The blockchain network, unlike fiat currencies, lacks a central authority. Since there is no central authority to ‘hack’, the blockchain is immutable. Furthermore, since the ledger is public, the information in it is available for anyone to view and verify.
What does decentralization mean?
Centralization is essentially where there is a single entity that stores the information, and data is accessed solely through interaction with this entity. A common example would be a bank. A bank hold your funds, and if you wish to pay someone these funds its done through your bank.
In a decentralized network, everyone holds the information. If you want to pay your friend, for example, you can do so using bitcoin without the need for a bank. You are in charge of your funds, and the decentralized network verifies the transaction.
How are Bitcoins made?
Bitcoins are created by essentially having computers solve cryptographic problems to mimic the mining of a hard commodity like Gold. Gold miners use capital and labour and compete with other gold miners to extract a limited amount of gold from the Earth’s crust. Similarly, people or entities wanting to ‘mine’ Bitcoin purchase specialized hardware and incur labour costs to run their operations. They compete with other miners to solve an arbitrary yet complex math problem. The miner to solve this problem is rewarded the ‘block reward’. Currently, there are 12.5 Bitcoin mined approximately every 10 minutes.
While fiat currencies have an unlimited supply, central banks can print as much as they want. Alternatively, Bitcoin has a supply that is tightly controlled by this underlying algorithm. A small number of new bitcoins are released to these and will continue to do so at a diminishing rate until a maximum of 21 million has been reached.
Is Bitcoin anonymous?
Due to the public nature of the blockchain, it allows transparency with a level of privacy. Using bitcoin as an example, a users identity is represented with a complex cryptographic public address. So while the public may view the transactions conducted by said address, no information on the blockchain would identify the owner of the address. However, if someone knows that an address belongs to you they would be able to see all transactions associated with that address.
One of the biggest advantages of blockchain is it’s immutability. Once a transaction has been entered and confirmed, it cannot be modified or tampered. Let’s use the bank example once more. Say you deposited $14,000 cash into your account, but someone at the bank deleted all records of this transaction and it did not appear on your account history. There would be no recourse to prove your deposit, since the bank is a central authority and they technically control your funds. Due to the decentralisation and immutability of the blockchain, this problem does not occur as the deposit would be recorded on the public ledger.
What is a Wallet?
A bitcoin wallet is a piece of software that stores your private keys. Your private keys are essentially the secret needed to prove you own your bitcoins. There are a few different types of wallets each with their own advantages and disadvatages. We are more than happy to help you get your wallet set-up and figure out which one is best for you.
How Do I Protect My Bitcoins?
A wallet that keeps your private keys on an internet connected device. This way it is always ready to be used.
A hardware device that holds the private keys offline. Plug it into a computer/phone and use the private keys on the device to send transactions.
A wallet that keeps the private keys offline. This type of wallet requires more work to spend from but is more secure.
A hot wallet that is located on your computer or mobile phone. Usually connects to a remote server to use the blockchain.
Download a Bitcoin Wallet
For the best experience at The Coin Shack we recommend the Bitcoin wallet Exodus to store, send and receive your Bitcoin. It is free, open source, and requires no personal information to use. Download Exodus now!
Scams To Watch For
Unfortunately the anonymity and ease of bitcoin comes with its fair share of scams. It is important to note that these have nothing to do with the digital asset itself, but rather taking advantage of individuals who may lack knowledge of their asset. Three main scams are typically seen in the crypto-currency world:
Certain sites which allow for the exchange of various crypto assets can sometimes pull an exit scam, or even conduct selective scamming. A most recent example of this would be Quadriga. It is important to use reputable exchanges, and to not leave large amounts of cryptocurrency on these sites. (See online wallets [hyperlink])
These scams typically involve high yield returns paying initial investors with funds from newer investors. However once they have amassed a large enough investment, they will typically steal all the funds resulting in a loss for all investors. You should be cautious of any program promising returns on your investment.
Want to exchange Bitcoin?
Any email that claims urgency you should be wary of. It could be an attacker impersonating an exchange trying to get your login information. Always check URLs before logging into a service and use 2FA to help defend against this.