Bitcoin Basics: What You Should Know

The purpose of this page is to aggregate information on Bitcoin basics. I’ve been asked many questions recently about the crypto space: How do you use Bitcoin? How do I buy Bitcoin? WTF is this Bitcoin stuff I keep hearing about? Crypto huh?

If you’re a trader, this isn’t focused on you. If you’re an investor, or just trying to figure out what Bitcoin is about, then read on!

In considering my focus on Bitcoin investing basics, I also think it pertinent to mention here that cryptocurrencies are very volatile. The market is small, and day traders are all-in. For the long-term investor this volatility shouldn’t matter. Instead, it should be embraced. We’re focused on investing little amounts every month, every week, or even every day. Therefore, volatility is a GOOD thing, offering an opportunity to buy more frequently at lower prices. To be sure, volatility over the last couple years has been advantageous for the drip investor.

Why is Bitcoin suddenly interesting?

It’s not! Bitcoin has been a top performing investment for several years now. You’re just now hearing about it because governments and Big Banks can no longer ignore the disruptive potential of peer-to-peer capital markets.

Bitcoin is a disruptive technology that will “liberate the poor of the world” by offering banking services in emerging markets where banks are few, or may not even exist at all. Because Bitcoin is a global and decentralized technology, it can go anywhere regardless of geography, demographics, or geopolitics. Bitcoin gives people in developing countries the ability to sell their products and services regardless of whether they have access to a bank or not, via mobile payment systems. In places such as Africa or South East Asia, where more people have cell phones than bank accounts, one can easily see the potential for massive disruption to traditional capital markets.

The United States and its citizens are way behind in cryptocurrency adoption and knowledge. That’s by design. Fiat currencies, issued by governments, are becoming worth less every year, and will eventually return to their original value: nothing. That’s a fact, not opinion, but a discussion for another time. The U.S. and other governments DO NOT want its citizens to have their own money. This is for many reasons, but a very simple one to illustrate is in considering the manipulation in precious metals markets. Governments print paper (backed only by their word, not physical assets) to buy gold for long term storage and inflation protection. Does that sound like a good deal for you? No, it’s not. This is why I’ve shifted most of my precious metal investing to the crypto space instead.

P2P capital is the future of money as “the people” get fed up with their governments. Once the masses get fully behind Bitcoin, get organized, and take control of their money and financial future, THEN we’ll start to see the changes we so desperately need.

What is a Bitcoin? 10 Things You Should Know

  • A virtual currency which gives consumers a way to exchange money for free or a nominal fee, WITHOUT the need for a third party intermediary (banks, for example).
  • A “digital crypto-currency,” secured by cryptography.
  • Bitcoin only exists in a digital format and there are no tangible properties to this money, just like e-mails.
  • A type of currency valued in divisible units, similar to the USD (pennies, nickels, dollars).
  • Bitcoins are decentralized: Bitcoin is not controlled or backed by any bank or central government authority, such as the Federal Reserve, for example.
  • Bitcoins are pieces of computer code, mathematical algorithms, actually, that represent monetary units.
  • Each unit of the virtual currency is nothing more than an entry on a digital ledger, just as most dollars and cents exist only as entries on a bank’s digital ledger.
  • Bitcoins are kept on a ledger that is maintained and updated by any user of Bitcoin who wants to help. The constantly updated ledger is kept on the computers of all the users — just as Wikipedia entries are written and kept current by the users rather than by any central authority. The work maintaining Bitcoin’s ledger is done according to rules that are established by the Bitcoin software.
  • Because there is no central authority in Bitcoin, only the network of users keeping the records, there is no one to shut down accounts or demand personal information from Bitcoin users: Anyone can open an account and spend whatever Bitcoins they have as long as they have the password, or secret key, for their account.
  • It is the communally maintained ledger on which all Bitcoin accounts and transactions are recorded, the Blockchain, that makes the currency so different from existing ones.

What’s a “blockchain?” 10 Things You Should Know

  • Without Blockchain technology, there would be no Bitcoin…
  • The Blockchain is a shared public ledger (distributed) on which the entire Bitcoin network relies.
  • All confirmed transactions are included in the Blockchain, or block chain.
  • Simply put, the Blockchain is a database of all decentralized and immutable transactions.
  • While anyone can download and see the database, no one can rewrite its history.
  • The reason the tech is called “blockchain” is because transactions are grouped in blocks and then “chained” together through cryptographic links.
  • With the Blockchain you can send someone a Bitcoin and everybody in the world will be 100% sure that you no longer have that Bitcoin, preventing the issue of double spending seen in previous attempts at digital currencies.
  • Blockchain = capital integrity.
  • “The consequences of this breakthrough are hard to overstate.” – Marc Andreessen
  • Blockchain technology is often described as the backbone for a transaction layer for the Internet, the foundation of the Internet of Value.

How does Bitcoin work? 10 Things You Should Know

  • Bitcoins are forgery-resistant.
  • People often say Bitcoin is anonymous, but pseudonymous is more accurate.
  • Bitcoins are traded from one personal ‘wallet’ to another.
  • As with paper money, you can save Bitcoins in a wallet, which stores the public and private keys needed to identify the Bitcoins and execute a transaction. These can be digital wallets that exist in secure cloud environments or on a computer, or they can take physical form.
  • If a wallet is hacked, or you lose your private Bitcoin key, you no longer have access to that Bitcoin: Possession of the public address and private key amounts to possession of the Bitcoin.
  • Bitcoin can either be used to buy things online from merchants and organizations that accept Bitcoin, or it can be cashed out through an exchange, broker, or direct buyer.
  • Unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority.
  • Bitcoin is underpinned by a peer-to-peer (P2P) computer network made up of its users’ machines.
  • The entire Bitcoin network is used to monitor and verify both the creation of new Bitcoins through mining, and the transfer of Bitcoins between users.
  • A log is collectively maintained of all transactions, with every new transaction broadcast across the Bitcoin network. Participating machines communicate to create and agree on updates to the official log. This process, which is computationally intensive, is in fact the process used to mine Bitcoins.

Where do Bitcoins come from? 10 Things You Should Know

  • Bitcoin was created by Satoshi Nakamoto, who published the invention on October 31st, 2008, to a cryptography mailing list in a research paper called “Bitcoin: A Peer-to-Peer Electronic Cash System.”
  • Satoshi Nakamoto implemented bitcoin as open source code and released it January 2009.
  • Bitcoins are mathematically generated as the computers in the Bitcoin network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”, in a computational race to win new coins.
  • The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to “mine” Bitcoins over time, and the total number that can ever be mined is limited to around 21 million (generated through the year 2140).
  • Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the Blockchain.
  • Bitcoin mining enforces a chronological order in the Blockchain, protects the neutrality of the network, and allows different computers to agree on the state of the system.
  • Bitcoin mining is also called “hashing”.
  • When a Bitcoin mining program wins the mathematics race for new coins, it creates “blocks,” or encrypted Bitcoin transactions. When you (or your pool) solve a block, you are rewarded with Bitcoins.
  • The blocks created by mining make up the transaction record of the Bitcoin system.
    Every block contains a hash of the previous block, which creates a transaction database — the previously referenced blockchain.
  • Application Specific Integrated Circuits, commonly referred to as “ASICs”, are computer chips built purely for the purpose of mining Bitcoins.

Why is Bitcoin expensive? 10 Things You Should Know

  • Bitcoin’s price is determined by the laws of supply and demand.
  • Because the supply of Bitcoins is limited to 21 million BTC, as more people use Bitcoin the increased demand, combined with the fixed supply, will force the price to go up.
  • Because the number of people using Bitcoin in the world is still relatively small, the price of Bitcoin in terms of traditional currency can fluctuate significantly on a daily basis, but will continue to increase as more people start to use it.
  • When Bitcoin becomes truly popular, each single Bitcoin will have to be worth at hundreds of thousands of dollars in order to accommodate additional demand.
  • A single Bitcoin can be divided down to 8 decimals, and people can transact with fractions of Bitcoins, so even if one Bitcoin is worth a lot, the system is still useful for very tiny transactions.
  • Fractions of a Bitcoin are known as Satoshis.
  • May 22, 2010: The price of two pizzas was negotiated at the BitcoinTalk Forum for 10,000 BTC, marking the first ever Bitcoin transaction.
  • November 6, 2010: Bitcoin economy surpasses $1 million; value of a Bitcoin reaches $0.50 on the Mt. Gox exchange.
  • February, 2011: Bitcoin reaches parity with the US dollar for the first time.
  • November 27, 2013: The Bitcoin price tops $1000, bringing total market capitalization to over $10 Billion.

How do I buy Bitcoins? 10 Things You Should Know

  • Do your research and find an exchange you can trust.
  • It’s a good idea not to use an exchange as a wallet. Move your Bitcoin to your personal wallet so that you have control over your funds at all times. Exchanges are hackable.
  • For investors in the U.S., the simplest way to buy Bitcoins is Coinbase, which was established in 2012.
  • Coinbase sells BTC to customers at a mark-up that is usually around 1% over the current market price.
  • Coinbase has an option to link your bank account to your Coinbase wallet. This makes future payment transfers easier.
  • Coinbase offers automatic Bitcoin buying at regular intervals, or drip investing.
  • Coinbase Con: delivery of your assets to your wallet takes up to seven days. (which isn’t a big deal unless you plan on using the coins right away)
  • Coinbase also allows for purchases of, and drip investing in, Ethereum (ETH) and Litecoin (LTC), in addition to Bitcoin, and has plans to support other coins in the future.
  • Coinbase provides a secure wallet separately for each digital asset, so a Bitcoin wallet, and Ethereum wallet, and a Litecoin wallet.
  • Coinbase is the first cryptocurrency “Unicorn.”

How do I use Bitcoin? 10 Things You Should Know

  • As a new user, you can get started with Bitcoin without understanding the technical details.
  • Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one.
  • Bitcoin addresses should only be used once.
  • Anyone with a Bitcoin address, which is similar to an email address, can send and receive Bitcoins from anyone else with a Bitcoin address.
  • If you can operate a smartphone, Bitcoin is easier to use than a credit or debit card.
  • Sending Bitcoins is as easy as copying and pasting someone else’s address, choosing an amount, and clicking send.
  • There are thousands of merchants that now accept Bitcoin payments online. For the merchants, Bitcoin is preferable to credit-card payments because the merchant doesn’t have to pay a fee to a credit-card company.
  • Bitcoin.travel has one of the most comprehensive list of businesses that use bitcoin.
  • Major retailers and services that accept Bitcoin include: Overstock.com, Expedia, eGifter, Newegg, Shopify, Dish, WordPress.com, Subway, Microsoft, Reddit, Virgin Galactic, OKCupid, Wikipedia, Steam, Zynga, Whole Foods, Mint.com, Bloomberg, Intuit, Stripe, Paypal, and Webjet, to name just a few.
  • One of the easiest ways to use Bitcoin is through BitPay. Send your Bitcoins to the BitPay wallet, and request a Visa logo card from them. Use your card anywhere Visa is accepted, but the debit is in Bitcoins (BTC)! Use the BitPay and Coinbase mobile apps, and you’re set to go.

Final thoughts:

It is my opinion that U.S. investors shouldn’t transact in cryptocurrencies. Not yet. This is the time of accumulation. Buy crypto for the long-term, and stick primarily to digital currencies built to be stores of value. Essentially, I’m not long crypto, I’m SHORT government.

I recommend a diversified portfolio through Coinbase, with investment primarily in Bitcoin, and secondarily in Litecoin and Ethereum. Bitcoin has been referred to as digital gold, while Litecoin has been referred to as digital silver. BOTH are stores of value akin to precious metals. Ethereum, on the other hand, is NOT a store of value. This digital asset more closely represents stocks and equities, the “growth” portion of the portfolio, whose future outlook relies on risky ICOs. Personally, my crypto portfolio stands at 50% BTC, 25% LTC, 25% ETH.

Of course, there are indices and ETFs coming for this space, but you can keep fees WAY down by owning the currencies yourself in a personal wallet. This mirrors investing in individual stocks vs indices. At some point, indices and active funds will rule the crypto space. Until then, stock those BTCs for a rainy day!

Conclusion from Satoshi Nakamoto’s Bitcoin white paper:

“We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent double-spending. To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power. The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified, since messages are not routed to any particular place and only need to be delivered on a best effort basis. Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.”

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