The Beginner’s Guide to Bitcoin

Bitcoin is the cryptocurrency everyone is talking about. After a recent surge in value followed by a dramatic drop, you may have seen several news items about it in the past few weeks. But unless you’ve followed its journey from inception in 2009, you probably won’t understand how it works, the controversy surrounding it, or how you can acquire it.

From a beginner’s perspective to the world of cryptocurrency, we’ll share the basics of this worldwide payment system that’s causing a stir in banks and governments across the planet.

What is Bitcoin?

Bitcoin is a virtual currency made up of computer code, which exists and is spent entirely online. It was created in 2009 by someone going by the name of Satoshi Nakamoto, though this is believed to be an alias, and nobody knows his true identity.

Bitcoin has gained more traction as a real currency in the last year, with even some high street stores and restaurants now accepting it as payment. In places where you can’t buy things with bitcoin outright, you can use apps and other software to convert your coins – people have used this method to buy things from Amazon and even get Starbucks credit.

How is it Stored?

Before you can get any bitcoins, you’ll need a ‘wallet’ (a bitcoin bank account). The three main options for this are –

  1. Software stored on your computer’s hard drive
  2. An online wallet, storing your coins on the internet
  3. A hardware vault that protects your bitcoins offline

Each of these methods has vulnerabilities, so many people use a combination of options to fully protect their coins. Storing them on your computer means they will be lost if your computer breaks or corrupts; online bitcoin storages are vulnerable to hacks; and external hardware can also fail. Add in forgetting your passkeys, and you’ll realize how complicated and tenuous bitcoin storage can be.

How do I Get Some?

Either by trading, mining, or earning.

Mining is a process that requires a lot of time and energy – a miner’s computer must solve a difficult maths problem to approve a transaction. With every transaction, these maths problems get harder and harder. It’s now said that the average bitcoin transaction uses enough energy to power a house for a month. (This leads to issues of whether mining would even be worth it for you – your electricity bills could offset your profit)

People who mine bitcoin are rewarded with a small fraction of the currency made in the transaction in return. Often, people have multiple computers used solely for mining, or even buy huge machines to do this.

How do I Trade Bitcoin?

Bitcoin trading is an equally complicated business to simply acquiring and storing the coins. There are different trading platforms, much like stock exchange with other currencies. A popular one is Plus500, where you can buy and sell bitcoin and other cryptocurrencies.

Coinbase, Circle and Xapo are bitcoin wallet and exchange services that will trade dollars, pounds, euros and more for bitcoins.

Why is it Controversial?

Bitcoin is a decentralized currency – there is no one in charge, and the government has no control over it. This means it’s often used by people who don’t want their transactions recorded, so obviously, governments are keen to know what’s being hidden.

The other issue with decentralized cryptocurrency is that with no regulation, its value is dramatically dipping and soaring, which has come to an all-time high recently. World banking experts are saying that bitcoin investors are playing a dangerous game that will ‘end in tears’.

With the value of bitcoin recently enjoying great highs, people with investments in traditional currencies worry that their savings will lose value as a result. Conversely, if bitcoin’s value drops suddenly never to rise again, high investors stand to lose thousands.

The same security measures offered by regular banks are not offered for bitcoin. If your account is hacked and coins stolen, there is no insurance for the value of your lost coins. As it has no legal status as currency, authorities often don’t know how to resolve thefts.

The environmental issue of bitcoin mining also causes contention. Transactions cause computers to consume vast amounts of energy, causing bills to increase and fuel to be quickly spent.

The Future of Bitcoin

While some currency experts (usually those who work in centralized banking) cast doubt over its future, others predict that it’s very bright. Some think it will soon become a normalized method of payment, as many consumers demand for their bitcoin to be accepted in more real-life and online stores.