Bitcoin Basics Lesson 2: Essentials of Bitcoin
In Lesson 1, you learned that Bitcoin is a decentralized cryptocurrency invented in 2009 by Satoshi Nakamoto and that it can be freely transferred between people all over the world, without the control or the limitations imposed by conventional payments through banks or government authorities.
In Lesson 2 you will learn:
- Bitcoin isn’t 100% anonymous
- Bitcoin wallets are used to protect and access your money
- Bitcoins are stored in a public ledger called ‘the blockchain’
- Bitcoin isn’t printed like regular money, it’s discovered, or ’mined’, by a network of computers worldwide
Authority and Anonymity
As mentioned in Lesson 1, Bitcoin is not controlled by any third party. It’s the first decentralized peer-to-peer payment network and it’s solely powered by its users. Bitcoin awards you freedom from government control, but at the same time it’s your own responsibility to safeguard your money. There’s no formal entity to complain to if you misspend BTC or lose access to your wallet’s password.
Bitcoin is pseudonymous rather than anonymous, this means that the value within a wallet is not tied to real-world people or email addresses, but rather to specific bitcoin address(es). Owners (those in control of bitcoin addresses) are not explicitly identified, but all transactions are registered on a digital ledger called the blockchain. The blockchain is public and all transactions are recorded and visible via tools known as ‘blockchain explorers’. Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, are often required by law to collect the personal information of users.
How Can I Store My Bitcoin Safely?
To start using bitcoin you’ll need to use a bitcoin wallet. A wallet stores the information necessary to handle your bitcoins. Wallets are often described as a place to hold or store digital currency. But, bitcoins are inseparable from the transaction ledger, the blockchain. A better way to describe a wallet is as “something that stores the digital credentials for your bitcoins and allows you to access them”. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated. You could say a wallet is a collection of these keys.
There are also several types of wallets to choose from. Software wallets connect to the network and allow you to spend bitcoins in addition to holding the credentials (the cryptographic keys) that prove ownership. There are also online wallets that offer similar functionality. In this case, the keys to access the money are stored with the online wallet provider rather than on the user’s hardware or software app. There are also physical wallets that store the credentials offline, which could, for example, be just the keys printed on a piece of paper in your pocket, or remembered in your head. Because a piece of paper can’t be hacked, this is the most secure method of storing bitcoins (assuming your physical wallet can be kept safe).
All bitcoin transactions are stored in a public ledger called the blockchain. It’s not maintained by an authority, but by a network of communicating nodes and miners running open-source bitcoin software. Transactions are sent to this network using readily available software applications (such as wallet apps). These nodes can validate transactions, add them to their copy of the blockchain (the ledger), and then forward these additions to other nodes. The blockchain is a distributed database, which means each network node verifies and stores its own copy of the blockchain.
As I explained before, bitcoin prices were first set by enthusiasts on bitcoin forums and exchanged both offline and online. Nowadays everything has moved to online exchanges where participants offer bitcoin buy and sell bids, just like on other commodity exchanges.
The price is subject to the market forces of supply and demand which, at this point in time, go hand-in-hand with the trends and whims of speculators. The price can move suddenly and sharply up or down in response to news events.
Buying and Spending
You can buy bitcoins online from Bitcoin.com using a credit card, or by using an exchange via a bank transfer of fiat currency. Bitcoin can also be purchased locally using services like Localbitcoins or Bitcoin ATMs.
So where can you spend your bitcoins? Well, the currency is up and running with some of the most popular ecommerce platforms and point-of-sale systems. Additionally, hundreds of thousands of merchants and vendors, both online and offline, already accept bitcoin for payments.
A Brief Word on Bitcoin Mining
In traditional money systems, governments simply print more money when they need to. This leads to inflation which reduces the value of each unit of the currency previously printed. But in bitcoin, money isn’t printed—it’s discovered.
Computers around the world ‘mine’ for coins by competing with each other. To succeed in mining you’d need a specialized mining computer, as they are much faster than your regular laptop and specialized to complete mining work. Mining is competitive business today and requires specialized equipment to earn return. Mining is the act of processing and verifying transactions on the Bitcoin network and securing them into the blockchain. Each set of transactions are processed into blocks, secured by the miners, and added to the blockchain.
This ends today’s lecture. Now you know a little more about bitcoin. Let’s recap:
- Bitcoin isn’t strictly anonymous
- You can make use of a wallet to protect and access your money
- Bitcoins are stored in a public ledger called the blockchain
- You can buy bitcoins online, with a credit card, at exchanges, or via ATM’s
- Bitcoin isn’t printed like regular money, it’s discovered or ’mined’ by a network of computers worldwide
In the next lesson, we will discuss more about Bitcoin price.
Check out the other lessons: