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A Beginners Guide To Bitcoin

Bitcoin has attracted a lot of press in recent months, and not all of it has been positive. Depending on the reports you’ve seen, you may think bitcoin is a money launderer’s dream come true. Equally, you may feel excited at this new virtual currency, since it provides a way for global businesses to transmit cash without boundaries.

Positive or negative, it’s important to gain a full understanding of the way the currency works before you use it. Unlike ‘real’ money, there are no cash machines, no banks, and a relatively high risk that you’ll lose money if you don’t proceed with caution. That doesn’t mean bitcoin is dangerous – it just means you need to educate yourself before you start.

Before we begin, let’s note that there are many virtual currencies in operation, including bitcoin, litecoin and dogecoin. Each has its own history and quirks. In the interests of simplicity, this guide does not apply to other cryptocurrencies and applies to bitcoin only.

What is Bitcoin?

Bitcoin is a way of sending money electronically, across short or long distances, with no fee at the point of transaction. Each transaction is made between a sending address and a receiving address, both of which are anonymous.

One user can have multiple addresses linked to various wallets. Sending money between these addresses, or wallets, does not attract a fee. One of the best ways to understand bitcoin is to acquire a small amount, then bounce that back and forth between two wallets as a kind of low-risk trial.

Bitcoin is a digital currency. There are no physical tokens, like coins and notes, although you can buy coins with bitcoin addresses associated. These items are just bitcoin wallets in a physical form. With bitcoin, there’s no concept of legal tender, since it’s not a government endorsed currency. That doesn’t mean it’s illegal; it just means it’s not guaranteed by the state.

In fact, bitcoin is not backed by anyone or anything. Since it’s not fiat currency, nobody will guarantee that it will retain its value. However, that isn’t to say that it’s inherently risky to use. Some of the richest entrepreneurs in the world hold millions of dollars in bitcoin already.

How Does it Work?

To obtain bitcoins, you’ll have to do one of three things: earn them, mine them or buy them.

To buy, many people start by exchanging fiat currency (probably the local currency) into bitcoin. You can do this at a bitcoin exchange, a site like Localbitcoins, or by using a wallet system like Coinbase.

You can also ask your clients to pay you in bitcoin, or play games online that pay out in bitcoin. (Remember: many of these gaming sites are essentially gambling sites, so proceed at your own risk). Sites like Bittylicious sell bitcoin online for a small fee.

Once you have some coins, you’ll hold them in a virtual wallet, with its own unique address(es). You can use a wallet app on your smartphone, a web wallet (eWallet), a paper wallet or a hardware wallet device like the Trezor.

If you want to withdraw the coins again, note that many sites will charge commission or withdrawal fees, and international bank transfers are expensive. It’s therefore best not to deposit huge amounts until you find a payout solution that is affordable for you.

Find out more about how bitcoin works

Sending and Receiving Bitcoin

To make a payment, you log into your wallet and enter the address of the recipient. It’s best to scan a QR code of the address, or copy and paste it, to avoid mistakes. Click Send, and the transaction is initiated. It can take several hours for the money to appear in the recipient’s account.

This sounds slow, right? The key to bitcoin is that it’s a peer to peer (p2p) system. If you’ve used file sharing systems, you will understand how this works. Just like bittorrent, bitcoin does not utilise a central server, and nobody’s responsible for making sure the users behave themselves. This is perhaps why bitcoin is thought of as a ‘Wild West’ system.

Once a transaction is made, the sender immediately sees the bitcoin debited from their wallet. The transaction is then made publicly available on an index of global transactions called the blockchain. No transaction can be traced to a named person, but anyone can view the transaction.

The transaction is only fully confirmed when it’s been passed between users multiple times, and this is when the bitcoin hits the recipient’s account.

The blockchain is key to bitcoin security. It’s this process of multiple confirmations that ensures no user can create false transactions or game the system.

How Does Bitcoin Differ From Fiat Currency?

Fiat currency is the term for any currency declared to be legal tender. Essentially, the currency has an official endorsement from the government in one or more countries. The coins and notes, therefore, take on a higher value than their raw materials would be worth.

While banks create fiat currency, bitcoin is created through virtual mining. Over time, mining gets more difficult, because it’s more expensive for the miner to obtain coins; the hardware used to mine requires more power to achieve the same result, which means higher electricity bills, and a lower return on investment. It’s , unfortunately,all too easy to lose money when mining, and you should check out expert reviews (like the ones on this site) before investing any money in hardware or cloud services.

Final Thoughts

Bitcoin is not a risk-free currency. Its value is extremely volatile, and no investment can be guaranteed day to day – or even hour to hour.

To safely try bitcoin, we recommend starting with small amounts. Have a proven, affordable exit strategy in place in case you want to cash out quickly. And if you’re investing any significant amount of money in bitcoin, we recommend that you use two-factor authentication and make sure all of your wallets are securely backed up.

Bitcoin is not without its risks, nor is it without its ‘losers’. But the smart money says it will be around for good, and there are massive opportunities for innovation as bitcoin becomes more trusted and established. Educate yourself, proceed with caution and use common sense, and you could be part of this brand new way to earn, pay and invest.