Table of Contents
What is Bitcoin?
Digital currency: It’s money that only exists digitally.
Peer-to-peer: It’s sent from one person to another. There is no bank or PayPal — these are called middlemen or third parties. Bitcoin has no middlemen or third parties.
Public: All Bitcoin transactions are recorded on a public ledger called a blockchain. All users with access to the internet can view the Bitcoin blockchain and all the Bitcoin transactions that have ever been made.
Encrypted: Transaction information is encrypted using cryptography. This means that special codes are used to hide the account information of users. Crypto means hidden so Bitcoin is hidden money!
Decentralized: Bitcoin has no center. It’s controlled by its users and computer algorithms. No one person, group or government decides how it works.
Distributed: This means that the Bitcoin blockchain is stored on thousands of computers (or nodes) around the world. This makes it very difficult to hack.
So, now if anyone asks you, “What is Bitcoin?” You can tell them it’s a decentralized peer-to-peer digital currency which uses a public ledger called a blockchain to record all its transactions. This is what Bitcoin is, but how does Bitcoin work? The answer to this question is a very important part of Bitcoin. It’s also the first on our list of how to get Bitcoin. It’s called mining — so let’s get digging, shall we?
Immutable: This means that once a transaction is added to the Bitcoin blockchain, it can’t be changed or deleted. Ever!
How Does Bitcoin Work?Let’s use an example to make this a bit more fun… Dionne owes Warwick 10 US Dollars (USD). Dionne doesn’t have any money in her account but she tries to send 10 USD to Warwick’s account anyway. The staff at the bank check to see if Dionne has 10 USD in her account. They stop the transaction from happening when they realise that Dionne doesn’t have any money to send. This is called verification. It’s one of the most important jobs a bank has. Bitcoin also needs to verify the transactions on its blockchain. This makes sure all the transactions that get added to the blockchain are real and valid. Bitcoin has special users called miners who verify transactions. This is how it works using the example of Dionne and Warwick:
- Dionne has 10 BTC that she wants to send to Warwick
- Miners encrypt this information and add it to other transaction information. They keep doing this until they have enough information to form a block.
- The new block needs to be given a code number that will connect it to the rest of the blockchain. All the miners work really hard trying to guess what that number is. It’s like a lottery!
- When the winning number is found, all the other miners check the information in the new block against the information that already exists on the blockchain. If the information is valid, the new block can be added to the blockchain.
- Warwick receives 10 BTC from Dionne.
Mining BitcoinBitcoin miners need very powerful computers to do the work involved in verifying transactions and adding new blocks to the blockchain. More powerful machines have a higher chance of guessing the winning code number than home computers like laptops and PCs. Most Bitcoin miners use special equipment called ASICs which are designed to do one job, mine Bitcoin. ASIC miners aren’t cheap! Let’s have a look at some prices:
Mining PoolsMining pools are groups of Bitcoin miners who use their combined computer power to mine Bitcoin. Miners then share the reward when new blocks are mined. You don’t even need to buy any mining equipment. You can rent mining power from a pool on sites like HashFlare. This means you get a share of the reward without any of the hard work! Whichever way you choose how to get Bitcoin, you’re going to need a place to store the information you need to access your Bitcoin. This storage is called a Bitcoin wallet. Wallets are pretty important so let me tell you more…
This kind of wallet is usually offered by Bitcoin exchanges (and I will talk about those in a moment!). Online wallets can be useful when buying and trading Bitcoin. You should never leave your Bitcoin in an online wallet though.
One of the safest ways to store your Bitcoin is with a paper wallet. These are printouts of your public key and private key. You can make a paper wallet for free here. The good thing about paper wallets is that they are very safe. The bad thing is that they’re made of paper! Don’t get them wet or let your Aunt’s dog play with them!
Each kind of wallet has pros and cons. This is why it’s important to have more than one. Wallets that are connected to the internet are called hot storage. Wallets that are offline are called cold storage. The best way to store your public and private keys is in a mixture of hot and cold wallets. And whatever wallet you use, keep them away from that dog!
How to Get Bitcoin: Buying Bitcoin OnlineThe easiest way how to get Bitcoin is to buy some. The most popular way to buy Bitcoin is on a Bitcoin exchange. So, what are Bitcoin exchanges? Bitcoin exchanges are online marketplaces where you can buy or sell Bitcoin. Different Bitcoin exchanges offer different services. Most will require users to register with personal information. Bitcoin exchanges also charge fees for their services. Here’s a few of the most popular exchanges for you to try:
- Coinbase is an online broker exchange which means that it buys Bitcoin for you at a set price. Coinbase is a very popular platform for users who are buying Bitcoin for the first time. It is a quick and easy way how to get Bitcoin. It also has great security features which include its own online wallet. Users can buy Bitcoin with fiat currencies and other cryptocurrencies like Litecoin or Ether.Note: Fiat currencies are the official currencies of countries. They are backed by national governments. Examples of fiat currencies are the Japanese Yen (JPY), the Canadian Dollar (CAD) and the Polish Zloty (PLN).
- Bitfinex is an online trading platform where buyers and sellers can trade Bitcoin for different prices. Users can buy and sell Bitcoin with fiat currencies and other cryptocurrencies. Bitfinex offers users more advanced trading features with lots of different coins being offered for trading like Ripple, EOS, Dash and Monero. This can make the exchange more difficult for new traders to use.
- Bittrex is another online trading exchange which offers a huge selection of cryptocurrencies for trading. However, it doesn’t offer fiat currency trading. This means that it’s not a great way how to get Bitcoin unless you already own other cryptocurrencies. Newbies should avoid exchanges like Bittrex until they have more trading experience.
Buying Bitcoin… in the real world!
LocalBitcoinsThe best place to visit if you want to know how to get Bitcoin in your local area is LocalBitcoins.com. This website will help you find people in your hometown who want to sell Bitcoin.15,000 cities in 248 different countries. LocalBitcoins is a great way to meet the crypto community and buy Bitcoin at the same time! The price you pay for Bitcoin peer-to-peer may be higher than you’ll pay on crypto exchanges though.
Top Tip: Always take care when buying Bitcoins peer-to-peer. If you meet a seller in person, take a friend and always do it in a public place!