Bitcoin 101: Learning the basics

Bitcoin 101: Learning the basics

You maybe heard about Bitcoin for a really long time, but never sit down and get to know more about this digital currency. You don’t know much about technologies and technical details, this guide is totally for you.

Today we at CFD will explain what Bitcoin is, how the system works, how you can get it, how to use it and which scams to avoid. We also direct you to some useful resources that will help you to gain more knowledge about this digital currency.

 

BITCOIN: A BRIEF VIEW  

You totally relied on big banks, small banks to manage your money. Banks are in charge of making transactions and you have to pay them to do that. And you don’t really know what is going on behind those walls.

Bitcoin pioneers wanted to put the seller in charge, take out the middle man, cut fees and make the transaction transparent. They created a decentralized system, where you can control your money and get a clear view of what was going on.

Bitcoin has come far and grow fast in quite short time. All over the world from companies to private hospitals accept its currency. Giant guys in business such as Dell, Expedia, PayPal, and Microsoft do accept too. Websites promote it, forum discuss and trade its coins. It has its API (application programming interface, price index, and exchange rate.

 

WHAT IS BITCOIN?

At the simplest definition, Bitcoin is either virtual currency or reference to the technology. You can use Bitcoin to make transactions. You will refer the purchaser to your signature, which is a long line of security code encrypted with 16 distinct symbols. The purchaser decodes that code with his smartphone to get your cryptocurrency. In other word, cryptocurrency is an exchange of digital information which allows you to buy goods and services. To gain security the transaction, the transaction runs on a peer-to-peer computer network that is similar to Skype.

 

5 PROPERTIES OF A BITCOIN TRANSACTION:

1) Irreverseible: After you confirm the transaction, there is turning back, it can’t be reversed. Nobody can reverse it. Nobody means nobody. Not you, not the purchaser, not your president, not your miner…I mean it, Nobody. If you send your money, you send it. No one can help you reverse it, no one can help you if you send your Bitcoin to a scammer or if a hacker stole it from you.

2) Pseudonymous: All transactions and accounts are anonymous, it can’t be traced back to its owner. You receive Bitcoins on an virtual address, which are a chain of random 30 characters.

3) Fast and global: Transaction is propagated nearly instantly in the network and is confirmed in matter of minutes. Because it happens in a global network of computers, they are completely different from traditional transaction. No matter you send your Bitcoin to your friend next door, or a person from the other side of Earth, it happens in global network.

4) Secure: Bitcoin funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency. Very strong cryptocurrency and the magic of big numbers make it impossible to break this scheme. 

5) Permisionless: You don’t need permission from anyone to use cryptocurrency. It’s a free software that everyone can download. After you installed it, you can use it to send and receive Bitcoin or any other coin. No one can stop you. 

 

WHERE CAN YOU FIND BITCOINS?

You can earn your first coin from any of these 4 places:

-  A cryptocurrency exchange where you can exchange ‘normal’ coins for bitcoins, or for satoshis.

Resource: Coinbase, LocalBitcoins in the US &  Canada, BitBargain UK and Bittklicuous in the UK.

- A Bitcoin ATM where you can change Bitcoins or cash for another cryptocurrency.

Resource: CoinCorner

- A classified service where you can find a seller who will help you trade Bitcoins for cash.

Resource: LocalBitcoins

- You could sell something for Bitcoins.

Resource: Purse

Warning! Before using any of these services, make sure you read reviews from previous customers or post a question on Bitcoin forum.

 

HOW DOES BITCOIN WORK?

When a transaction is confirmed, it’s broadcasted to the peer-to-peer computer network of users for validation. In this way, all users are aware of each and every transaction, which prevents stealing or double-spending.

“Unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority. Instead it is underpinned by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent, a file-sharing system, and Skype, an audio, video and chat service. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”. 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. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.”

 

HOW CAN BITCOINS BE STORED?

You’ll have to sign up for a cryptocurrency wallet to put your coins in.

There are 3 different applications:

- Full client – This is like a standalone email server that handles all aspects of the process without relying on third-party servers. Alice would control her whole transaction from beginning to end by herself. Understandably, this is not for beginners.

- Lightweight client – This is a standalone email client that connects to a mail server for access to a mailbox. It would store Alice’s bitcoins, but it needs a third-party-owned server to access the network and make the transaction.

- Web client – This is the opposite of “full client” and resembles webmail in that it totally relies on a third-party server. The third party replaces Alice and operates her entire transaction.

You’ll find wallets that come in five main types: Desktop, mobile, web, paper and hardware. Each of these has its advantages and disadvantages.

 

WHY DO YOU USE BITCOIN?

Here are some reasons for you:

- Imagine when you need to transfer money from another bank to your bank, your money will be hold for serveral days. So international transfer would take even longer. However, Bitcoin transactions are generally faster.

- Government can’t put their hands in your pocket and take money away from your family savings. Because Bitcoin currency is decentralized, you have it, you own it. No authority has control of the system, so a bank can’t take your savings away from you like they did in Cypus 2013.

- There is no inflation in Bitcoin currency. Unlike regular fiat currency, Bitcoin was designed to have a maximum number of coins. 21 million, that’s the number. After that number, Bitcoin won’t grow anymore, so there’s no inflation. In fact, it’d be deflation – where the price of goods and service decreases.

- It’s anonymous. As we have mentioned in 5 properties of a transaction. You can have your own privacy as much as you want. It’s like having a clear plastic wallet, everybody can look inside it, but no one know who it belongs to. However, using the same bitcoin address all the time or combining coins from multiple addresses into one address and things like that can make it easier to identify the owner online.

- You don’t have to give your sensitive information, you don’t have to let another person to handle the money for you, you don’t have to trust that person, you don’t have to trust a bank for example. Because Bitcoin is decentralized, you don’t need to trust anyone when making a transaction. When you send a transaction, it’s signed digitally and secure. An unknown miner will verify it, then the transaction is completed.

- You can create your own money and it’s encouraged to do that. You can buy coin from the open market and you can mine your own coins if you have enough computing power. After covering all initial cost for equipments and electricity, mining bitcoins is simply let your computer on and running a software. Don’t you want your computers to make money for you while you sleep?    

 

WHAT YOU NEED TO KNOW TO PROTECT YOUR BITCOINS

Here are four pieces of advice that will help your bitcoins go further.

As you’d do with a regular wallet, only store small amounts of bitcoins on your computer, mobile, or server for everyday uses, and keep the remaining part of your funds in a safer environment.

1) Backup your wallet on a regular basis and encrypt your wallet or smartphone with a strong password to protect it from thieves (although, unfortunately, not against keylogging hardware or software).

2) Store some of your bitcoins in an offline wallet disconnected from your network for added security. Think of this as a bank, while you, generally, keep only some of your money in your wallet.

3) Update your software. For added protection, use Bitcoins’ multi-signature feature that allows a transaction to require multiple independent approvals to be spent.

Spending some time on these steps can save your money.

 

SCAMS TO WATCH OUT FOR

The four most typical Bitcoin scams are Ponzi schemes, mining scams, scam wallets and fraudulent exchanges.

- Ponzi Scams: Ponzi scams, or high-yield investment programs, hook you with higher interest than the prevailing market rate (e.g. 1-2% interest per day) while redirecting your money to the thief’s wallet. They also tend to duck and emerge under different names in order to protect themselves. Keep away from companies that give you Bitcoin addresses for incoming payments rather than the common payment processors such as BitPay or Coinbase.

- Bitcoin Mining Scams: These companies will offer to mine outrageous amounts of bitcoin for you. You’ll have to pay them. That’s the last you’ll see of your money (with no bitcoins to show for it, either).

- Bitcoin Exchange Scams: Bitcoin Exchange Scams offer features that the typical bitcoin wallets don’t offer, such as PayPal/Credit Card processing, or better exchange rates. Needless to say, these scams leave you in the hang while they siphon your dollars.

- Bitcoin Wallet Scams: Bitcoin scam wallets are similar to online wallets – with a difference. They’ll ask you for your money. If robbers like the amount, that’s the last you’ll see of your deposit. The address, in other words, leads to them, rather than to you.

Of all of these, wallet scams are the most popular with scammers managing to pinch millions.

Here are various resources that will direct you to best places for finding wallets, stores that accept bitcoins, exchange for trading Bitcoin, and Bitcoin news, prices, charts, guides and analysis among other information.

  1. 99Bitcoins – 99Bitcoins supplies video and text tutorial on how to buy Bitcoins with Paypal, Credit Card, debit card and more.
  2. Bitcoin.org – Choose your Bitcoin wallet from 12 different mobile, desktop and hardware applications.
  3. Coinmap – For bitcoiners who want to spend their BTC at brick-and-mortar locations, Coinmap refers you to hundreds of retailers who accept bitcoin at their physical store locations.
  4. Blockchain.info – Blockchain info is the go-to place for checking transactions on the ledger. You can check how much money your wallet contains, or, for that matter, how much BTC is stored at any particular wallet address.
  5. Bitnodes Run by the Bitcoin Foundation, Bitnodes estimates and visualizes the size of the bitcoin network.
  6. Wizbit – Wizbit shows all transactions and newly mined blocks in real time on an eye-catching spinning globe.
  7. We Use Coins – Weusecoins.com is a list of credible exchanges for trading Bitcoins worldwide or in the U.S.
  8. Buy Bitcoin Worldwide – Get help finding a Bitcoin exchange.

 

 

 

 

 

 

 

 

We’d love to hear your views on this…