Ƀitcoin Basics
A non-technical compilation for beginners.
No Bitcoin isn’t dead, but if you’re interested in seeing how many times it has “died”, see here. On the contrary, Bitcoin has been gaining significant attention over the past year. Some of this is due to more negative incidents, such as hacks or scams, but more recently it’s been neutral or very positive.
Bitcoin had its first ever entire month above $1000USD (for Canadians it’s been over $1000 since January 13th). The Winklevoss twins’, affectionately the Winklevi, ETF proposal was rejected by the SEC which some view as bad news, but I’d argue 1) Bitcoin doesn’t need an ETF, and 2) if there’s to be one, it’s much too early.
This is, in part, why I’ve been prompted to write this post. There’s still a significant gap in understanding Bitcoin (setting aside crypto and blockchain generally). This post is for anyone who wants a basic understanding of what bitcoin is.
The following is 12 key points to help you gain a better understanding of what Bitcoin is, how it came to be, and how to use it.
1) Read the Whitepaper. The best place to understand anything is its beginning, this is the original paper describing the what, the how, and the why of Bitcoin. It was written by Bitcoin’s creator, Satoshi Nakamoto, an anonymous person or group of people. The more you understand how Bitcoin works, the more you realize its creator does not matter, whether he is becomes known or not.
2) Bitcoin is Open Source. Bitcoin is not a company with shareholders or a board of directors. To a degree, Bitcoin is unregulated and without a governing body or leader. The code it uses is completely open source meaning it’s free and anyone can review and scrutinize every single line of code. Anyone can submit proposals for improvement, but each proposal will be vetted and must be agreed upon by an overwhelming majority of the entire community. Additionally, it is regulated through the hundreds of exchanges via the AML/KYC requirement Money Services Businesses must adhere to.
3) Bitcoin is Secure. It’s important to be comfortable with bitcoin before using it and that usually means feeling it’s secure. Bitcoin itself is secure. It’s backed by millions of dollars in energy costs, thousands in specialized equipment costs, and a genius protocol that prevents double spending (fraud) and fake transactions. Where one needs to be concerned is your own security. When you create a bitcoin account, which you can do for free, you’re given a Public Key and a Private Key.
Think of your Public Key as you bank account number, a public (safely shareable) number that can only receive bitcoin. Your Private Key is like your pin, it controls the bitcoin in your account, DO NOT SHARE OR LOSE THIS, anyone with has access to your bitcoin. Additionally, it’s important to note bitcoin transaction are irreversible, if you send them to an incorrect address or another user’s public key they’re gone or no longer yours.
4) Bitcoins Are Not Coins. bitcoin is peer-to-peer digital cash that lives on the internet in a decentralized database that no one owns, but everyone shares. Its finite, supply is restricted 21 million. There will never be more. Internet money may sound scary, but again, the more you research, the more you’ll realize bitcoin is unhackable in any realistic sense.
The hacks that wind up in the news are (often times inside job) hacks at centralized exchanges where users trusted other people with their private keys (see below). It’s also somewhat important to distinguish between Bitcoin and bitcoin. Bitcoin (capital “B”) refers to the technology, protocol, movement, community, etc., and bitcoin refers to the currency (divisible up to 8 decimal places 0.00000001Ƀ).
5) Don’t Hold Bitcoins On Exchanges. As Bitcoin educator and public speaker, Andreas Antonopoulos publicly stresses “if you don’t hold your keys, they’re not your bitcoin.” The only way you truly own bitcoin is if you hold the keys associated with them. If you want to trade, sure have some bitcoin on an exchange, but know the risks associated with that. These exchanges are not intended for long term storage, and if it gets hacked you are not guaranteed you coins back.
6) Lose Your Keys (or seed), Lose Your Coins. You can find horror stories about users losing thousands of bitcoins, worth millions today, due to losing private keys. There is no customer support; with great power comes great responsibility. When using or owning bitcoin, you are your own bank. There is no support line you can call and ask for your password or private keys back. Its slightly bittersweet, but it means you have 100% control over those assets. It’s good practice to write down your seed/private key on a few pieces of paper and keep one in a safe place, give one to a trusted family member, and put one in a safety deposit box at a bank. Yes I am aware of the irony of the last one.
7) Always Be Skeptical. Scams are everywhere. There is significant hype in this space and people or groups attempting, and often successfully, to scam people out of money. Many have very cool, innovative projects with fancy, professional websites and bios. Do your due-diligence, ask questions, and press to discover true value propositions. Lately, a majority of scams have been through ICOs (Initial Coin Offerings) or projects on the Ethereum platform. Chris DeRose provides great, objective content doing just that. However, never follow anyone blindly, always find people with opposing views from your own and those you follow and listen, carefully.
8) There Are Technical Obstacles. Bitcoin is not perfect, it’s a project with very ambitious goals socially, politically, technically. It’s irresponsible to not understand this before investing your money. For example, scaling bitcoin is the hottest topic and debate currently. Bitcoin can currently process ~7 transaction per second (tps) (Visa typically does 2000 tps). As mentioned above, to change the rules of bitcoin (increase the transaction throughput), there needs to be overwhelming consensus on the change otherwise the network can split, reducing security, increasing uncertainty, and creating many other issues.
9) There Are Political Obstacles. The previous point heavily leads to this one. One of the very interesting but also great features of bitcoin is there is no authority that determines what will happen. It’s up to us, as users, miners, businesses, and developers, to figure out and come to consensus on the future of bitcoin. Everyone plays a role. This is not a simple task, we’re dealing with people across every border with different ideals, opinions, cultures, motives, an education. This can be seen clearly in online forums and platforms with regard to the infamous blocksize (scaling) debate that has been going on for at least 2 years.
10) Avoid r/btc & r/Bitcoin. As a good starting point, I’d avoid both these forums. They’re quite toxic for both sides and don’t seek to find any common ground. I recently unsubscribed from both after 2 years. At times it can be entertaining, but after a while rather very frustrating. It’s good to pop in every once and awhile to see what’s going on.
11) The Inevitable Tradeoff. Depending on your involvement and goals in bitcoin, you will eventually have an opinion. It’s my opinion that in the future, there will have to be a tradeoff in bitcoin between Security, Decentralization, and Cost (fees). It’s important to understand that while bitcoin may offer all of these today, at scale and much large adoption achieving all three is not technically possible. Much of the debates today are over high fees due to small blocks (another oversimplification), but larger blocks and hardforks to achieve them introduce security and decentralization risks. So do your research and determine what you value about bitcoin. Remember, bitcoin is not the one and only project. See “Alt Coins”.
12) It’s An Experiment. As early bitcoin entrepreneur and martyr Charlie Shrem said, “Bitcoin is one of the largest socio-economic experiments humankind has ever seen.” It started as an ideological experiment aimed creating an alternative to governmental control of money supply. This is evident in the first block ever mined (Genesis Block) by Satoshi Nakamoto embedded the message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.
However, as the technology attracted awareness and matured, its utility moved to speculation (investing and storage of wealth), Tipping, Dark Markets, and gambling. Many aspire to use bitcoin to help the unbanked, consisting of almost 2 billion people without the means or proper documentation to open a bank account. Further, significant investment has been put into using bitcoin to solve the high costs of remittances and cross-border payments. This too hasn’t taken off due to the difficulty in regulation, on/off ramps for fiat, and education.
This whole industry is still very much an experiment that needs to prove itself. Remember, Bitcoin is only 8 years old. Any investment in bitcoin should of course consist of only risk capital aka money you can stand to lose. With that said, the technology is novel and its future implications are quite exciting. Bitcoin isn’t going anywhere and I believe it’s important to be aware of it and its potential. I’ve included an infographic from Blockchain.info that highlights its value and why people use bitcoin.
Useful Links
Wallets
Mobile
Available for phones, laptops, and other devices. Some wallets are web-based, but I’d avoid all web-based wallets.
Hardware
Most secure storage, also called “cold storage” as its offline and typically a USB device. (I’ve also included a link to creating physical paper wallets, also very secure).
Exchanges
Where to Spend
Further Learning
Youtube
Reading
Bitcoin: Economics, Technology, and Governance
Topics of Interest
Thanks for reading through. Any further questions, reach out!
