Beginner’s Introduction to Bitcoin

by | 24 July 2014

A lot of people have heard of Bitcoin or are interested in learning about it. But where do you begin?

If you want to know more about Bitcoin, you’ve come to the right place. We’ve got a full guide to Bitcoin including where it came from, how it differs from regular money, why it’s so volatile, and much more. We’ll also explain a little about cryptocurrency in general to help provide you with some background knowledge. And there’s a list of commonly used crypto terms at the bottom of the page to help you get to grips with all the ultra-modern lingo.

Once you’re ready to take the plunge and buy some Bitcoin of your own, make sure you check out our guide which explains how to buy Bitcoin.


What is Cryptocurrency?

Cryptocurrency is an electronic type of currency. All of the currencies we currently use, such as GBP, USD and EUR, are referred to as fiat currencies – all of which are physical. Cryptocurrencies exist only online, with no notes or coins (despite their being referred to as “coins”).


What is Bitcoin (BTC)?

Bitcoin was the first major cryptocurrency, and therefore the most widely used and most popular to date. At first, Bitcoin wasn’t hugely trusted; in fact, it was largely used to purchase and exchange illegal substances, weapons and other illegal activities on the dark web. This led to its reputation as an unstable and even unsafe currency.

However, this perception is now changing. There are now Bitcoin ATM machines where you can withdraw fiat funds. There are even restaurants in Japan plus online shops and casinos where Bitcoin is a valid form of payment.


Where Did It All Begin?

The exact roots of Bitcoin are unknown, as the creator – or creators – purposely shrouded themselves in mystery. The name attributed to the creation of Bitcoin is Satoshi Nakamoto, but there is no such person in real life. Instead, crypto fans and experts have been left to speculate over who the real people behind the name could be.

There has even been a feature-length documentary, Banking on Bitcoin, in which a man named Craig Steven Wright claims to be Satoshi Nakamoto. With no real evidence, though, the claim has been discredited in many quarters.

It is widely believed the real Satoshi Nakamoto was born or lives in Japan. Online sleuths claim to have found Satoshi’s Bitcoin stash, and it is believed that Satoshi could be sitting on around 980,000BTC. Based on the coin’s peak value in 2017, that amount could be valued at as much as £10 or $14 billion.

For now, the search for Bitcoin’s real creator goes on.


What Are the Advantages of Using Bitcoin?

Cryptocurrencies are an interesting concept. But is buying Bitcoin just a novelty, or does it have any advantages over traditional fiat currencies?

In theory, there are many ways in which a digital currency may be preferable to traditional currencies. Here are a few of the major advantages Bitcoin can offer:

  • Speed. With no need to have transactions approved by a banking authority, Bitcoin can be transferred very quickly. Imagine withdrawing from an online casino without the traditional three-to-seven-day waiting period. A number of projects that aim to make Bitcoin transfers as fast as sending a text are currently being worked on.
  • Price. International bank transfers can be slow and very costly. Because Bitcoin is entirely digital, it doesn’t matter where you send it to. It enjoys the same low fees even when you send funds across the world.
  • Anonymity. Credit card fraud is a very real problem. Not only that, but victims will have details including their name and address compromised. With Bitcoin, there is no such risk as funds are not linked to a name or address.
  • Decentralisation. This is a frequently used word in the world of crypto. Essentially, Bitcoin is open-source and managed by a peer-to-peer network rather a bank-like, central authority. This is viewed as a big advantage by adopters of Bitcoin.

What Are the Risks of Using Bitcoin?

Just as there are many advantages to using Bitcoin, there are also several risks. Most of these risks are easy to expose when users don’t take care to store their Bitcoin safely.

Here are a few of the most prominent threats to your funds when using Bitcoin.

  • Hacking. There have been a few high-profile cases of hacking where an exchange has had coins stolen from it. In this instance, barring the goodwill of those who run the exchange, there is little people can do to recover their stolen currency.
  • Typing errors. Bitcoin addresses are long and complex. If you mistype one character the transaction will not work, or you might not be able to access your wallet. Similarly, if you happen to lose your password, it may prove difficult or even impossible to recover access to your account. You must remain diligent at all times.
  • Governments. Regulatory risks are another lingering threat. As Bitcoin continues to tread the water between fringe currency and mainstream adoption, there is always a risk that a government might clamp down on it. If that happens and it leads to people selling their Bitcoin, there’s no guarantee of its value lasting.
  • Scams. As well as being hacked, there’s always the risk that Bitcoin users could find themselves the victims of a scam. The Mt Gox fiasco, which saw some 850,000BTC stolen, is probably the most notorious Bitcoin-related scam to date. Always be aware of red flags, and make sure every address you enter is accurate. Just like with banking fraud, be wary of any suspicious emails or phone calls requesting your details.


What Is a Blockchain?

A blockchain is a public ledger which shows all the transactions that occur, in this way eliminating the need for banks and cutting out the middleman. It’s like a giant Excel spreadsheet that everyone can see and nobody can corrupt. Instead of one massive bank running it, it is controlled by millions of computers worldwide, each using a little power.

Every time you make a transfer with a coin such as Bitcoin or Ethereum, it will pop up on a blockchain. One example of how this could be helpful is to imagine a Word document that you send to several colleagues to review. As they make changes, you are temporarily locked out of editing. When it comes back, you have to put all those changes into one document – this is where you might miss changes, misplace a document, and so on. In a blockchain version of this, everybody would have access to the document simultaneously.


What Is a Coin?

Different types of cryptocurrency are referred to as “coins”. Bitcoin is one coin, Ethereum is another, and there are hundreds or even thousands more. There is no actual physical coin for any cryptocurrency – this is just how the currency is referred to.


How Do People Make Money out of Cryptocurrencies?

One way in which people make a profit is by investing in coins and waiting for their value to increase – just like playing the stock market. Bitcoin started at a few pennies, and in March 2018 it’s over £8,000 ($11,240) per coin. Similarly, Ethereum (ETH) started for pennies and rose from strength to strength in 2017, launching at around £6 ($8.43) and reaching a high of over £1,000 ($1,405).

When you consider that a £1,000 ($1,405) investment in a solid ISA will get you 5% per annum return (£1,050 or $1,475), but that investing £1,000 in ETH at the start of 2017 would have returned 4,000% in less than six months (£40,000 or $56,200), it’s easy to see why people are so excited by it.

However, it can also go downhill just as fast. In 2013, Bitcoin lost half its value after reaching $1,000 and went on to dip below $200 down the line, recovering only fairly recently. ETH hit £300 ($422) and then went as low as £100 ($140) in just two weeks before recovering to settle around £250 ($351). Potential investors should think long and hard before overinvesting in this budding technology.


How Much Could Bitcoin’s Value Increase By?

Cryptocurrency is still in its infancy, and the value of the coin continues to fluctuate wildly as users seek to establish a baseline of what one BTC should be worth. There are plenty of examples of “Bitcoin millionaires” – people who invested a small amount several years ago who have now become millionaires thanks to its increasing value.

Some respected industry heads have even put a figure on what they believe Bitcoin is capable of. John McAfee, famous for his internet security software, has boldly stated that he believes one BTC will be worth $1 million by 2020. With predictions like that, it’s easy to see why people are getting so excited.

But for every Bitcoin optimist, there’s a detractor. Trusted UK broadcaster the BBC recently aired a segment on Bitcoin, likening it to the Dutch tulip fad which saw people lose fortunes in backing an essentially worthless flower in the 1600s.


Why Is Cryptocurrency so Volatile?

The value of coins changes daily, and often drastically. Just like the pound can go up or down against the dollar, so too can cryptocurrencies fluctuate. The difference is that they fluctuate wildly as this is all relatively new. If a real-life event like Brexit happens, causing mass panic, it could weaken the pound by a couple of percent.

In the crypto world, because there is less money involved and a few major players have more of a market share than is possible in fiat (which is used by everyone), the market can change much more quickly. These people or companies who hold large percentages of the coin are referred to as “whales”, and they can easily manipulate the market by buying and selling in huge quantities over a short period of time.

One piece of good news can see the price rocket, and one hack or setback can cause it to crash. Even the act of a few people selling to take profits can cause a domino effect which sees other investors panic, leading to more selling and therefore a lower overall price. Also, there is no bank or institution behind this, so people generally panic much more than they would with fiat.


What Other Options Are out There?

Altcoins and tokens. Altcoins – alternative coins – are other options to rival Bitcoin and Ethereum. At the moment Bitcoin is by far the leading cryptocurrency, but that doesn’t mean it will always be the case. Jumping in and out of coins is one method to make a profit in this volatile industry. But if you find a coin you trust, like Bitcoin, it could well appreciate in value over time without you needing to jump ship.

Tokens are built on the blockchain of “parents” such as Ethereum. You might hear a lot about these tokens when researching cryptocurrency, especially because some people purchased tokens built on the Ethereum network and quickly saw them spin up to five, ten or even 20 times their value in a short time. You can buy tokens on exchanges or in an ICO.


What Is an Exchange?

There are several exchanges that allow you to buy and sell Bitcoin, Ethereum, and other altcoins and tokens. Here are a few:

Visit one of these sites and you’ll be confronted with graphs that can be overwhelming if you’ve never seen them before. There are lots of YouTube tutorials if you want to master the intricacies of buying and selling. In the main, these are places where you can buy and sell your Bitcoin and other cryptocurrencies.


What Is an ICO?

An Initial Coin Offering, or ICO, is the first possible chance to buy a new coin. It’s like Kickstarter for cryptocurrencies, except instead of getting a limited-edition T-shirt or accessory, you get the coins at (possibly) the cheapest price possible. Following an ICO, the coins are put on the exchange where anybody can buy them, and from there they could become the next Bitcoin or Ethereum.

Buying into an ICO is different for each company, who will usually have details on their website in the run-up to the ICO which tell you exactly how to buy their coin or token. Once you’ve bought, the funds will have to be moved to your wallet either automatically or via instructions explained by the company offering the ICO.


How Do I Store Coins in a Wallet?

When you buy coins or tokens on an exchange like Coinbase or Liqui, they’ll be safe there for the time being. The problem is that if the exchange is hacked or anything else goes wrong, your funds are gone.

Instead, you can store your coins in a wallet. There are a fair few websites that will create a free wallet for you. Typically, you only need to visit the website and enter a handful of details for a free online wallet to be generated for you. Each wallet is defined by a public address, which is a long string of random numbers and letters. This is the address you use to transfer your coins from the exchanges to your wallet.

You don’t have to use a wallet as your funds will probably be okay on the exchanges, and it’s a scary moment when you first see your coins leave the exchange and disappear into cyberspace for a few minutes before arriving. But it’s safer than leaving it on an exchange for too long.

If you want to make a free online wallet, just check out our guide on how to buy Bitcoin.


Common Terms

There are a lot of new words being thrown around in the crypto world, so here’s a breakdown of the technical and not-so-technical to help you sort your hodlers from your moon kids.

Address: A string of random numbers and letters to identify your wallet

Altcoin: Alternative coin. This covers all coins and tokens other than BTC and ETH

ATH: All-time high, used in reference to a coin reaching its highest ever price

Bearish: A negative sentiment towards a coin or market, in that it should decrease in value

Block: A section of the blockchain, by way of measuring it

Blockchain: A public ledger that records all Bitcoin transactions

Bullish: A positive sentiment towards a coin or market, in that it should increase in value

BTC: An acronym of Bitcoin

Cold storage: A way of storing your Bitcoin offline

Confirmation: Finalisation of a blockchain transaction

Cryptography: The science behind Bitcoin

Ethereum: A rival currency to Bitcoin

Exchange: A website which allows buyers and sellers to exchange coins in real time

Fiat: Traditional currency such as GBP, USD or EUR

FOMO: Fear of missing out

Fork: A new variant of a current blockchain which can produce a new type of cryptocurrency

FUD: Fear, uncertainty and doubt

Hash rate: Power required by Bitcoin network to operate properly

Hodl: To keep hold of one type of cryptocurrency coin (slang)

ICO: Initial coin offering

Limit order: Manner of buying on an exchange when the price hits a certain point only

Mining: The process of earning Bitcoin by solving blockchain algorithms

Moon: A drastic increase in a coin’s value (slang)

Node: A computer connected to the Bitcoin network

Online wallet: Somewhere to store your coins and tokens online

P2P: Peer-to-peer

Private key: A password that grants the user direct access to your funds

Pump and dump: The rapid buying, and then selling, of one coin

Roadmap: Forthcoming plan for a cryptocurrency

Satoshi: The smallest unit of Bitcoin, based on the pseudonym of Bitcoin’s creator

Sharding: A way to scale blockchains

Shill: The promotion of a coin to manipulate the market perception in your favour

Smart contract: A set of operations that must be met and recorded on the blockchain

Token: Type of cryptocurrency built on another blockchain

Wall: A large set of limit orders on an exchange, either to buy or sell

Whale: An individual or group with a large holding in one type of coin

Whitepaper: Proof of concept for new or upcoming cryptocurrencies

XBT: Another acronym of Bitcoin