What is Bitcoin? How does it work? Is it legitimate?
Bitcoin is the first pseudonymous open-source, decentralized, P2P
digital currency relying on cryptographic algorithms for the validation
of all transactions and the (limited) generation of new coins. It is
also deflationary, the opposite of most fiat currencies. Bitcoin
transactions are intentionally designed to be irreversible, unlike
chargebacks allowed with Paypal and most credit card companies. This
offers a unique level of protection for anyone selling goods (merchants
or individuals) for BTC.
Okay, neat. But what exactly does that mean? If you are brand
new to Bitcoin, and cryptocurrencies in general, there's a good chance
you don't understand some of that description. That's perfectly fine,
and I will try to break some of that down for you.
Although
physical coins and/or logos such as this one appear on many websites
and news articles about Bitcoin, there is actually no official image for
BTC. However, there are many nice physical coins/wallets available,
such as this one from Titan BTC.
Decentralized- Decentralized means that
Bitcoin is not controlled or run by any centralized authority (think-
governments). Bitcoin is a currency (money), just like U.S. Dollars,
British Pounds, and the Euro. However, these other currencies are
produced, controlled, and distributed by their respective governments.
Bitcoin has no centralized authority, and because of this, your accounts
(wallets) cannot be frozen, taxed, or otherwise regulated. Bitcoin is
free from political motives and turmoil. Economic freedom's starting to
sound better and better huh? Although some have tried (and are probably
still trying), Bitcoin cannot be shut down by any government. This is
because there is no central web server or site that can be taken down.
Instead, Bitcoin is run on a P2P network.
P2P Network- Peer-to-peer. Instead of
going through a central server, middleman company, or third-party, as
all other payment processing is done, Bitcoin is sent straight from
sender to receiver. Each node on the network (your wallet/computer) is
able to connect to any other node and act as both a server and a client
sharing updates to the blockchain (public ledger). The blockchain is
open-door and can't be altered or tampered with. Essentially this means
that Bitcoin cannot be counterfeited, transactions cannot be
forged/hacked, and there is proof and confirmation of every legit
transaction publicly available. The Blockchain tells no lies. Because
there is no third-party payment processor, transactions are virtually
free. This is great for both the buyer and the seller.
Cryptographic algorithms- Cryptography
relates to the study and use of secret codes and encryption technology,
while an algorithm is an advanced mathematic problem. When Bitcoin is
sent through the network, the transactions are encrypted in a
cryptographic hash function known as SHA256. Every transaction has to be
signed by a private key for security, which makes fraud and
counterfeiting nearly impossible.
How do I get started?
Get a wallet. To get started with
Bitcoin you need to get a good Bitcoin client or online wallet. This is
necessary to store your funds, but also to send and receive Bitcoin. You
can safely download the latest official Bitcoin Core client here
on Bitcoin.org. If you are just now doing this, you will have to wait a
while upon starting the client for the first time in order for the
blockchain to load. This gets your Bitcoin wallet caught up and current
with all existing transactions. You will only experience this long wait
the first time. If you know how to download torrent files, there is a
bootstrap.dat file you can place into the data directory to skip this
loading process.
If you don't want to use up your time and hard drive space
downloading the complete blockchain, you can always use an online wallet
service. The online wallet I personally use and trust is from blockchain.info. Blockchain.info lets you securely
store, send, and receive BTC. Be sure to write down all of your sign-up
information, as blockchain.info does not keep any of your login
information on their servers. This makes it much safer for you, although
you can't recover a lost password. Though you won't have a personally
stored copy of the blockchain when using their service, they have a
wonderful search feature where you can search for transactions based on
trxid (transaction identification), block height, address, block hash,
transaction hash, hash160, or ipv4 address.
There are a few more online wallets out there, I just recommend doing some research into them before you let them hold your money. Two of the most popular (besides blockchain.info) are Electrum and MultiBit.
There are a few more online wallets out there, I just recommend doing some research into them before you let them hold your money. Two of the most popular (besides blockchain.info) are Electrum and MultiBit.
Get some Bitcoin. Now that you have a
wallet/Bitcoin client, you are ready to get your first Bitcoin. There
are many ways you can earn BTC/get some for free, though for now we will
discuss buying some on an exchange. For info. on how to earn/get free
BTC, click here.
There are many different exchanges out there that give you the option of buying and selling BTC for different fiat currencies (USD, GBP, Euro), and seemingly more pop up everyday. It can sometimes be hard to tell from a glance whether an exchange is legitimate and trustworthy, or will disappear overnight after taking your initial deposit. I will list a few options that I have personally used and know to be reliable and trustworthy. I will also list a few big name exchanges among the Bitcoin community that I have not used but have heard good things about. It is ultimately up to you to do your dilligent research into these companies before you give them your money. For more information, check out my page on Where to buy BTC.
There are many different exchanges out there that give you the option of buying and selling BTC for different fiat currencies (USD, GBP, Euro), and seemingly more pop up everyday. It can sometimes be hard to tell from a glance whether an exchange is legitimate and trustworthy, or will disappear overnight after taking your initial deposit. I will list a few options that I have personally used and know to be reliable and trustworthy. I will also list a few big name exchanges among the Bitcoin community that I have not used but have heard good things about. It is ultimately up to you to do your dilligent research into these companies before you give them your money. For more information, check out my page on Where to buy BTC.
Learn Bitcoin safety measures. As with
all other forms of money, if you don't take the proper steps to protect
your BTC there is a possibility you may end up having it stolen. This
usually occurs on shady exchange sites or unreal investment scheme
sites. One of the biggest Bitcoin thefts of all time was the result of
Japan-based exchange site Mt. Gox
claiming a "vulnerability in the Bitcoin protocol" caused them to be
hacked and have approximately 850,000 BTC (valued at more than $450
million USD at the time) stolen. However, many in the Bitcoin community
and former customers of Mt. Gox don't believe that story, instead saying
they have been robbed by the company itself. Others said Mt. Gox should
have known about this supposed "vulnerability" and taken steps to
protect itself long before this happened. The Mt. Gox fiasco caused the
price of Bitcoin to drop, dealt a blow to the BTC community, and the
mainstream media ran with it- doing their best to make Bitcoin look
shady and unsafe. However, the price has since rebounded, and the truly
legitimate Bitcoin companies will continue to shine. Luckily, you will
be well-informed on how to be safe with your Bitcoin after reading this.
•Private Keys. A private key is
basically a secret code that allows Bitcoin to be spent. Every Bitcoin
address ever created has a matching private key which is saved in the
wallet file of the person who owns the balance. If you have the official Bitcoin client downloaded on your computer, your private key(s) will be saved in your wallet file. If you use an online wallet, such as blockchain.info,
your key(s) will be held by them, but you have the option of
importing/exporting them, and putting them onto a paper wallet. I use
blockchain.info and fully trust them holding private keys, but many
people you'll talk to who have been around Bitcoin for a long time will
tell you: "If you don't own your private keys, you don't own your
Bitcoin." They are referring to the fact that if a site or company is
hacked, or the owners are untrustworthy, it is much easier to steal your
BTC if they hold your private key(s). Important- If a private
key with a Bitcoin balance is compromised or stolen, the Bitcoin balance
can only be protected if it is immediately spent to a different address
whose private key is not compromised.
•Offline/Paper/Cold Storage wallets. A
paper wallet is a way to store Bitcoin that involves taking the Bitcoin
addresses and private keys offline and printing them directly on a piece
of paper. Paper wallets are probably THE safest way of storing BTC.
Think of them as a no-risk savings account that you don't typically
spend from often. Instructions for printing a paper wallet can be found
on most major online wallets/companies. Here are a few of the most
popular: Blockchain.info, Coinbase, Electrum, and MultiBit.
You can also store your BTC in physical wallets. There are a variety of manufacturers of some really beautiful looking physical Bitcoins, most of which you can choose to buy either empty or funded. Some of my favorites include the original, first-of-its-kind, Casascius coin, and the exquisite models designed by Titan BTC and Cryptolator. Most of these physical coin wallets contain a QR code and private key hidden under stickers to spend the BTC, or they'll leave you with some space to place your own private key onto them.
You can also store your BTC in physical wallets. There are a variety of manufacturers of some really beautiful looking physical Bitcoins, most of which you can choose to buy either empty or funded. Some of my favorites include the original, first-of-its-kind, Casascius coin, and the exquisite models designed by Titan BTC and Cryptolator. Most of these physical coin wallets contain a QR code and private key hidden under stickers to spend the BTC, or they'll leave you with some space to place your own private key onto them.
•Irreversible Transactions, PayPal, HYIP and Ponzis.
Bitcoin transactions are intentionally designed to be irreversible.
This is meant to prevent ridiculous chargeback scams that many buyers
using PayPal or credit cards pull on sellers, getting both the
merchandise and their money back. Speaking of PayPal, always remember: Do Not Ever sell any Bitcoin to somebody using PayPal as payment.
Sure, I suppose the person you're talking to just might be one of the
few honest people who won't do a chargeback on you after you send him
your BTC. But it's much safer to not assume that, because most people
you'll find trying to buy BTC on the internet with PayPal are indeed
scammers. Better safe than sorry as they say. Now where were we? Oh,
yeah- irreversible transactions. While they are one of Bitcoin's unique
features, they also make it much easier for scammers and thieves to rob
you. Though all of the sites and companies directly listed on my site
have been verified and proven trustworthy by myself (though maybe not
all of the advertised companies), it is still ultimately up to you to do
your prior research and use your best judgment when letting 3rd parties
handle your funds. Sometimes you just have to go with your gut feeling
on whether a company is trustworthy or not. If there is an investment
program that sounds too good to be true, it probably is. Sites promising
ridiculous return rates (i.e.- 500% in a week) are most likely a scam.
Scams like these are known as HYIP, or High Yield Investment Programs.
A HYIP is a type of Ponzi scheme, an investment scam that promises
unsustainably high ROI (return on investment) by paying previous
investors with the money deposited by new people joining in. Eventually,
they will just take the money and run. Sure, if you're one of the early
"investors" you might have a higher chance of getting your initial
deposit + interest, but there is no guarantee that even the first few
won't get robbed. Some BTC scams even advertise themselves as a Ponzi.
This is to fool you into a false sense of insight and security, and the
end-result is almost always the same. However, there are some resources
available to you to help investigate Bitcoin sites/companies.
Badbitcoin.org has their "Badlist,"
a list of proven illegitimate scam sites. You can also reach out to a
large percentage of the BTC community with your questions at bitcointalk.org.
Bitcointalk is a great place to look for inside information of the
Bitcoin economy and community. Many of the members are Bitcoin core
developers, industry heads, entrepreneurs, innovators, and general
Bitcoin enthusiasts. You can find a wealth of information about the
Bitcoin network, industry news, news about new retail products and
services available, company/site feedback, and much more here.
Helpful Links-
- Common BTC Myths from the Bitcoin Wiki
- Bitcoin.org, a useful resource site maintained by the Bitcoin Foundation
- Blockchain.info- You can search the blockchain, view stats, charts, and markets, utilize free applications such as payment processing, create a wallet, and much more!
- Bitcointalk.org- Join the BTC community and add your voice to the discussions! A great source for verifying the legitimacy of companies and hearing the latest news as it hits.
- Bitcoin's Subreddit- Another voice of the Bitcoin community, kind of like Bitcointalk's twisted step-brother.
