Bitcoin Made Simple: A Step By Step Guide

So you’ve heard about Bitcoin, but you’re confused.

All the talk of code and complex terminology is baffling. Is it just another version of PayPal? Is it even “real money”? Is it a good investment?

And besides, how can you “own” a line of code? Won’t it just make you a target for hackers?

I understand your questions. For people used to the world of cash and credit cards, Bitcoin is a revolutionary concept.

Today, I’ll give you concise answers to each question. By the end of this article, you’ll have a solid understanding of what Bitcoin is and how it works.

Even better, you’ll have the knowledge you need to make smart investments that 2x, 3x, or even 10x the money you’ve put in.

Let’s jump in!

3 Reasons Why You Should Pay Attention To Bitcoin

1. Bitcoin Isn’t Controlled by Any One Single Entity

One of the biggest selling points of Bitcoin is that it’s decentralized.

This means that it isn’t controlled by one company, corporation, or government. There is no governing body, and the users of Bitcoin manage and control it.

Like the Internet is controlled by the diverse network of users that inhabit it, Bitcoin can’t be rigged by one system.

In many ways, it’s the Wikipedia of currencies. The underlying components are open-source, meaning anyone can ensure the code works, and the best changes are made permanent.

There is no risk of the top 1% managing the currency with Bitcoin.

Since there are no “controllers” of the currency and no processing fees, it’s free to use and outside of government bounds.

What’s the best proof we have that Bitcoin is changing the way the financial system works?

All we have to do is look at how the current managers of money feel about Bitcoin. And sure enough, Bitcoin is revealing their insecurities about losing their power.

Rather than start with the complexities of Bitcoin, let’s take a simple look at the economic systems we have right now.

In our current world, we can pay with cash or a digital payment.

(For the sake of simplicity, I’m going to group together credit cards with bank transfers.)

Digital currency has a few advantages over cash. Most notably, it’s easier to store and spend than a stack of bills or coins.

It’s also easy to spend money digitally, and you can buy things online without mailing physical cash. But with the advantages of digital payment comes a serious downside.

2. Bitcoin Protects Against Inflation

A national currency comes with a few advantages. The good part of a national currency, like the U.S. Dollar, is that it’s reliable and trusted around the world.

But it’s not all great news.

Because it’s under the complete control, or fiat, of another entity, this type of money is known as a fiat currency. And fiat currencies have some serious downsides.

For one thing, all major modern currencies have moved past the gold standard.

If you owned $100 USD in 1900, you could go to the federal government and trade in your $100 for the equivalent in solid gold.

Today, there is no such guarantee. The US dollar is only worth what others are willing to pay for it, and for as long as the world believes the government will be stable.

This also means the government can print more currency whenever it sees fit, since there is no cap on the physical gold stores held by the federal bank.

Fiat currencies fluctuate in price as the economy shifts. Governments simply print more money, adjusting the rate of inflation and deflation to better suit their own needs.

That’s why you could buy a loaf of bread for 9¢ in the 1920’s, but will never find that price today. Inflation has exponentially devalued US currency since Congress created it in 1792.

History is replete with tales of government crashing their currency to get an advantage. One of the most famous was post-WWI Germany.

In an effort to pay off massive war debts, the government simply printed more money, causing the value of the German mark to plunge in relation to other currencies.

But it isn’t just during the throes of a world war that inflation can devalue a currency. Examples abound throughout history: Yugoslavia, Peru, Poland, Cyprus.

Throughout 2007 and 2009, Zimbabwe’s hyperinflation spiraled out of control. It peaked in November 2008 to the tune of 79,600,000,000% inflation over the previous month.

The same thing is happening in present-day Venezuela, where citizens are literally turning to Bitcoin to fight against hyperinflation.

This massive stack of bills would have been worth $71,000 USD back in 2001, but less than two decades later is only worth $21 USD due to the staggering hyperinflation in the country.

There’s no such risk of inflation with Bitcoin. Like gold, there are only a certain number of Bitcoins available. This means that the value of Bitcoins will stay relatively steady.

This is in contrast to the US Federal Reserve, which simply prints more money whenever it wants to cover the $20+ trillion of debt the US owes.

Because inflation helps the US government, it works to maintain a consistent inflation rate of 1-2% every year.

This means that every bank account, even with a high interest rate of 1%, is actually a losing investment.

It’s impossible to “print more” Bitcoins, because the number of coins is very consistent.

Exactly 12.5 bitcoins are released every 10 minutes or so, through a process I’ll explain in a minute.

To make it even more scarce, the number cuts in half every time 210,000 blocks are mined. When bitcoin started in 2009, each bounty was 50 bitcoins, which then cut to 25.

The number halved again to 12.5 in July 2016.

The last bitcoin will be handed out around 2109, when 21 million bitcoins have been distributed.

Like gold, this ensures that bitcoins remain scarce, and provide a hedge against the inflation and deflation governments create as part of their monetary policy.

3. Bitcoin Keeps Your Identity and Private Data Safe

Every time you swipe a card, the transaction is traced back to you and recorded. While you may think this is only the insidious tracking done by government agencies, you’re wrong.

Multinational companies have been tracking customers for years.

Every time you buy something at a store like this, your credit card information is recorded alongside your purchases.

Back in 2012, a Target analyst was quoted as saying: “If you use a credit card… we’ll record it and link it to your Guest ID… we want to know everything we can.”

Every time you pay with your bank account or a card with your name on it, you’re leaving behind a digital trail that will be searchable as long as the internet is around.

The September 2017 Equifax hack left sensitive personal data (including credit card information) for 143 million Americans in the hands of hackers.

For someone who doesn’t want to be tracked at every transaction, what’s the solution?

At its heart, Bitcoin is a way to pay for things digitally, while still reaping all the advantages of paying with cash.

Unlike most digital transactions, which are linked to your card or bank account, Bitcoin transactions are recorded only by the identifier of the payment itself.

You can think of this like the serial number on a piece of paper currency. It’s unique for each transaction, but it doesn’t signify the purchaser in any way.

This makes it far easier to send bitcoin to someone else than any form of currency, since it doesn’t go through a bank.

Because there is no governing body, currency exchange, or processing, bitcoin payments can be sent instantly, even to the 39% of the world’s population without bank accounts.

Bitcoin is Seriously Disrupting the Financial System

The truth is that most governments and central banks aren’t big fans of Bitcoin.

Why?

The reasons have to do with control. Unlike a fiat currency, Bitcoin is unregulated and impossible to devalue by managing its monetary policy.

There’s also a regulatory side of things to contend with. Because it’s like cash, governments don’t have record of sales and it’s largely non-taxable.

In fact, there are disagreements to this day exactly how Bitcoin is considered.

The US government has finally decided to consider Bitcoin to be registered as property and subject to property taxes instead of viewed as currency.

This lack of control makes it a thorny issue for those steeped in the olds types of money mange and currency control.

Again, Bitcoin is very similar to gold. Like gold, it can be exchange for other items of value.

And like gold, it’s impervious to the micromanagement of governments, banks, and economic management.

But let’s take a step back. How exactly does Bitcoin work?

How Bitcoin Works: an Explanation for the Non-techy

To truly use Bitcoin, you need to understand some of the underlying mechanisms that make the system work.

But don’t worry!

While the actual software that makes it run uses a lot of code and complicated computer algorithms for security, we’ll look at it on a simple level.

You see, at its most basic level, bitcoin is similar to a social network.

How Bitcoin Keeps your Money More Secure Than Your Bank

Imagine for a minute you’ve created an account on Twitter. You have a public username that others can use to contact you, and a private password that only you know.

Behind the scenes, Twitter records all the tweets you’ve sent and received, and the content of each tweet.

Now, let’s do a little thought experiment. Imagine that you set up a new account on twitter with an anonymous username, something like @akgu489gj04mb.

Then instead of using Twitter to send messages, you used it to send and receive money.

These transactions are recorded, but since nobody knows who @akgu489gj04mb actually is, your spending is secure without being associated with you.

And since only you have the password, nobody else can use your money.

Bitcoin works in this way, with one difference. A single company like Twitter would have complete control over your money.

They could charge new fees, sell your contact information, or even get hacked and lose control.

To solve this problem, Bitcoin uses what’s known as a “decentralized” system.

How Bitcoin Distributes Power to its Users

A decentralized system means your transactions aren’t recorded in a single master database, but updated on thousands of computers around the world.

But what if there’s a disputed transaction, like what might happen if one computer was offline for a few minutes? The majority of computers determines the “correct” outcome.

This system is set up in such a way that a rogue programmer can’t hack Bitcoin transactions and steal your money.

Such an activity would require attacking 51% of the computers on the network, making it far more difficult to hack Bitcoin transactions than a standard bank account.

Of course, because it’s special, Bitcoin doesn’t use the term “transaction” or “database.”

A group of transactions is known as a block, and the list of blocks stored on the computers around the world is known as a blockchain.

So, why would someone want to keep their computer online all the time to record this blockchain?

The short answer is, they’re bribed with Bitcoins.

Mining: How New Bitcoins are Generated

If someone chooses to help maintain this ledger of transactions known as the blockchain, they’re periodically rewarded with new bitcoins.

Here’s how it works.

The computers keeping track of the blockchain are known as miners, since they work to earn money just like old time gold miners.

A new block is created about every 10 minutes. It’s a list of the most recent pending transactions.

(This works like a credit card leaving a “pending transaction” notification in your account for a short period until the purchase is verified.)

When a new block is created, the Bitcoin software takes that information, along with information from the previous block, and generates a puzzle with it.

Imagine starting with a book, taking every 1000th letter, and creating a new “sentence” with these letters.

This is a simplified version of how the Bitcoin software operates, except the book is the previous block of transactions, and each sentence is called a “hash.”

To make it more difficult, the Bitcoin software determines how many zeros need to be at the front of the hash.

Imagine taking the book and instead of choosing every 1000th letter, you had to create a mathematical formula that ensured the first 10 characters were all the letter A.

It’d be difficult, right?

Mining computers work furiously to find the right formula to create a hash with the correct number of preceding zeros.

Once a mining computer strikes the right answer, it sends the hash and formula used to create it to other mining computers to confirm that the solution is correct.

This formula is called a “proof of work,” because it allows other computers to double-check that the solution actually works.

If the solution is correct, it’s recorded. To keep the system transparent, anyone can access the most recent blocks and hashes.

It keeps the information in the hands of the users, while staying private and secure.

But there’s a bonus for the winning computer. It’s awarded 12.5 brand new Bitcoins.

This is how new Bitcoins are entered into the system, instead of printing money like traditional governments do.

This constant interconnection with all the different computers in the network is intentional. It ensures that a hacker can’t change the blockchain and steal Bitcoins from innocent users.

So now that you understand how Bitcoins work, how can you start using them?

How you can start using Bitcoin (it’s easier than you think)

There are a few different ways you can acquire Bitcoins.

Of course, mining is one option.

But unless you’re highly technical and have the technological capacity to rival the supercomputers competing for mining bounties, you’re going to be disappointed.

Thankfully, you can buy Bitcoins far more easily.

Using a Wallet to Manage Bitcoin

Just like any other kind of currency, you can exchange money you already own for Bitcoin.

Once you do this, you’ll have access to a special public and private key which represent the coins, and your ownership will be recorded in the blockchain.

Like real coins, though, it can be tiresome to manage a bunch of Bitcoins all at once. Imagine going to the store with a pocketful of quarters and dimes.

To store Bitcoin, you’ll need to create a wallet. This is similar to a bank account that keeps your Bitcoins secure, but again, it’s completely anonymous.

And by the way, you can own less than one whole Bitcoin. You can own a fraction of Bitcoin, as little as 0.00000001 (one satoshi) of a Bitcoin.

At its core, it’s a secret password that ensures nobody else can access the coins you own.

To send Bitcoin to someone, you’ll just enter their Bitcoin address and schedule a transfer. eg: 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy

The address is a combination numbers and letters that keeps the recipient anonymous, similar to the imaginary @akgu489gj04mb Twitter username I mentioned earlier.

You can receive Bitcoins the same way, through an anonymous address you’re assigned as part of your wallet.

So, that’s great! But why would you want to trade Bitcoins? Can you even use them to buy things in the physical world?

Glad you asked. Let’s talk about that next.

Spending Bitcoin: The Good, the Bad, and the Promising

What can you do with Bitcoin? Isn’t it just computer code?

Well, yes and no. If you had to look at what gold is actually worth, you’d be pretty disappointed. I mean, at the end of the day it’s just a shiny yellow metal.

Ultimately, the value of a currency is just based on what people are willing to pay for it. And in the case of Bitcoin, people are willing to pay a lot.

With all the talk about a “virtually untraceable” currency, you’ve probably guessed one of the biggest values of Bitcoin: the black market.

And you’re not wrong.

Just as the Internet gave people the ability to distribute illegal material in a way traditional publishing never had, Bitcoin provides a gateway for illegal purchases without tracking.

But there’s more to Bitcoin than just buying drugs online.

It’s also a very handy way of sharing money between friends. It’s a quick way to pay a friend back for running an errand for you, or a buddy for mowing your lawn.

It’s also hugely beneficial in the world of (legal) online shopping. Major companies like Overstock.com, Microsoft, and Expedia now accept Bitcoin payments.

If you want to buy products and services online without knowing your every move is being tracked, Bitcoin is there to deliver.

It can also easily be used as a store of value. Just like you can store cash or gold to spend at a later time, Bitcoin doesn’t expire after a certain period.

It’s good for as long as you want to keep it, and its value will likely increase. Because of that growing value, Bitcoin is also a way to invest money.

As the price of Bitcoin continues to rise, it’s becoming a popular way for investors to hedge their bets against an unstable economy and unreliable stock prices.

While we’re on the subject, let’s talk about the price of Bitcoin.

What Affects the Price of Bitcoin?

Ultimately, the price of Bitcoin is similar to the price of precious metals. It fluctuates based on the different whims of the market, new valuations, news events, and other factors.

And just like any other currency, there are fluctuations based on the perceived value of the currency.

It’s also largely affected by major players in the Bitcoin space.

The Effect of Large Bitcoin Companies

Because Bitcoin is a relatively new currency, there are a smaller number of players in the market than for, say, the US dollar.

If a bank closes in the US or there’s a government shutdown, it doesn’t have much of an effect on the value of currency because the US dollar is so prevalent.

But bitcoin is a smaller currency, and sites that use Bitcoin tend to have a large impact on the its value.

This can easily be compared to the early days of the internet. The novelty of the World Wide Web meant that a lot of the first websites were launched by amateurs.

Without the management skills necessary to build a business, many of these early sites met an ugly demise.

To the uninformed, those sites made the fledgling internet appear to be unstable and doomed.

But perceptive investors recognized that the faulty efforts of early adopters didn’t reflect on the viability of the technology that was changing communications forever.

Like the Internet, Bitcoin has experienced it fair share of dramatic company downfalls.

But just as Napster’s legal problems and Internet Explorer’s battle against Netscape in the 1990s didn’t kill the Internet, these early problems don’t affect bitcoin’s core functionality.

They do, however, change the perceived value of Bitcoin.

One of the first sites to capitalize on bitcoin payments was Silk Road, an illegal marketplace run on the dark web.

In 2013, the FBI seized and shut down the Silk Road website, putting the founder in prison for life without chance of parole.

Because Silk Road had been such a cornerstone piece of the bitcoin landscape, the news shocked the Bitcoin world and sent the price into a freefall.

It recovered over the new week, and is currently valued much higher than its days during the Silk Road era.

Another large player in the early days of bitcoin was Mt. Gox, a website that allowed users to store their bitcoins and trade them for other currencies.

While it was never officially related to bitcoin, the site handled 70% of all Bitcoin trading by 2013.

But due to mismanagement and security vulnerabilities, Mt. Gox ended up losing $480 million dollars worth of Bitcoin, around 7% of the total currency in circulation at the time.
In 2014, Mt. Gox declared bankruptcy in its home country of Japan, the notice which still appears on the homepage of the site.

While the integrity and security of Bitcoin has not changed, these initial players have changed the perceptions of how usable Bitcoins are.

As Bitcoin continues to grow and diversify, however, these massive spikes and drops are beginning to even out.

For example, in 2017 authorities shut down AlphaBay and Hansa Market, two large black markets run primarily on bitcoin.

In September 2017, China announced a suspension on all of its Bitcoin exchanges.

Despite the shutdowns, however, the price of Bitcoin has remained stable and even continued to grow, proving its resiliency and legitimacy as a decentralized digital currency.

News Soundbites and Fluctuating Prices

Another factor that has a huge influence on the price of Bitcoin are news events.

These are usually when large companies announce their acceptance of Bitcoin, or there is talk of regulation of the currency.

These announcements and news events play a huge role in the value of the currency over time.

The journey to becoming a mainstream currency has been an arduous one for Bitcoin, and even minor events tend to cause dramatic shifts in the price.

Over time, however, Bitcoin has maintained a steady increase in trading price against the US dollar. So, what does the outcome of Bitcoin look like in the long term?

Is There Long-term Potential for Bitcoin?

There are a few different factors you should look at when considering the future price of Bitcoin or any currency.

The first is the factors that have affected the price in the past.

We know that news events, new users of Bitcoin, and the fates of major independent players in the Bitcoin space have huge sway over the price of the currency.

We also know that Bitcoin is viewed as a haven in times of change and financial uncertainty. Its value went up during Brexit and when Donald Trump was elected in the US.

It remains a popular form of currency in China, where nationals with wealth view it as a way to move cash out of China and avoid government regulations and scrutiny.

This has resulted in a massive shift to Chinese trading in the Bitcoin market, as the currency becomes popular due to capital flight regulations.

This is a sign that the currency, while new, is still viewed as being more potentially reliable when other more traditional currencies are in question.

This is a good sign for the future.

The second place to look is the overall trend across years.

While the price of anything fluctuates day to day, it’s a much more reliable way to look at the overall price increase of a commodity across time.

When we look at the broad range of prices that change on a daily basis, it can be discouraging.

But when viewed in a long-term light, Bitcoin’s conversion rate to USD has increased dramatically over the past five years.

Finally, we should see what the experts are saying about the future of Bitcoin.

Bill Gates, the founder of Microsoft, has said that Bitcoin is better than currency.

Of course, he’s not an investment expert. But as someone highly knowledgeable about the technology that will come to shape the future, he’s a good source to trust.

Technology pioneer John McAfee, founder of McAfee security software, has said Bitcoin will hit $500,000 each in the next three years.

And he placed a pretty high bet against it!

Jeremy Liew, the first investor in Snapchat, has said that Bitcoin will rise to $500,000 by 2030, and provides compelling analysis for the math behind the increase.

When comparing Bitcoin investment to other cryptocurrencies options, he said, “you want to be where the most trading volume is happening, and right now that’s happening in Bitcoin.”

Taken together, the indicators of growth, long-term value increase, and expert opinions seem to indicate that Bitcoin will only increase in the future.

Overall, it’s becoming a more mainstream currency, and we should expect to see the price of Bitcoins continuing to grow in the coming months and years.

So, Here’s what Bitcoin is in a Nutshell

Before you can start leveraging Bitcoin to keep as a financial investment and start using it to generate insane returns, you need to understand what it is.

At its most basic level, Bitcoin is a like a username and password, called a public and private key.

The money each set of keys has access to is stored on computers around the globe in a list of transactions known as the blockchain.

Unlike traditional currencies that are tied up by governments and economics policies, Bitcoin functions in a decentralized network that’s owned and managed by the users.

It’s also untrackable, meaning it behaves much like a form of cash you can pay with online.

As it’s still in the early stages of drawing attention and becoming mainstream, it has a high volatility.

Even small news segments can make it look unstable, though the price has been in a steady uptick since it began.

Despite (and perhaps because) of the advantages Bitcoin has over fiat currencies, the more traditional financial institutions, including government and banks, don’t appreciate its value.

Some restrictive government have even banned the currency, and its regulatory framework is uncertain.

Finally, Bitcoin is at a stage of development where it is gradually gaining mainstream usage, and the value of Bitcoin is increasing steadily over time.

Early adopters and investors in the currency can reap huge rewards by acting now and taking advantage of the price of Bitcoin that is projected to increase in the coming years.

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