A basic guide to Bitcoin

Despite launching in 2009, Bitcoin is still a hot topic today. But if you've ever tried researching it yourself, you might be left scratching your head.

So, here is a simple guide to Bitcoin that answers the most common questions people ask, including what it is, how it works and a glossary of Bitcoin-related terms.

What is Bitcoin?

Bitcoin is a virtual currency, sometimes called a digital currency.

It's also known as a cryptocurrency because it uses cryptographic security (which is difficult to hack). This makes it possible for users to make peer to peer transfers without needing to use a traditional bank or exchange.

This is possible due to the fact that Bitcoin uses the Bitcoin Blockchain and because it is decentralised – it has no central authority (e.g., a company/governance) – so information about transactions is held in multiple locations, known as nodes. It has been reported that there are 13,000 nodes on the Bitcoin Blockchain.

How does Bitcoin work?

Bitcoins are created as a reward for solving a complex cryptographic puzzle and whoever gets the correct answer first is rewarded with 6.25 Bitcoins every 15 minutes (as of August 2021).

The solving of the puzzle, in effect, then creates set data/information onto a ‘block’ which is ‘chained’ (linked to the previous block) so, once recorded, the information cannot be altered.

Since this process of creating blocks also occurs every 15 minutes – and assuming a Bitcoin price of £28,500 – whoever solves the puzzle is paid 6.25 x £28,500 = £178,125 every quarter of an hour. This equals £712,500 an hour, or £17.1million every day.

This explains why there is huge competition and a large number of very powerful computers dedicated to trying to earn or, as they say, ‘mine’ Bitcoins.

Why are people interested in Bitcoin?

There are three possible answers to this:

• Bitcoin has created a new type of asset (other assets include equities, bonds, commodities, real-estate) in which to invest - free from governments or corporations being able to manipulate it.
• Bitcoin also offers a way to digitally transfer value/money on a global basis without the need for a central authority to enable transactions.
• Fear and greed - fear of missing out and greed to make more, since Bitcoin’s price has risen from a few cents at its launch to, at one time, over $64,000.

How can people use Bitcoin?

The simplest way for someone to use Bitcoin is for them to open a crypto debit card (of which there are very many).

Essentially, if you have a crypto debit card that is linked to Visa, you could spend your Bitcoin wherever you can use Visa globally. As you shop, money is then transferred from Bitcoin into the currency from where you have just made your purchase.

Indeed, the price of Bitcoin has recently increased since it is rumoured that vast internet-based enterprise Amazon will potentially allow its customers to use Bitcoin on its platform when making purchases.

As well as venturing out shopping or buying products online, you can use Bitcoin to purchase almost anything. As reported in the Times recently, a Bitcoin miner bought a $1million property which was paid for in Bitcoin.

Other ways to use Bitcoin

One of the attractions of Bitcoin is that some believe its performance is not correlated to other assets i.e., the price of Bitcoin is not linked to equities. Therefore, Bitcoin is potentially a good way to have a more diversified portfolio since, if other assets fall, hopefully Bitcoin will not.

So-called crypto experts believe Bitcoin will rise from its current $40,000 price to over $1m which, if this were to happen, would certainly be a welcome boost to many peoples’ investments.

Glossary of some Bitcoin-related words

Altcoins - any crypto coins not named Bitcoin.

Block - a unit of a blockchain. Each block contains the hash of the previous block, confirmed transactions, and a number called a nonce.

Cold wallet - a digital wallet where digital currencies can be stored. It's held on a physical device that can be disconnected from the internet and then stored off-line (e.g in a safe) and therefore cannot be hacked into.

Decentralised apps (dApps) - open-source applications built on a blockchain.

Decentralised finance (DeFi) - a blanket term for decentralised alternatives to traditional (centralised) finance. DeFi includes banking, money management, payment processing, insurance, etc.

Difficulty - how hard it is for miners to create a new block. It is adjusted programmatically every 2,016 blocks to try and ensure that a Bitcoin block is created as near to 10 minutes as possible.

DLT - refers to a distributed ledger, another term for Blockchain technology.

Fear, Uncertainly and Doubt (FUD) - a term used to describe negative media or doubt over a project.

Gas - the fee you have to pay a miner to make a transaction on the blockchain (sometimes called the block reward).

Hot wallet - a digital wallet that holds a digital currency that is connected to the internet and therefore could be hacked into since it is online.

Miner - someone who receives Bitcoins for verifying new transactions on a blockchain.

Multisignature (multisig) - typically used to describe a wallet that needs more than one person/signature to authorise a transaction.

Private Key - similar to your password i.e., a set of numbers and letters to enable you to access your digital wallet.

Public Ledger - a place where anyone can view all the transactions ever made on a blockchain.

Satoshi Nakamoto - the individual (or group of individuals) believed to have invented Bitcoin, but the true identity still remains unknown.

Whales – people who own a lot of Bitcoins. It's believed there are just 1,000 whales who account for 40% of all Bitcoins.

Did you know?

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