Getting Started With Bitcoin: How and Why
- 1 What is Bitcoin?
- 2 Uses for Bitcoin
- 3 Bitcoin Wallets and How They Work
- 4 How to Buy Bitcoin
- 5 Conclusion
Many people interested in getting started with bitcoin have trouble knowing where to begin. It seems there are so many different places to buy bitcoin, different wallets to use for storing it, and other queries and confusions. I’ve been asked questions about this a few times by friends and colleagues wanting to get started, so I decided to write a post to try and clear some of this up. I’ll cover the basics of how bitcoin works, common reasons for wanting to own some bitcoin, how to buy your first bitcoin, and how to store it.
This post is intended for beginners to cryptocurrencies, and may not be worth reading if you already know what you’re doing. Feel free to check out my other posts; some of those will be slightly more advanced.
What is Bitcoin?
Without going into detail, bitcoin is an open source digital currency, released by Satoshi Nakamoto in 2008. Users can send bitcoin directly to each other through the network, without requiring a central authority. All transactions are stored in a public ledger called the blockchain. The blockchain is secured using cryptography and the computing power of ‘miners’ on the network who are rewarded for their work. Each time a miner ‘mines’ a new block, they are awarded some bitcoin. Transactions made since the last block are stored permanently in the new block, and all miners start to use this block as the most recent block to build on top of.
This decentralised blockchain is great, as there’s no central authority that can control your money. This is unlike PayPal or your bank, for example, who have your money and usually let you access it when you want to. It has some other advantages such as making it impossible to counterfeit bitcoin; ensuring that there are never more than 21,000,000 bitcoins created, and by extension preventing inflation. In summary, bitcoin is naturally immune to many problems fiat currencies and payment systems suffer from.
There are many other cryptocurrencies that work in a similar way to bitcoin, but with a current market cap of over $19 billion, bitcoin is the largest. Other cryptocurrencies you may have heard of include Litecoin, Ethereum, Ripple and Dogecoin.
Uses for Bitcoin
There are many reasons the bitcoin ecosystem and blockchain can be useful:
Possibly the most obvious is as a currency. Bitcoin can be used to send payments instantly to anyone in the world – payments which cannot be reversed once sent. Many people are interested in owning bitcoin in order to use it for buying items online or in person.
Store of Value
Some people don’t like trusting banks with all their money, or simply prefer to store some of it elsewhere. Bitcoin offers an alternative that allows you to have total control over your assets. No government or organisation can intervene and take away access, and inflation won’t increase the amount of bitcoin in circulation. This allows you to store money in bitcoin without having to worry so much about external factors.
A lot of people over the past few years have wanted to buy into bitcoin after seeing others profiting from it. When the value of bitcoin increased over 50 times in 2013 a lot of people made a lot of money from trading. Even now, the value of bitcoin is near an all time high, so most people who bought bitcoin any time before have also profited from it. Buying bitcoin can be seen as a good investment, despite its volatile nature, and many people are buying it for this reason.
Buying/trading other cryptocurrencies
Another reason people might like to have some bitcoin is that it’s often the only currency you can use to buy other cryptocurrencies. There are hundreds or even thousands of other cryptocurrencies, most of them based on bitcoin. Many of them build on the technology and offer new features; some of them are more of a novelty or just for fun. In any case, some people like to own these and some day-trade them to try and make profit. Acquiring bitcoin is the first step to being able to get most of these other cryptocurrencies.
Whichever reason you have for getting into bitcoin is fine, even if it’s something completely different like simply being interested in the technology.
Bitcoin Wallets and How They Work
If you’re interested in getting started with Bitcoin, you’ll need to know how to store it, but there are a few main ideas you ought to understand before choosing which wallet software is best for you.
How Bitcoin Transactions Work
To receive bitcoin you have a bitcoin address, which looks something like this:
1BKP6dopYEqDC6GFyTegid9jEhoKuj1opp. Each address has a private key associated with it, and can receive bitcoin sent in a transaction. You can generate as many addresses as you like for free using any bitcoin wallet. When an address receives payment in a transaction, the bitcoin received can then be spent in a new transaction. However, transaction outputs can only be spent by a person who has the corresponding private key for the receiving address.
The balance you have in a bitcoin wallet is simply the total amount of unspent bitcoin received in addresses you own the private key to. So if you have address
A and address
B, each having received 1 BTC, your wallet will show a balance of 2 BTC. On the blockchain, however, there is no ‘balance’ of this total amount — it only has record of the two transactions of 1 BTC each. Then if you decide to send 1.5 BTC to another address,
C, your wallet will combine the transactions sent to
B, forming a third transaction. The difference of 0.5 BTC will be sent to a new ‘change’ address, which your wallet will also keep track of. Your balance will now show 0.5 BTC. A similar real-life example of this from the bitcoin blockchain (with different amounts) can be seen below:
- Bitcoins aren’t stored in the wallet, but your addresses and corresponding private keys are.
- Transactions are all stored on the blockchain. Your bitcoin wallet simply allows you to create new transactions on the blockchain.
Keeping track of all your addresses would be a very difficult task if done manually, which is why you’ll want to use a bitcoin wallet – software that handles all your addresses and private keys for you. There are different types of wallets, so this is where being aware of your options comes in handy.
This is probably the easiest way to get started with bitcoin. You simply download some software which allows you to instantly receive and generate addresses and receive payments. No need to create an account or remember credentials. You can usually use the software to encrypt your wallet if desired, for more security.
Some of the easiest and most popular wallets for getting started include:
The main advantage of using one of these wallets is that they store your private keys locally. No-one else has access to your private keys, and you don’t have to rely on any external service running in order to access your bitcoin. However this also means you should make sure to keep your data backed up in case you lose your device. Most of wallet software has built-in features to help with backing up your addresses and keys, so it’s an easy enough task.
Another easy way to get started is to use a web-based wallet or an exchange to store your bitcoin. These are services run by third parties, some of whom also sell bitcoin. Usually you create an account, which you can sign into from anywhere, either via a web browser or specific software, and access your bitcoin. This brings some advantages and disadvantages. Your private keys are stored on the servers of the service, which means you usually don’t have direct access to them. In most cases this is not a problem, but theoretically if the service were to go down or suffer an outage, you would lose access to your bitcoin. Think of it like PayPal – you depend on the service to access your money.
It can be much easier to use a web wallet, as you don’t even need to download any extra software. You also don’t need to worry about backing up your private keys yourself. As long as you know your account details, you can sign in from any device and send/receive payments.
Coinbase is a possibly the most popular example of a web wallet, and used by many people. You can access your account via web browser, but they also have nice iOS and Android apps. You can also buy bitcoin from Coinbase, so if you buy there and use it as your wallet you won’t have to transfer your newly acquired bitcoin to a separate address after buying.
Hardware and Paper Wallets
I won’t go into detail here, but there are a couple more types of wallets. One of these is paper wallets, whereby you print the address and private key from a machine that isn’t connected to the internet. This adds a lot of security, as the private key is never exposed on a machine with internet access. However it makes your bitcoin a bit more difficult to access than via software wallets. You can find out more about this at bitcoinpaperwallet.com.
Another alternative is hardware wallets. These are devices for sale which store your private keys. When you want to make transactions with your bitcoin, you plug the hardware wallet into your computer or phone, open up some compatible bitcoin wallet software, and the device will sign transactions as required without releasing your private keys to the other machine. This provides similar levels of protection as paper wallets, but makes handling multiple addresses and spending your bitcoin as easy as using a software wallet. Trezor and Ledger Wallets are among the most popular hardware wallets.
How to Buy Bitcoin
This is how you really get started on your journey with bitcoin: obtaining some of your own. There are many ways of obtaining bitcoin, the simplest being to buy it with fiat currencies. Depending on your country your options here will vary but I’ll go through a few ways of buying bitcoin here in the UK:
Coinbase is my first choice when looking to buy some bitcoin. They do require you to verify your identity, for Know Your Customer and Anti Money Laundering regulations. Usually this involves sending a photocopy of your passport. Once done, you can buy bitcoin instantly via credit/debit card or bank transfer. Some people prefer not to send this information, but if you don’t mind, this is probably the easiest and cheapest way to quickly buy bitcoin. Coinbase supports buying both bitcoin and Ethereum in 33 different countries. You can also sell bitcoin back to Coinbase, so if you want to trade your bitcoin back for fiat you can do it here.
If you use a referral link to sign up to Coinbase, your first $100 (~£80) of bitcoin bought will get you a free $10 of bitcoin. You can use this link to sign up to Coinbase or if you prefer not to, visit Coinbase without a referral link.
At Bittylicious you can buy small amounts of bitcoin without having to fully verify your ID. You do have tighter limits than at Coinbase, but for purchasing small amounts you only need to verify your email address and phone number. Once this is done you simply send your money via bank transfer and receive your bitcoin within minutes. The exchange rate is usually not as good as Coinbase but if you don’t like the idea of verifying your identity this may be the easiest way to get some bitcoin. I have used Bittylicious in the past, but since verifying my ID with Coinbase I use the latter, as I tend to get a better deal there.
At LocalBitcoins users can buy and sell bitcoins from each other. The price varies a lot here, as the individual sellers set the price. However you can buy via bank transfer or using cash without having to verify your identity. For some this may be preferable. However, you need to be careful as users have had issues with being scammed or put in dangerous situations. It’s not too common, but when buying with cash you will be meeting up with someone in real life, so be wary and take the same precautions you always should when meeting a stranger from the internet. LocalBitcoins works worldwide, so it’s especially useful if none of the other options operate in your country.
If you’re lucky, you may have a bitcoin ATM near you. These are like cash machines, but you can buy bitcoin printed on a paper wallet which you can sweep and store in a software wallet. Most people won’t have a bitcoin ATM near them, but you may be in luck, especially if you live near a large city. Check here to see if there’s one near you.
Other Ways of Getting Bitcoin
There are also many other ways to get bitcoin. Many bitcoin exchanges (used for trading bitcoin and other cryptocurrencies) allow you to send fiat, and you can use this to buy bitcoin. However these can be a little more difficult to send your money to, and it’s probably easier to use one of the options above.
You can also use bitcoin faucets to get very small amounts of bitcoin for free. These are websites you sign up to and can claim tiny amounts, often by completing simple tasks or playing games. These may or may not be worth your time, but if you want a small amount of bitcoin without paying, it may be worth checking out some faucets.
Lastly, I should mention mining. As an individual it is currently infeasible to mine bitcoin and make profit, but this is the main way of acquiring bitcoin and indeed, how all bitcoin in existence came into being. There is a maximum of 21 million bitcoin that will be brought into existence, and mining farms all over the world are trying to mine new blocks in return for receiving the block reward. This helps keep the blockchain and the whole network secure.
Hopefully now you have an idea of the fundamentals of bitcoin – at least enough for getting started. Once you’ve obtained some bitcoin of your own, send it to an address generated from your wallet and keep it safe until you want to spend it. I’ll be making more detailed posts here on some of the topics covered, so check back if you’d like to learn more. In the meantime, here are some external resources for further reading:
- Original bitcoin whitepaper, by Satoshi Nakamoto
- Bitcoin.com – Getting started
- Mastering Bitcoin: Unlocking Digital Cryptocurrencies, by Andreas Antonopoulos