Caleb & Brown

June 27, 2022  ·  4 min

Bitcoin Basics: A Beginner's Guide

Bitcoin Basics: A Beginner's Guide

Bitcoin is just over 13 years old but it has quickly been adopted globally at unprecedented speeds, leaving a lasting impact on the world. Many of its proponents believe this “magic internet money” is the future of money, whereas Bitcoin critics claim it has no inherent value. It’s been proclaimed dead over 450 times by the media, but it continues to thrive. But what actually is Bitcoin? This simple guide will cover what Bitcoin is, why it’s important and how it works.

What is Bitcoin?

Bitcoin is a peer-to-peer decentralised digital currency - the first of its kind globally. This means users can transact with one another without the need of an intermediary or a third-party like a bank. This is made possible through Bitcoin’s revolutionary blockchain technology. This new form of digital money is censorship-resistant, permissionless and highly resistant to seizure.

What is Bitcoin used for?

People use Bitcoin for a number of reasons. Like fiat currencies, Bitcoin can be used as a medium of exchange to buy anything from coffee to cars, as long as the vendor accepts Bitcoin as payment. It is permissionless - so anyone with an Internet connection can send and receive it.

Bitcoin’s digital nature allows it to be transferred globally with ease. The cost of sending money internationally using Bitcoin is often much lower than bank transfers. In many of the world’s unbanked countries, Bitcoin is the preferred method of sending remittances as it is the cheapest way to do so.

Bitcoin is also commonly used as a store of value. Since its inception, Bitcoin has enjoyed a highly appreciative value growth trajectory. Many refer to Bitcoin as “digital gold”. This comparison comes from Bitcoin’s scarce supply (only 21 million Bitcoin will ever exist) and fixed supply schedule.

Why is Bitcoin Valuable?

Bitcoin shares many of the characteristics that give traditional commodities and fiat currencies value - scarcity, durability, portability, divisibility, fungibility and acceptability. Because of Bitcoin’s digital presence, it can even be argued that Bitcoin is superior to traditional money across all these properties.

Scarcity - There will only ever be 21 million Bitcoins introduced to the network’s economy. Therefore, its supply is more limited than both silver and gold. There are currently over 19 million Bitcoin in circulation, with the last Bitcoin expected to enter the supply in the year 2140.

Durability - Bitcoin is purely digital and thus completely durable. All transaction history is permanently etched in the blockchain, meaning that you should never lose what’s rightfully yours (provided you follow the best security practices).

Portability - With Bitcoin, you can carry around all your wealth on a flash drive, memorised in your brain or transfer it instantly around the globe via the internet.

Divisibility - All currencies carry denominations so people can purchase goods that carry differing values. U.S. dollars, for example, are divisible down to two decimal places.

Bitcoin can be subdivided up to the eighth decimal place. The smallest unit of currency is called a Satoshi after Bitcoin’s creator. 1 BTC equals 100,000,000 Satoshi’s.

Fungibility - Fungible, or exchangeable, means that any unit of a currency can be exchanged for any other unit of the same value. In short, any Bitcoin created can be traded with another Bitcoin, since they are essentially identical.

Acceptability - For something to store value, people need to recognise and accept that it’s worth something.

There are currently thousands of individuals and vendors accepting Bitcoin payments globally and thousands of other small businesses taking payments and donations with Bitcoin. You can also Buy and Sell Bitcoin for other cryptocurrencies at Brokerages like Caleb & Brown, which provide a 24/7 service to match your needs.

History of Bitcoin

Bitcoin was originally created by an anonymous developer, or group of developers, under the pseudonym Satoshi Nakamoto. The Bitcoin Whitepaper was published in 2008, with the blockchain going live in January 2009, in response to the great financial crisis which saw unprecedented central bank intervention in markets, in order to prevent further collapse. Reference to these bailouts was made in Bitcoin’s genesis block, using The Times headline “Chancellor on brink of second bailout for banks”.

Bitcoin Cash System
Bitcoin Cash System

Source: The Bitcoin White paper - https://www.bitcoin.com/bitcoin.pdf

Who is Satoshi Nakamoto?

Nobody knows! Their real identity has never being uncovered. Satoshi could be one person or a group of developers anywhere in the world. The name is of Japanese origin, but Satoshi’s mastery of English has led many to believe that he/she/they originate from an English-speaking country. Satoshi continued to have an internet presence during Bitcoin’s early years, eventually disappearing on December 13th 2010, posting on BitcoinTalk forum for the last time.

Did Satoshi invent blockchain technology?

Bitcoin actually combines a number of existing technologies that had been around for some time. This concept of a chain of blocks wasn’t born with Bitcoin. Earlier attempts at producing a scarce digital currency using cryptography included Nick Szabo’s Bit Gold and Wei Dai’s B-money, however these attempts did not gain traction. Attempts at this technological solution were worked upon as early as 1992, and had many of the best and brightest minds of the cypherpunk community involved.

Interestingly, at no point does Satoshi’s white paper make use of the term “blockchain”. To seek a more in depth look into Bitcoin’s history click here.

How does Bitcoin work?

Bitcoin is the world’s first completely open payment network which anyone with an internet connection can participate in. Bitcoin was designed to be used on the internet, and doesn’t depend on banks or private companies to process transactions.

One of the most important elements of Bitcoin is the blockchain, which tracks who owns what, similar to how a bank tracks assets. What sets the Bitcoin blockchain apart from a bank's ledger is that it is decentralised, meaning anyone can view it and no single entity controls it.

How are new Bitcoin created?

Bitcoin is created using a process called Bitcoin mining, which involves using computing power to solve complex cryptographic problems on the Bitcoin network. Every time a new block is mined, it creates Bitcoins, which miners receive as a reward for contributing their computing power to the Bitcoin network.

When the first block was mined in 2009, the block reward was 50 Bitcoin. As a core function of Bitcoin’s deflationary design, this reward is halved roughly every four years (every 210,000 blocks), which increases scarcity and demand and this has historically resulted in a price surge. This event is known as the halving.

How Does Bitcoin mining Work?

Bitcoin uses a Proof of Work (PoW) consensus mechanism, which is used for validating transactions and mining new coins. Bitcoin’s network is comprised of a collection of computers, commonly referred to as “Bitcoin miners” or “nodes”, who are responsible for verifying transactions and creating new Bitcoins.

Blocks are solved by miners who compete to solve a block of transactions first in order to be rewarded with Bitcoin. Bitcoin uses a SHA-256 algorithm to form consensus. This involves miners expending computational work, much like how physical work is needed in order to ‘mine’ gold. The more energy that is directed to mining Bitcoin, the more secure the network becomes.

The protocol adjusts the difficulty of mining so that it takes approximately ten minutes to find a new block. Blocks aren’t always found exactly ten minutes after the previous one – the time taken merely fluctuates around this target.

How to get Bitcoin

There are three primary ways to obtain Bitcoin - mine, earn or to simply buy it. The most common of course being the latter.

The easiest way to buy Bitcoin is through a brokerage like Caleb & Brown. If you’re ready to dive in and make your first Bitcoin purchase, Caleb & Brown is here to help. Trusted by over 20,000 investors across 100 countries, our dedicated team of experts works around the clock to carry out all your Bitcoin trades.

Get set up with a personal broker today and you’ll receive a free security consultation, along with support to help you execute your first Bitcoin order.

How can I send Bitcoin?

Sending and receiving Bitcoin is a straightforward process, requiring only a Bitcoin address and the amount to send in order to carry this out. A Bitcoin address is an alphanumeric string and can also be displayed in a QR code format. Most wallets allow you to toggle between either sending a Bitcoin amount or a fiat value equivalent of Bitcoin should this be more apt.

How can I store my Bitcoin?

There are multiple ways of storing Bitcoin, from a cold wallet, hot wallet or with a custodian. Individual risk tolerance and preferences will determine the method employed by most users.

Cold wallets are completely disconnected from the internet. As such, they cannot be easily hacked and are often seen as a safer option for infrequent traders. These storage devices often resemble USB flash drives. Cold wallets have additional built-in layers of security to prevent a data breach once you connect it to the internet for trading.

Hot wallets are connected directly to the internet, usually through a phone or desktop application. Their popularity lies in their ease of use and ability to make trades quickly.

Many of these storage methods can seem complex, especially if you are not tech savvy. Caleb & Brown provide end-to-end custody solutions for hassle free storage and peace of mind investing. We have a battle-tested security infrastructure, through the leading asset security platform Fireblocks. All clients receive a free security consultation to ensure they follow security best practices.

Recommended reading: The Bitcoin Lightning Network Explained

Disclaimer: This assessment does not consider your personal circumstances, and should not be construed as financial, legal or investment advice. These thoughts are ours only and should only be taken as educational by the reader. Under no circumstances do we make recommendation or assurance towards the views expressed in the blog-post. The Company disclaims all duties and liabilities, including liability for negligence, for any loss or damage which is suffered or incurred by any person acting on any information provided.

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