Bitcoin for Dummies Guide: All You Need to Know About BTC

If you have ventured online in the past 15 years ago, the chances are you have come across the term “Bitcoin”. However, despite its popularity, most people still don’t really have a grasp on what Bitcoin is, which is why we have put together our Bitcoin for Dummies guide to help you understand:

• What is Bitcoin?
• How Bitcoin works?
• What is a Bitcoin wallet
• How to mine for Bitcoin and earn rewards
• Pros and cons of Bitcoin

Let’s start from the beginning and explain how and why Bitcoin was invented.

Bitcoin for Dummies: BTC Explained

Before we get into the details of Bitcoin for beginners, let’s talk about its inception first, as it will help you gain a better understanding of some of the concepts that underpin the idea of Bitcoin, such as blockchain technology, digital ledger, and mining.

Who Invented Bitcoin and Why

Bitcoin was invented by an individual or group of individuals going under the pseudonym Satoshi Nakamoto. They still remain anonymous, and their true identity is still a cause for much speculation. Bitcoin was introduced to the world in 2008 through a white paper that explained the need for a decentralized digital currency.

This digital currency operates without the need for a central financial authority or institution, such as a bank or government. It removes all the intermediaries in the process and introduces a peer-to-peer system cash system in the digital realm.

Bitcoin, in a way, was born out of disillusionment with the existing financial system, especially after the economic crisis of 2008, and provide an alternative to the existing system, which has failed many.

Bitcoin’s advantages are better transparency, security, and resistance to control or censorship, at least for the time being. Put in bitcoin for dummies terms, it is a peer-to-peer system that allows for direct financial transactions between users, backed by cryptography and running on blockchain technology.

It also opened the door for the cryptocurrency movement that is going stronger than ever.

What Is Bitcoin?

Bitcoin is the first digital cryptocurrency that is independent of traditional, centralized banking systems and is used for making online transactions between parties, buying good or services, or as a way of investing your money, much like stocks.

But, unlike the dollars or euros in your wallet or bank account, Bitcoin exists on a network of computers worldwide, which is kept in operation by complex mathematical computations. Every Bitcoin transaction is recorded on a public ledger called the blockchain, which ensures transparency and security.

This means that once a transaction is made, it’s visible to anyone and can’t be tampered with, making fraud extremely difficult. Bitcoin supply is capped at 21 million coins, and its value increases over time as the demand grows and Bitcoin becomes more scarce.

This scarcity mimics the real-life scarcity and finite supply of precious metals, such as gold. Another built-in mechanism that keeps Bitcoin scarce and impervious to inflation, is Bitcoin halving, which is explained in simple terms in our video:

Now that you know what Bitcoin is and how and why it came to be, let’s get on to our Bitcoin for dummies explanation of how it works, as well as how to earn Bitcoin money.

How Does Bitcoin Work?

Bitcoin, the first and most well-known cryptocurrency, operates using blockchain technology. A blockchain is a decentralized and distributed digital ledger that records all the transactions across a network of computers.

The blockchain provides transparency, security, and integrity of data without the need for a central authority, effectively making Bitcoin a peer-to-peer digital currency. This means that transactions are done directly from one user to another, and each transaction is digitally signed with a unique set of cryptographic keys to ensure security.

These transactions are then broadcast to the Bitcoin network and await confirmation. Then, Bitcoin miners, who are participants in the network with powerful computers and rigs, take on confirming these transactions. They are called miners because the process of solving these complex mathematical equations is called mining.

The first miner to solve the puzzle and validate the block is rewarded with newly minted bitcoins and transaction fees. This not only incentivizes miners to maintain and secure the blockchain, but also controls the creation of new bitcoins.

Once a transaction is confirmed and added to a block on the blockchain, it is irreversible and publicly recorded, which provides transparency and ensures trust in the system. Because blockchain acts as a public ledger, anyone can trace Bitcoin transactions back to their source.

Next up in our Bitcoin for dummies guide is how new Bitcoins are created.

How to Mine Bitcoin?

Bitcoin, for beginners especially, can be an overly complex subject, especially when it gets to mining, so we’ll keep as simple as possible. Bitcoin utilizes the Proof of Work (PoW) consensus mechanism to secure its network, validate transactions, and create new blocks on the blockchain.

This process, known as mining, requires participants to solve complex mathematical puzzles. It not only keeps the blockchain secure and in operation but also introduces new Bitcoins into circulation. Mining requires specialized hardware, software, and a significant amount of electricity. Most of Bitcoin mining occurs in the US.

Initially, miners used standard computer CPUs to mine Bitcoin, but as the network grew, the difficulty of the mining puzzles increased, which required more powerful hardware. Today, miners use Application-Specific Integrated Circuits (ASICs), which have tremendous processing power and efficiency compared to general-purpose hardware.

The mining process starts with gathering recent transactions into a block, and the miners then apply a cryptographic hash function to the block’s data. The goal is to find a hash that meets the network’s current difficulty target, a measure that ensures a consistent time interval between blocks added to the blockchain.

This difficulty adjusts approximately every two weeks to maintain a ten-minute block discovery time, a design choice that is meant to stabilize block creation rate regardless of total network hashing power.

Finding the correct hash is a matter of trial and error, as it requires guessing multiple nonce values (a random piece of data added to the block’s header) until the miner finds one that produces a hash within the target range.

This process is highly competitive and resource-intensive, as the first miner to find a valid hash is rewarded with newly minted bitcoins (the block reward) and transaction fees from the transactions included in the new block.

For a more concise and visual explanation, check out our video on cryptomining:

Bitcoin Halving

The block reward is 6.25 bitcoins, a figure that halves approximately every four years in an event known as “halving.” The next Bitcoin halving event is expected to take place on April 19, 2024, after which the mining reward will be halved to 3.125 BTC.

This mechanism ensures that the total supply of Bitcoin will never exceed 21 million coins, making Bitcoin a deflationary asset. Due to the competitive nature of mining, many miners join mining pools to combine their computational resources and share the rewards.

The rewards can then be reaped using a digital Bitcoin wallet with public and private keys, which is explained in the next section of our Bitcoin for dummies guide.

What Is a Bitcoin Wallet?

Bitcoin wallets and the concept of private and public keys are crucial for understanding how Bitcoin transactions work. A Bitcoin wallet is essentially software that allows you to send and receive Bitcoin and keep track of your Bitcoin balance and transactions.

Unlike a physical wallet, your Bitcoin wallet doesn’t actually store your Bitcoin. Instead, it stores private and public keys associated with your Bitcoin addresses. These keys provide you with the ability to access and control the Bitcoin transactions that are recorded on the Bitcoin blockchain.

Private Key

The private key is the equivalent of the PIN code to your bank account. It is basically an alphanumeric code that allows a you to access and manage your Bitcoin holdings. It’s meant to be kept secret and is used to sign transactions, proving ownership of the Bitcoin being sent.

Obviously, you should be the only one who has your private key, as anyone who has it can access and spend your Bitcoin. The private key is generated randomly when a Bitcoin wallet is created and can also be used to derive the wallet’s public key and Bitcoin addresses.

Public Key

As we have already mentioned in out Bitcoin for dummies explanation of public key, a public key in Bitcoin is derived from a private key through a complex mathematical algorithm. It is essentially a cryptographic code that enables you to receive transactions.

Unlike the private key, the public key is meant to be shared with others. It is used to generate a Bitcoin address, a more user-friendly version of the public key, which acts like an account number to which other users can send you Bitcoin.

The public key plays a crucial role in the digital signature process, verifying the transaction without revealing the private key. Now, no Bitcoin for dummies is complete without explaining how to mine for Bitcoin, and ultimately, how to earn Bitcoin assets, which we explained in the chapter below.

Pros and Cons of Bitcoin

Let’s get started with the Bitcoin for dummies explanation of BTC advantages.

Bitcoin Advantages

• Decentralization: Bitcoin operates without a central authority, reducing the risk of manipulation and interference from governments or financial institutions.
• Limited Supply: Capped at 21 million coins, Bitcoin’s scarcity can protect against inflation, similar to precious metals.
• Transparency: Transactions are recorded on a public ledger (blockchain), ensuring transparency and traceability.
• Security: Cryptographic protocols make Bitcoin transactions secure and tamper-proof.
• Global Accessibility: Anyone with internet access can participate in the Bitcoin network, facilitating financial inclusion.
• Lower Transaction Fees: Bitcoin can offer lower transaction fees compared to traditional online payment methods, especially for international transfers.
• Privacy: While not completely anonymous, Bitcoin offers a higher degree of privacy compared to traditional financial transactions.
• Investment Potential: Bitcoin has shown significant price appreciation over time, attracting investors looking for high returns.
• Innovation and Ecosystem: Bitcoin has spurred innovation in financial services, leading to the development of cryptocurrencies other than Bitcoin, known as altcoins, new technologies and businesses in the cryptocurrency and blockchain space
• Portability: Being digital, Bitcoin can be stored on a small piece of hardware or even memorized, making it highly portable.

Bitcoin Disadvantages

• Volatility: Bitcoin’s price is highly volatile, leading to potentially significant losses for investors.
• Scalability Issues: The Bitcoin network currently faces challenges with transaction processing times and fees during periods of high demand.
• Environmental Impact: Bitcoin mining consumes a significant amount of electricity, raising concerns about its environmental footprint.
• Security Risks: While the network is secure, users’ wallets can be vulnerable to hacks and theft if not properly secured.
• Limited Acceptance: Despite growing popularity, Bitcoin is still not widely accepted as a payment method by all merchants.
• Technical Complexity: Understanding how Bitcoin works and safely managing wallets can be daunting for newcomers.
• Potential for Loss: Losing access to a Bitcoin wallet (e.g., forgetting a private key) means losing the bitcoins stored in it permanently.
• Association with Illicit Activities: Bitcoin has been associated with illegal transactions, which could affect its reputation and acceptance.
• Market Manipulation: The cryptocurrency market is susceptible to manipulation by large holders or coordinated groups.

FAQ

If you have more questions about Bitcoin cryptocurrency, make sure to check out the FAQ section of our Bitcoin for dummies guide.

When Will the Last Bitcoin Be Mined?

The last Bitcoin is expected to be mined around the year 2140. This projection is based on the halving mechanism embedded in Bitcoin’s protocol, which reduces the mining reward by half approximately every four years.

This deliberate design controls the rate at which new bitcoins are created, ensuring that the total supply will gradually approach the maximum limit of 21 million.

What Happens When All Bitcoins Are Mined?

When all 21 million bitcoins are mined by around 2140, miners will no longer receive new bitcoins as rewards. Instead, their compensation will shift entirely to transaction fees paid by users.

This change could affect the incentive structure for miners, who play a crucial role in maintaining and securing the Bitcoin network. The absence of new Bitcoin entering the system is expected to contribute to its deflationary nature, potentially increasing its value if demand continues to grow.

The long-term impact on Bitcoin’s security and value will largely depend on how the network adapts to these changes and the sustained demand for transactions.

Can Bitcoin Be Converted to Cash?

Yes, Bitcoin can be converted to cash through various means, including cryptocurrency exchanges, Bitcoin ATMs, and peer-to-peer transactions. Once sold on these platforms, the funds can be withdrawn to a bank account or, in some cases, withdrawn as cash.

What Lies Ahead for Bitcoin

As the technology continues to evolve, Bitcoin’s role in the global economy is likely to expand, offering new opportunities and challenges. For beginners, understanding how Bitcoin works is the first step into the world of cryptocurrencies, and we hope our Bitcoin for dummies has helped you enter it.

There is no doubt that Bitcoin, along with blockchain technology, has revolutionized the financial landscape, challenging the traditional notions of money, finance, and investment. Its decentralized nature, combined with the potential for high returns, makes Bitcoin attractive to many, from individual enthusiasts to institutional investors.

And to learn just how attractive, check out our video on Bitcoin price prediction after the 2024 halving right here:

If previous Bitcoin halvings are anything to go by, it seems like Bitcoin is set to sore once again and blow past all the previous records.