Write and prepared from : Paolo Masotti and Roger Ver
Welcome to Bitcoin Basics Lesson 1: Cryptocurrencies and Bitcoin.
In Lesson 1 you will learn:
Cryptocurrencies are decentralized digital currencies secured with cryptography
Bitcoin is the top cryptocurrency due to its first-mover advantage
Bitcoin was created by Satoshi Nakamoto
Bitcoin is only in its infancy period with huge growth potential
Cryptocurrency is a new type of digital money used to exchanged agreed-upon values. It is just like regular currency, except it uses cryptography to secure transactions and control the creation of its native currency.
In centralized financial systems—such as the U.S. Federal Reserve system—government and banks control the supply of currency. They essentially "print" units of this currency, which is called fiat. When centralized entities operate in this fashion often times the "fiat" system can be inflationary. By contrast, a lot of cryptocurrencies like bitcoin have a capped supply, although some digital assets do not. This means currencies like bitcoin are produced by a cryptocurrency protocol at a predetermined, set rate. The supply is capped at a specific amount. Bitcoin's cryptographic financial system is built on a peer-to-peer, open source, and decentralized network. The currency is not controlled by one person or organization, and their specifications are not easily altered without consensus on the network.
The great thing about cryptocurrencies is that you can send and receive money anywhere in the world at any given time. You don’t have to worry about bank hours, formal permission or any other limitations. You can make and complete payments in bitcoin without anyone’s personal information being tied to the transactions, therefore it also protects against identity theft. The fees involved are usually also low, compared to legacy systems like Western Union. Bitcoin payments are irreversible and secure, meaning that merchants don’t have to worry about the cost of fraud.
Bitcoin pioneered the field as the first decentralized cryptocurrency back in 2009 and the decentralized control is by use of Bitcoin's distributed ledger, called the blockchain. Bitcoin is by far the most popular digital currency and it has tens of thousands of programmers and entrepreneurs around the world developing new services and apps. Like most other cryptocurrencies, Bitcoin is not controlled by any single government or central bank, and no one can decide who is allowed to send or receive money. Bitcoin transactions are censorship resistant. This means that no one, including banks, or governments, can block you from sending or receiving bitcoins.
Bitcoin was the first decentralized digital currency and has had time to gain acceptance among both merchants and consumers. It is considered very safe compared to other digital currencies, it has no third parties, and the protocol is open source (i.e. its code is peer-reviewed by a large community of developers). It is also the first digital currency to implement the blockchain as a core component. All these factors have helped attract the open source developer community to the currency. The no-VAT ruling in Europe has also helped to enhance the popularity and value of the currency, and today most countries around the world allow bitcoin as a payment method. Many companies now also accept bitcoin as a method of payment. From restaurants and coffee shops, to real estate companies and online shops, Bitcoin is now accepted by a wide variety of establishments. It also has a strong advantage over its competitors because of important network effects like adoption-rate and developer mindshare.
The Past, Present, and Future
Bitcoin was created by an anonymous person or group who called themselves Satoshi Nakamoto. Nakamoto published the invention on October 31, 2008, to the Cryptography Mailing list called metzdowd.com. The research paper was called "Bitcoin: A Peer-to-Peer Electronic Cash System". It was implemented in its first client and released to the open source community in January 2009. The Bitcoin network came into existence on January 3, 2009, with the release of the first Bitcoin software and the issuance of the first bitcoins. Satoshi Nakamoto continued to collaborate with other developers on the bitcoin software until mid-2010. Around this time, he handed over control of the source code repository to the bitcoin developer Gavin Andresen. Nakamoto also transferred several related domains to various prominent members of the bitcoin community, and then stopped his involvement in the project. Prior to his absence and handover, Satoshi Nakamoto made all modifications to the source code.
At first, the initial exchange rates for Bitcoin were set by individuals on online forums. The first “famous” transaction was the infamous 10,000 bitcoin pizza purchase, worth around 20 million USD eight years later. Today, however, most bitcoin exchanges are made through online trading platforms. In 2013, several mainstream websites began accepting bitcoin. Wordpress started in November 2012, followed by OKCupid in 2013. In 2014 several major vendors started to accept bitcoin, including TigerDirect, Overstock.com, Expedia, Dell, and Microsoft.
With bitcoin’s transactional volume increasing every day, a cap on supply, and an ongoing reduction in bitcoins produced, bitcoin values should continue on an upward trend. Compare this to most all fiat (paper) currencies which lose value every year due to inflation.
The digital currency has not gone viral yet, and many of the apps, upgrades, and protocols that will make it truly ready for common use are still being developed, so the potential is still huge. We’ve probably only scratched the surface of what Bitcoin can do.
This ends today’s lecture and hopefully you now have a first grasp on what Bitcoin is and why you should start learning about it and using it.
Welcome to Bitcoin Basics Lesson 2: Essentials of Bitcoin
In Lesson 1, you learned that Bitcoin is a decentralized cryptocurrency invented in 2009 by Satoshi Nakamoto and that it can be freely transferred between people all over the world, without the control or the limitations imposed by conventional payments through banks or government authorities.
In Lesson 2 you will learn:
Bitcoin isn’t 100% anonymous
Bitcoin wallets are used to protect and access your money
Bitcoins are stored in a public ledger called ‘the blockchain’
Bitcoin isn’t printed like regular money, it’s discovered, or ’mined’, by a network of computers worldwide
Authority and Anonymity
As mentioned in Lesson 1, Bitcoin is not controlled by any third party. It's the first decentralized peer-to-peer payment network and it’s solely powered by its users. Bitcoin awards you freedom from government control, but at the same time it’s your own responsibility to safeguard your money. There’s no formal entity to complain to if you misspend BTC or lose access to your wallet’s password.
Bitcoin is pseudonymous rather than anonymous, this means that the value within a wallet is not tied to real-world people or email addresses, but rather to specific bitcoin address(es). Owners (those in control of bitcoin addresses) are not explicitly identified, but all transactions are registered on a digital ledger called the blockchain. The blockchain is public and all transactions are recorded and visible via tools known as ‘blockchain explorers’. Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, are often required by law to collect the personal information of users.
How Can I Store My Bitcoin Safely?
To start using bitcoin you’ll need to use a bitcoin wallet. A wallet stores the information necessary to handle your bitcoins. Wallets are often described as a place to hold or store digital currency. But, bitcoins are inseparable from the transaction ledger, the blockchain. A better way to describe a wallet is as “something that stores the digital credentials for your bitcoins and allows you to access them”. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated. You could say a wallet is a collection of these keys.
There are also several types of wallets to choose from. Software wallets connect to the network and allow you to spend bitcoins in addition to holding the credentials (the cryptographic keys) that prove ownership. There are also online wallets that offer similar functionality. In this case, the keys to access the money are stored with the online wallet provider rather than on the user's hardware or software app. There are also physical wallets that store the credentials offline, which could, for example, be just the keys printed on a piece of paper in your pocket, or remembered in your head. Because a piece of paper can't be hacked, this is the most secure method of storing bitcoins (assuming your physical wallet can be kept safe).
All bitcoin transactions are stored in a public ledger called the blockchain. It’s not maintained by an authority, but by a network of communicating nodes and miners running open-source bitcoin software. Transactions are sent to this network using readily available software applications (such as wallet apps). These nodes can validate transactions, add them to their copy of the blockchain (the ledger), and then forward these additions to other nodes. The blockchain is a distributed database, which means each network node verifies and stores its own copy of the blockchain.
As I explained before, bitcoin prices were first set by enthusiasts on bitcoin forums and exchanged both offline and online. Nowadays everything has moved to online exchanges where participants offer bitcoin buy and sell bids, just like on other commodity exchanges.
The price is subject to the market forces of supply and demand which, at this point in time, go hand-in-hand with the trends and whims of speculators. The price can move suddenly and sharply up or down in response to news events.
Buying and Spending
You can buy bitcoins online from Bitcoin.com using a credit card, or by using an exchange via a bank transfer of fiat currency. Bitcoin can also be purchased locally using services like Localbitcoins or Bitcoin ATMs.
So where can you spend your bitcoins? Well, the currency is up and running with some of the most popular ecommerce platforms and point-of-sale systems. Additionally, hundreds of thousands of merchants and vendors, both online and offline, already accept bitcoin for payments.
A Brief Word on Bitcoin Mining
In traditional money systems, governments simply print more money when they need to. This leads to inflation which reduces the value of each unit of the currency previously printed. But in bitcoin, money isn’t printed—it's discovered.
Computers around the world ‘mine’ for coins by competing with each other. To succeed in mining you’d need a specialized mining computer, as they are much faster than your regular laptop and specialized to complete mining work. Mining is competitive business today and requires specialized equipment to earn return. Mining is the act of processing and verifying transactions on the Bitcoin network and securing them into the blockchain. Each set of transactions are processed into blocks, secured by the miners, and added to the blockchain.
This ends today's lecture. Now you know a little more about bitcoin. Let’s recap:
Bitcoin isn’t strictly anonymous
You can make use of a wallet to protect and access your money
Bitcoins are stored in a public ledger called the blockchain
You can buy bitcoins online, with a credit card, at exchanges, or via ATM’s
Bitcoin isn’t printed like regular money, it’s discovered or ’mined’ by a network of computers worldwide
Welcome to Bitcoin Basics Lesson 3: Bitcoin Exchange Rates
In Lesson 2, you learned that bitcoin is pseudonymous rather than anonymous and that you can make use of a wallet to protect and access your money. You also learned that bitcoins are stored in a public ledger called the blockchain, and that you can buy bitcoins on exchanges, with a credit card, or by using ATMs. We explored how bitcoin isn’t printed like regular money; it’s discovered, or ’mined’, by a network of computers worldwide.
In Lesson 3 you will learn:
Bitcoin has a value set by the laws of supply and demand
Because of its current adoption phase and limited distribution, exchange rates are often influenced by news
Bitcoin has a fixed supply that is limited to 21 million units total
How is the value of bitcoin determined? Well, all currencies and commodities have an exchange value, agreed upon by the seller and buyer. Bitcoin is a currency because it is a limited medium which people have agreed possesses value. This agreement is no different from ancient merchants who at one time did the same thing with materials such as seashells, precious stones, gold, or silver. The difference between bitcoin pricing and the pricing of paper money is that bitcoin’s value is set solely by the supply and demand within the community. There is no governing body like a central bank e.g. The Federal Reserve to influence or control the flow of money. Given that bitcoin is in its infancy, and has yet to fully find its identity and function, the price is easily influenced by news and rumours.
Large markets like the EU, China, Japan or the US may announce new bitcoin regulations, either favourable or restrictive to bitcoin’s growth, causing the price to rise or fall respectively. Other factors that can influence the value of bitcoin are internal issues. Examples of this include miners’ conferences or a meeting to decide changes to the Bitcoin protocol. The price may sometimes dip if an agreement on a subject cannot be reached, or seems to be too far off.
Supply & Demand
The supply of bitcoin is limited to 21 million units. This was set according to the initial design of the Bitcoin software, and this limitation is fixed into the bitcoin algorithm. As more and more people come to use Bitcoin, the increased demand combined with the fixed supply will force the price to go up. Because the number of people using Bitcoin in the world is still relatively small, the price of Bitcoin (in comparison to a more traditional currency) can fluctuate significantly on a daily basis. As more people continue to use Bitcoin, the value of the network increases. In early 2011 one bitcoin was worth less than one USD, but in early 2017 one bitcoin was worth more than one thousand USD. If Bitcoin continues to grow, a single bitcoin could be worth more than a hundred thousand dollars.
Due to the limited number of bitcoins in circulation, and the fact that new bitcoins are created at a predictable and decreasing rate (currently 12.5 bitcoins on average every 10 minutes), the demand for bitcoin must follow the supply increase to keep the price stable.
Like any other money, the value of Bitcoin will grow with more user adoption and trust. This can be measured by its growing base of users, merchants, and startups. As with all currencies, bitcoin's value is determined directly by people willing to accept them as payment.
This ends today’s lecture. Now you know that bitcoin has a value set by the laws of supply and demand, and because of its relatively early phase of adoption and limited distribution, prices are easily influenced by news. You have also learned that the total supply of bitcoin is limited to 21 million units.
Welcome to Lesson 4. Today is all about how to safely store your Bitcoin (BTC) in a bitcoin wallet.
Yesterday, you learned that bitcoin has its value set by the laws of supply and demand and that prices are easily influenced because of Bitcoin’s relatively small, steadily growing distribution. You also learned that Bitcoin's total supply cap of 21 million affects the price.
In today’s lecture, you’ll learn that there’s a wide range of choices when it comes to bitcoin wallets. You will learn that bitcoin wallets do not actually “store” or “hold” bitcoins. Rather, wallets store your private keys needed to handle the bitcoins you own which are stored on the blockchain ledger.
As mentioned above, you’ll need to get yourself a bitcoin wallet to store the private keys necessary to access your bitcoins. Wallets are often described as a place to hold or store bitcoins, but your bitcoins are actually stored on (and are inseparable from) the blockchain transaction ledger. Your wallet is a tool that stores the digital credentials for accessing your bitcoins and allows you to send or receive them. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated. A wallet is a collection of these keys. A public key is similar to your email address while the private key can be understood and should be treated like a password to that email address. Never share your private key with anyone.
You can choose from several types of wallets. They all share basic functionality. You should pick a wallet depending on how you will use your bitcoins. For instance, do you prefer to use the wallet on your mobile device? Perhaps you just want to store bitcoins safely and hold for many years without spending? Will you use Bitcoin as a shopping wallet and regularly spend/transfer them online and offline? Each of these purposes can be best achieved with a specialized wallet. Remember, you can have more than one Bitcoin wallet and choose which one to use based on the given circumstance.
Let's discuss some of the various types of wallets.
Software wallets connect to the network and allow you to spend bitcoins in addition to holding the credentials (the keys) that prove ownership. They usually come in the form of mobile applications downloaded from app stores.
Online wallets offer similar functionality but may be easier to use. In this case, credentials are stored with the online wallet provider rather than on the user's own hardware and can be accessed across each of your devices.
Physical wallets store the credentials offline. A simple “paper wallet” could be the keys printed on a piece of paper that you hold in your pocket or more securely stored in a safe.
A hardware wallet is a product that holds your private keys securely on an electronic device that can be accessed without an internet connection. There are various hardware wallets to choose from including Trezor, Keepkey, and Ledger. The device acts as a secure location for your private keys much like a paper wallet but is a far easier method than paper for sending and receiving bitcoins. If the hardware wallet is lost or stolen it can be restored using a 12-24 word phrase called a “seed.”
Security & Anonymity
If you choose to use services that store your private keys for you, such as an online wallet, be aware that you are completely at their mercy regarding the security of your keys. Most wallets, however, allow you to be in charge of your own private keys. This means that no one in the entire world can access your “account” (i.e. your bitcoin addresses) without your permission. It also means that no one can help you if you forget your password or otherwise lose access to your private keys. If you decide you want to own a lot of bitcoin it would be a good idea to divide them among several different wallets. Don’t put all your eggs in one basket!
Wallets also have a wide variety of anonymity levels, from software wallets which only store your keys, to more open wallets which displays sender/receiver name. Keep in mind that even with software and physical wallets, data will be sent to nodes maintaining the blockchain and the server may be able to view your IP address and connect this to the address data requested. To improve privacy, most bitcoin wallets will automatically create a new bitcoin address each time you want to send or receive a transaction, which makes it more difficult to identify the sender/receiver.
In Lesson 5, you will learn:
A bitcoin transaction is a transfer of value via the Bitcoin network
Bitcoin transaction records are not encrypted
Transactions can be viewed by anyone using a ‘blockchain explorer’
Transactions must be verified by miners on the blockchain network
Miners are rewarded with bitcoins for doing verification work
Bitcoin Transactions on the Blockchain
The blockchain is a public ledger where every bitcoin transaction is recorded. The ledger is maintained by a network of communicating computers running bitcoin software. It operates without any central authority.
Transactions are sent to this network using wallet applications. Mining computers and nodes try to validate these transactions. Valid transactions are added to their individual copy of the ledger. Each computer will then broadcast their ledger additions to the other nodes in the Bitcoin network.
The blockchain is a distributed database. This means that to achieve independent verification of the chain, (the correct ownership of each and every bitcoin amount), each participating computer stores its own copy of the blockchain and all of its transactions. A transaction typically references previous transaction outputs as new transaction inputs and dedicates all input bitcoin values to new outputs. As such they constitute a chain of transactions. Therefore, it is also possible to “trace” a particular bitcoin back in time (to check which addresses the bitcoin has “visited”).
To clarify: bitcoins don’t really ‘exist’ anywhere. There is no file with bitcoins in it. Instead, there are records of transactions between different bitcoin addresses with balances that can increase and decrease. And while each bitcoin transaction is secured via encryption, the record of that transaction is not. This enables the ability to browse and view every transaction ever collected in the blockchain using a hex editor. There are also blockchain explorers online where every transaction included within the blockchain can be viewed in human readable language.
A Practical Example of a Bitcoin transaction
Step 1: Submission of Transaction to the Bitcoin Network via Wallet
Alice wants to transfer bitcoin to Bob and they both have bitcoin wallet apps on their smartphones. Bob opens his wallet, creates a new bitcoin address, and shares this address with Alice. She pastes Bob's address into her wallet’s “Send to” field, she also inputs the amount of BTC she wants to transfer. Alice’s wallet (also called a client) signs her request with her private key corresponding to the address she’s transferring from.
Step 2: Verification
Now the bitcoin mining network goes to work. Connected computers all over the world simultaneously verify all transactions, and compete with each other to earn newly minted bitcoins as a reward. Bob and Alice’s transaction, once verified, will be added to the next transaction block. Once the block has been found by a miner, their transaction is confirmed, and can no longer be reversed. When this process is done, Alice and Bob’s wallets will display that the transaction is complete. This verification process ensures that the same bitcoins cannot be used for more than one transaction at a time.
This ends today’s lesson. You now know that transaction records stored in the blockchain are not encrypted and can be viewed by anyone using a blockchain explorer available online. You have also learned that transactions need to be verified by miners on the blockchain network, who are then rewarded with bitcoins for doing the work.
In Lesson 6 you will learn:
Bitcoin is sold and purchased much like other currencies through exchanges using a credit card, bank wire, Paypal, etc.
You can also exchange bitcoins for goods and services with people directly, just like you would with cash.
Buying Bitcoin and How Exchanges Work
Bitcoin can be bought and sold from various sources, online and offline, like any other currency. You can purchase BTC online directly with a credit card, or use an exchange or brokerage service that will enable you to buy bitcoin via a bank transfer. Some applications also offer buying and selling bitcoin with PayPal and other online payment processors. Some of these sites are full-service exchanges intended for institutional traders, while others are simpler wallet services with limited buying and selling capabilities.
Most exchanges and wallets can store digital and fiat currency for you, functioning like a regular bank account. Exchanges and wallets are the go-to option if you want to do regular trading and speculating. Beware of the fact that total anonymity is difficult to achieve at these sites. Also, there are setup procedures which usually involve supplying proof of identity and detailed personal information. Bitcoin can also be purchased locally from other people via marketplaces e.g. LocalBitcoins, and from Bitcoin ATMs that operate just like the cash ATMs you see worldwide. These servicess offer higher anonimity, but tend to charge higher fees.
This ends today’s lesson. You have learned bitcoin can be purchased and sold much like other currencies through exchanges. You know you can exchange bitcoins with other people directly, just like with cash.
In Lesson 7 you will learn:
Many merchants accept bitcoin as payment
How to find places that accept bitcoin payments
How to use bitcoin debit cards as payment in any store that accepts credit or debit
Where to Spend Bitcoin
Spending bitcoin is very similar to spending traditional money. However, since bitcoin is not yet universally accepted, you just need to select stores that accept it. Luckily, there are a bunch of them! Recent figures show that the number of retailers accepting bitcoin has now surpassed the 100,000 mark. As more countries continue to recognize bitcoin as a legitimate form of payment, these figures will continue to rise. The best way to find bitcoin-friendly merchants is by browsing online marketplaces and using specialized search engines that populate with large numbers of supporting establishments. For example, the site Coinmap offers a visual way to locate bitcoin-friendly stores, restaurants, and services around the world. The site also adds new locations regularly.
Bitcoin payments are easy to make online and offline. You just need to download a wallet application for your desktop, tablet or smartphone. Then, during checkout at a store, you will be presented with a code in text format or as a QR-code. This is a visual barcode representing the store’s public key. You scan their code with the scanner on your wallet application and confirm the total amount to be paid and then the transaction is complete. In the case of purchasing online where no scan option is available, you can simply copy and paste the public key address of the store into your wallet’s “Send to” field.
What Can You Buy with Bitcoin?
You can purchase just about anything with bitcoin ranging from goods to services. Bitcoin can also be used to purchase larger items including cars, real-estate, and even precious metals. Additionally, many merchants who accept bitcoin also give discounts for people who pay with the digital currency. One example is Purse.io who offers 15% off on Amazon purchases made using BTC. The most rewarding way to spend your bitcoin is by paying it forward. Use bitcoin to tip the author of an article or blog post with the click of a button, or donate to worthy causes including Wikileaks and the Foundation for Economic Education (fee.org).
Spending with credit card
If there is a merchant that does not accept bitcoin, there are still ways to use your digital cash to purchase the items you are interested in. Just use a bitcoin debit card. These cards help bridge the Bitcoin world with the world of legacy finance. Using them is simple, you can either buy bitcoin with your debit card or load a debit card with bitcoin to spend anywhere that accepts credit cards. With this bitcoin debit card, you can now essentially buy anything with bitcoin as any establishment that accepts credit or debit cards would accept your bitcoin debit card as well. The merchant gets paid in their own currency by the debit company and the charge will be deducted from your bitcoin balance.
There are several debit cards to choose from. Some cards can only be issued to certain countries, and all have varying fees, so be sure to read up on all the options to choose the best card for you. Two well-known choices in the U.S. are BitPay and Shift cards.
Best Practices for Using Bitcoin
To use bitcoin safely without worrying about being defrauded or losing your coins you simply need to heed some practical advice. Follow these basic guidelines and you can go bitcoin shopping online with confidence.
When seeking to use a shopping website for the first time, do a quick online search of the store’s name. There are several clear warning signs that you can look for in the search results to tell if a site is to be trusted or not.
Never buy anything from a site that doesn't have SSL (secure sockets layer) encryption installed. You'll know if the site has SSL because the URL for the site will start with HTTPS:// (instead of just HTTP://). There will also be an icon of a locked padlock visible, typically in the status bar at the bottom of your web browser, or next to the URL in the address bar—it depends on your browser.
No online shopping store needs your social security number or your birthday information.
Never give out your bitcoin wallet login credentials or passphrase or private key(s).
Always give out as little information as possible.
Also, try to avoid using the same bitcoin addresses more than once. Generate a new address for each transaction you receive. Luckily, many wallets do this automatically.
Today, you will learn that mining is the process of adding and confirming transaction records to the blockchain. This process is also how new bitcoins are created. You will learn that mining is a resource-intensive process. Aditionally, nowadays mostly done by specialized mining computers in large data centers.
Transactions on the Blockchain
Today’s lesson is all about the blockchain, mining, and how new Bitcoins are generated. Remember the previous lesson where you learned how the blockchain is the public ledger that records bitcoin transactions? Here’s a quick recap:
The blockchain operates without a central authority but instead by a network of communicating computers running bitcoin software. Bitcoin transactions are sent to this network using readily available software applications. Network computers or nodes validate the transactions, add them to their copy of the ledger, and broadcast these ledger additions to other computers.
The blockchain is a distributed and decentralized database. To achieve independent verification of the chain of ownership of any and every bitcoin amount, each network computer stores its own copy of the blockchain. A transaction typically references previous transaction outputs as new transaction inputs and dedicates all input bitcoin values to new outputs.
There is no file with bitcoins in it. Instead, there are records of transactions between different bitcoin addresses, with balances that increase and decrease. Transactions are not encrypted, so it is possible to browse and view every transaction ever added onto the blockchain.
Mining is the process of adding transaction records to the blockchain. Bitcoin computers or nodes use the blockchain to distinguish legitimate bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.
Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. The primary purpose of mining is to allow Bitcoin computers or nodes to reach a secure, tamper-resistant consensus.
Mining is also the mechanism used to introduce new bitcoins into the system: a successful miner finding a new block is rewarded with newly created bitcoins and transaction fees. Currently, the reward amounts to 12.5 newly created bitcoins per block added to the blockchain. To claim the reward, a special transaction called a coinbase is included in the block with the processed payments. All bitcoins in existence have been created via coinbase transactions. The reason for this setup is to motivate people to provide security for the system. Miners need to spend energy to find those cryptographic solutions to new blocks of transactions.
Can I Make Money Mining Bitcoin?
In the beginning, anyone could make money mining bitcoins using a common desktop computer or laptop, but those days are long gone. The total computing power of the network has risen exponentially since the introduction of machines designed specifically to solve Bitcoin’s mining proof-of-work algorithm and nothing else.
Individual miners can still make some money by producing or purchasing their own designated equipment – however, most mining takes place in large factory-like environments with hundreds or thousands of machines, in places where energy and cooling is cheap (such as in China and above the Arctic Circle).
Once your machine is superseded by a newer model, usually a few months after purchase, its ability to compete on the network (and thus its earning potential) is greatly diminished, along with its resale value. Though the average user has little incentive to mine these days, mining allows you to learn a lot about how the Bitcoin network works, and the network needs individual miners to keep it secure and decentralized. In fact, many individuals mine bitcoin solely for the sake of contributing back to the network or just for the fun of it.
Another way to mine bitcoin is to rent out other miners hashing power. This is called cloud mining. This means any individual can mine anywhere without needing the same hardware or resources of the miner, although it does come at a cost. Furthermore, any mining pools or miners that decide to do cloud mining may not receive as many returns from the mining process. Also, beware, because there are a lot of cloud mining scams.
If you want to start cloud mining right now, you could try the Bitcoin.com cloud mining service. Here you can sign up and start your mining business through us. It is an amazing way to get a feel for competing for cryptographically secured rewards. Give it a shot.
This ends today’s lesson. Now you know that mining is the process of adding and confirming transaction records to the blockchain, and that the chain is a network of computers around the world competing to find blocks in order to be rewarded. This process is how new bitcoins are created. You also know that mining is an increasingly resource-intensive process and is mostly done by designated mining machines in large data centers. Still, it needs its individual miners to keep it secure and decentralized.
In Lesson 9 you will learn:
More about bitcoin exchanges and the importance of finding one that suits your needs
The initial ID verification can take a few days, but after that you can usually buy or sell bitcoin instantly
A few tricks to help you determine how serious and secure an exchange is by checking for basic things like SSL encryption, two-factor authentication
Most bitcoins are bought and sold through online services called exchanges. Knowing how to buy bitcoin is an essential first step in getting started with the digital currency. However, knowing which bitcoin exchange to choose is one of the most important initial steps. Since you will be investing money into bitcoin you need to trust the exchange. Selecting the right exchange is a critical step on bitcoin journey.
Lesson 9 will guide you through the most important steps to take before selecting a bitcoin exchange. Remember, these are just suggestions to help you make the right decision. In the end, circumstances can be different based on the exchange and the market. Do your homework first!
Choosing an Exchange
Knowing where your bitcoin exchange is based is very important. The laws and regulations of your own country can vary from those of another, and what is considered legal practice in a foreign country may not be so in yours. You may notice that while certain exchanges are based in a specific country, they may still accept multiple national currencies. Make sure to check the fine print; exchanges usually post what currencies they do and do not accept in their terms of service.
You can usually transfer fiat currencies to an exchange with a wire transfer, credit card, PayPal, or other payment method. Use what works best for you at your convenience. Please make sure to consider your privacy levels. For example, credit cards may be convenient and secure but are one of the least private ways to transfer money.
You will also want to make sure that the exchange fees are within reason and not excessive compared to the rest of the market. Fees can change over time and can vary from exchange to exchange. Some exchanges charge additional fees on top of the bitcoin network transaction fees. Different payment methods also have varying fees.
Credit card purchases, for example, are often charged a fee of 3-10%. Services provided by credit card companies may be convenient but are one of the least private ways to transfer money. While most deposits with bank transfers are free at the exchange, banks usually charge hefty fees to transfer money abroad. More information about fees can be found on each exchange’s website. By comparing a local bitcoin exchange’s prices to a bitcoin price index, it’s easier to get the best bitcoin exchange rate. If an exchange constantly has substantially different prices than others, it is a sign of trouble and that exchange should probably be avoided.
As with everything else, do your research and find an exchange you can both use and trust. It’s also a good idea not to use your exchange’s wallet to store your bitcoins long-term. Move your purchased bitcoin to a personal wallet when you’re done so that you always have control over your money.
Security and Anonymity
Initial verification can often take a couple of days, but all subsequent purchases on the same exchange are usually instant if you have funds available to buy or sell. Do some research on each bitcoin exchange to determine verification levels and delivery speeds. Also, make sure to check if the exchange offers ‘locked in’ pricing. This means that the price you buy at is the price you will be charged even if the bitcoins take a few days to arrive.
A lot of exchanges follow the Know Your Customer (KYC) and Anti-Money Laundering (AML) laws in their specific country. If they do, then some identity information will have to be sent to them before buying. Exchanges that accept credit cards or bank transfers are also required by law to collect information about users’ identities.
Staying completely anonymous is difficult. If you seek total anonymity, you can buy in cash locally from someone else through a person-to-person marketplace like Localbitcoins.
Making sure the exchange website is secure is extremely important and should not be overlooked. As you initially investigate a potential exchange, always ensure that the website domain has a HTTPS address. This, as you learned in previous lessons, shows that the site and your connection to it is secured by an SSL encrypted protocol. Look for the padlock symbol next to the URL or in the bottom of the browser window. Another important consideration is two-factor authentication (2FA) secure login. If you enable two-factor authentication on an exchange that offers this type of service, you will be prompted to enter a short code at login that will be delivered typically to a mobile device you pair with the service. Enabling two-factor authentication will provide a second layer of verification that is required to access your account.
Do not forget to keep your bitcoin off of public exchanges. Keep your coins stored in your own personal wallet(s). Whenever your bitcoins are stored with third parties, it is easier for them to fall prey to hackers or unexpected exchange shutdowns. Your private key is your lifeline to your funds. Remember: bitcoin is about taking the power into your own hands and not relying on third party intermediaries or middlemen.
And, as always, when deciding whether to put your trust in any service, do an online search of the company or service in question and look for customer feedback and experiences regarding the service.
This concludes today’s lesson. You now know more about bitcoin exchanges and the importance of finding one that suits your needs. You also know that the initial ID verification can take a few days, but after that you can usually buy or sell instantly. You have also learned a few tricks on figuring out how secure an exchange is by checking basic things like SSL encryption, two-factor authentication, and the customary Google search.
Lesson 10 is a recap of all that you have learned
Lesson 1: Cryptocurrencies and Bitcoin
You learned that in centralized monetary systems, such as the U.S. Federal Reserve System, government controls the supply of currency by "printing" units of money, called fiat. Bitcoin on the other hand, is a decentralized cryptocurrency, invented in 2009 by Satoshi Nakamoto. It can be freely transferred between people all over the world, without the control or limitations usually imposed by banks or government authorities. Bitcoin is by far the most popular digital currency and it has tens of thousands of programmers and entrepreneurs around the world developing new services and apps. It is considered safe compared to other digital currencies, has no 3rd parties, is deflationary, and open source.
Lesson 2: Essentials of Bitcoin
You learned you can use a wallet to protect and access your money. Bitcoins are stored in a public ledger called the blockchain, and you can buy bitcoins at exchanges and ATMs. Moreover, bitcoin is not printed like regular money. It’s discovered or ’mined’ by a network of computers worldwide. Until bitcoin becomes an established currency for payments globally, it will probably continue to be more popular among traders and price speculators rather than with the general population. As a result, the price is subject to the market forces of supply and demand which, at this point, goes hand in hand with the trends and whims of speculators. As a result, the price can move suddenly and sharply up or down in response to new events.
Lesson 3: Bitcoin Exchange Rates
We explored basic facts of the Bitcoin network: the total supply of bitcoin is limited to 21 million coins, which also has an impact on the pricing. For example, in early 2011 one bitcoin was worth less than one USD, but in 2017 one bitcoin is worth more than a thousand USD. In the future, if bitcoin becomes truly popular, each bitcoin will likely be worth hundreds of thousands of dollars to accommodate additional demand. All that is required for bitcoin, or any form of money to stabilize, is trust and adoption. In the case of bitcoin, this can be measured by its growing base of users, merchants, and start-up companies. As with all currencies, bitcoin's value stems directly from people willing to accept them as barter or payment.
Lesson 4: Bitcoin Wallets
We looked at wallets and the wide range of options available. Bitcoin wallets do not store bitcoins, but rather hold secret and public keys used to handle bitcoins, which are stored in the blockchain ledger.
The main types of wallets are:
Software wallets connect to the network and allow you to spend bitcoins in addition to holding the credentials (the keys) that prove ownership. They usually come in the form of desktop or mobile applications downloaded from app stores.
Online wallets offer similar functionality but may be easier to use. In this case, credentials to access the money are stored with the online wallet provider rather than on the user's hardware, and it can be accessed across your devices.
Physical wallets store the credentials offline; which could just be the keys printed on a piece of paper in your pocket, or remembered in your head. One type of physical wallet is the hardware wallet. This is a wallet that is typically used for long-term storage. It is one of the safest wallets because they usually come with encryption keys and may not connect to a computer often, protecting the keys from nefarious entities and hackers. There are many retailers who now sell a variety of hardware wallets at affordable prices.
If you own a lot of bitcoin, it is a good practice to divide them among several different wallets. Never put all your eggs in one basket.
Lesson 5: Transactions and the Blockchain
You learned that a bitcoin transaction is a transfer of value over the Bitcoin network, is not encrypted, and can be viewed by anyone using blockchain browsers online. Transactions need to be verified by miners on the Bitcoin network, which are rewarded with bitcoins for doing this work. This is also where and how the bitcoin system creates new bitcoins. The blockchain is a distributed and decentralized database. To achieve independent verification of the chain of ownership of every bitcoin, each network computer stores its own copy of the blockchain.
Lesson 6: Buying Bitcoin
You learned that bitcoin is sold and purchased much like other currencies through exchanges, using your credit card, PayPal, or something similar. You also learned that you can exchange bitcoin to other currencies with other people directly, just like you would do with cash.
Lesson 7: Using Bitcoin
You learned how there’s over 100,000 merchants out there who accept bitcoin as payment and how to find places where you can spend bitcoin. These include search engines, maps, and dedicated marketplaces. You also learned about the option of signing up for a bitcoin debit card and using bitcoin as payment in just about any store that accepts regular credit cards. We also got into best practices and how not to get ripped-off when spending bitcoin.
Lesson 8: Bitcoin Mining
You learned mining is the process of adding and confirming transaction records on the blockchain. This process is also how new bitcoins are created. Lastly, you learned that mining is a resource-intensive process that is mostly completed by specialized mining computers in large data centers.
Lesson 9: Bitcoin Exchanges
You learned about bitcoin exchanges and the importance of finding one that suits your needs. You also learned that the ID verification can take a few days, but after completion, buys and sells are usually instant. You also got a few tips on figuring out how secure an exchange is by checking basic things like SSL encryption, two-factor authentication, and the customary Google search.
We would suggest you get yourself a wallet and start experimenting with all the things you can do with it. Also, you can continue learning about Bitcoin by visiting Bitcoin.com’s Knowledge Base.
We also recommend trying out Bitcoin.com’s new Bitcoin wallet.
Here are some of the features:
Installs easily on your favorite devices(s)
Buy, send, and receive bitcoin
Keep track of your transaction history