What is Bitcoin? Bitcoin Explained for Beginners (Complete Guide)

Last Updated September 5, 2018
Posted By Luke      No Comments

You must have heard of Bitcoin…

And if you hadn’t before, well, you have now.

But just because you’ve heard of it, that doesn’t necessarily mean you know what Bitcoin is.

And that’s completely fine.

Truth is, unless you have an interest in financial trading or complex technology, the whole world of cryptocurrency can seem confusing.

You’re far from being on your own. 

Over 100,000 people search “What is Bitcoin?” in Google every single month. That is a staggering number.

But here’s the thing:

Most of the answers that show up are written by people that don’t truly understand that you don’t understand.

Long words, complex phrases, no thanks.

This means that people like you end up searching and walking away with more questions than answers — we were in the same situation ourselves before doing weeks, or even months, of research.

This guide will put an end to your confusion. 

We promise to make this the most simple and easy to understand guide to bitcoin, no matter what your background is.

So, without further ado, here’s the world of bitcoin explained for beginners.

What is Bitcoin?

Bitcoin is a form of digital currency, and there is no physical version like with the coins and notes you find with traditional currencies. It is a finite resource (it’s in limited supply) meaning that more cannot simply be printed should a central party — such as a Government or bank — decide it’s necessary.

In fact, the decentralised structure of Bitcoin — there is no central party that can control it — is one of its biggest selling points to a generation of people that place much greater emphasis on transparency than in years gone by.

The whole cryptocurrency niche is booming thanks to a growing demand for decentralisation, but Bitcoin was the first to make it work with the revolutionary technology that the Bitcoin network is built on, known as blockchain.

Because Bitcoin is in limited supply — there will only ever be 21 million BTC (Bitcoin) on planet earth — it is often viewed as the internet version of gold. A valuable, finite resource that is used as a store of value.

Remember:

Gold was once used as a form of currency too.

Gold coins were traded for goods and services, until it was replaced with what we know as money today.

The money we use is called ‘fiat’, which simply means legal currency that is issued by the Government.

Bitcoin is leading the charge for cryptocurrencies in the battle vs fiat currencies like dollars, pounds and euros.

The key difference between fiat and cryptocurrencies lies in the centralised and decentralised structures that power them.

With one — the traditional, centralised form of money known as fiat — there are ‘middle men’ that add time and costs to verify and check that information is correct and legal.

Cryptocurrency — with its decentralised structure — aims to replace these middle men by automatically verifying information with computers, in a process known as mining.

Mining, which is crucial to the Bitcoin infrastructure, allows money to be sent faster and cheaper (amongst many other things). It also means that people can earn bitcoin, rather than having to purchase it.

However, governments have very little control over it…and this, understandably, makes them extremely nervous.

It is quickly becoming clear that governments, banks and other centralised parties cannot stand in the way of the technological revolution that Bitcoin and blockchain have helped explode, so they’re having to adapt.

 

Is Bitcoin Legal?

The simple answer to this is yes, Bitcoin is completely legal in most countries in the world. However, like with all forms of currency, it may not be legal if you’re doing things that you shouldn’t be with it.

If you’re buying illegal products or services with it then that is pretty obviously going to be breaking laws.

The same goes for those that are trying to use it for money laundering.

The areas where things get slightly confusing are mostly to do with tax.

We are not lawyers, accountants, tax advisers or anything close to any of those things. However, we believe that you probably should be paying tax on your Bitcoin investments like you would with stocks and shares.

With all of the above said, certain countries are potentially looking to make the currency entirely illegal because it just presents so many challenges to current systems — we talk about this more throughout this post.

Other countries are continually tightening their control whilst they try to figure out how a Bitcoin and blockchain-based future will work.

 

Bitcoin’s Reputation

Blockchain technology is incredibly powerful, but it’s also people’s beliefs that are helping to fuel the demand for Bitcoin and other cryptocurrencies.

A growing number of people are demanding transparency, openness and fairness in all areas of life, and Bitcoin helps to achieve that.

Every transaction is publicly visible, although anonymous.

Even you can see these public transactions by using sites like Blockchain.info and BlockExplorer.

Transactions are verified by multiple Bitcoin miners (powerful computers with mining software — there aren’t maths geniuses or people with pick axes sat at their desks all day doing this!) and this ensures the transactions are accurate and legitimate.

Known as ‘confirmations’, a transaction must be confirmed by a large number of miners and this will both verify its authenticity and also make it irreversible — someone can’t just claim their money back instantly after purchasing something.

Despite the fact that the Bitcoin infrastructure promotes an open and honest culture, its reputation has been tarnished due to its association with the dark web and the currency’s ability to make anonymous purchases of illegal products such as drugs, weapons and more.

This reputation will no doubt be loved by the central parties such as governments and banks that we mentioned previously, and they’ll want to do anything they can to further ensure its reputation is questionable at best in order to preserve their own interests and the status quo.

 

Benefits of Bitcoin

  1. You control your own money
  2. It’s decentralised
  3. It’s fast
  4. It’s cheap (and no hidden fees)
  5. It’s always online
  6. It’s completely transparent
  7. 100% accurate
  8. No changes can be made without a vote
  9. Extremely limited chance of fraudulent transactions

Let’s take a look at these benefits in a little more detail:

 

You Own It

Unlike with banks, you actually own and control your own money.

You store it in your own wallets, which could be a software wallet on your computer (almost like a secure folder) or even a hardware wallet that is a physical object that you plug into your computer’s USB port.

Did you know that if a bank collapses, you could lose all of your money?

Whilst this may seem unlikely, it happened in Iceland in 2008 — with many people losing large amounts of funds in the biggest banking collapse (relatively speaking) of all time.

When you are in control of your own funds, a banking collapse or crisis would not affect you.

You are your own bank.

 

Decentralised

We’ve spoken about this numerous times in this post already, so we’ll try not to recover old ground too much.

The decentralised nature of Bitcoin is actually the underlying reason for many of the benefits below.

 

Fast

Bitcoin transactions are usually confirmed by miners within 10-15 minutes and the receiver of the funds should usually receive (and be able to spend) the sender’s BTC after around one hour, when the transaction has been confirmed by enough miners to be verified as correct.

For transactions in the same country that may not seem too impressive, but Bitcoin is borderless.

It does not matter if you’re sending it 1 mile or 10,000 miles, it will get there in the same time.

 

Cheap

There is a huge problem for migrant workers in developed countries that send money back to their families in poorer parts of the world.

By sending their money through banks, these workers lose around 10-15% in fees and it can take 3-7 days to arrive back home.

To send to family in the third world via Bitcoin, it can cost less than 1% and arrives far more quickly (as detailed above).

 

It’s Always Online (And Can’t Go Down)

The blockchain, Bitcoin’s network, is virtually impossible to hack or take down, because it is spread across so many computers (hundreds of thousands, or even millions) throughout the world.

 

Transparent

All transactions are tracked and displayed in the public blockchain ledger — which is essentially an open record of events.

Nothing can be hidden, edited or deleted unless more than 50% of the entire blockchain vote to do so, which would realistically never happen unless there was a huge issue to rectify.

 

Accurate

Every transaction is confirmed and verified via the mining process.

It is impossible for an incorrect transaction to go through (i.e. to buy something for cheaper than it should be due to a system glitch) or for someone to reclaim their funds after purchase — this issue, known as ‘double spend’ (as it would literally allow someone to spend their money twice), was a long-standing problem for cryptocurrency attempts before Bitcoin.

 

Democratic

To make changes on the Bitcoin blockchain, more than 50% of the community must vote in favour of the change.

If this does not happen, changes cannot be made.

This means that unpopular or controversial opinions cannot force major change in the way that they can with governments.

With a government, you vote for a candidate but then the changes they implement are almost entirely out of your control.

On the blockchain, you vote for specific changes and whether you want them implemented or not.

 

Fraud (Low Likelihood)

Businesses that operate in industries that often have a high chance of fraud or money laundering can work much more freely due to transactions being verified by miners. Money is not going to fail to turn up when it should do.

When there’s a public record — although transactions are shown as anonymous — it is much harder to commit fraudulent transactions than it is with cash.

 

Drawbacks of Bitcoin

  1. Governments are (mostly) against it
  2. Most people (and businesses) are still unaware of it
  3. It is volatile and the value can change drastically from day to day
  4. Its current version is not capable, technologically, of performing to the level it wants to be…but it’s getting there!

And once again, let’s take a look at these in more detail:

 

Governments Are Against It

Because Bitcoin and the blockchain allows people to get around certain limitations and restrictions, and also places a huge amount of uncertainty around their future control, governments are — unsurprisingly — worried.

The fact is that blockchain technology will, in the future, be capable of improving taxation, reducing voter fraud and a whole load of problems that currently exist in countries today.

It will just take a lot of adapting, and for very traditional and, dare we say it, old-fashioned, parties like a government, adapting can be hard.

Lack of Awareness

Because people and businesses are struggling to truly understand Bitcoin, it is not being implemented in places as quickly as some would have hoped.

 

Volatility

Due to the huge amount of uncertainty in the market, and despite all of its advantages, the value of Bitcoin can change significantly on any given day.

Whenever things seem to be looking golden for the cryptocurrency, it has another huge issue facing it; governments wanting to ban it, exchanges being shut down, continued association with the dark web and more.

 

It Isn’t Capable Enough…Yet

If Bitcoin wants to become the default payment option online, it would need to be capable of processing the same amount of transactions as the likes of Visa.

Currently, it is unable to handle volume at anywhere near that level, although it continues to improve — and there are a lot of other cryptocurrencies also trying (and arguably succeeding) to improve on Bitcoin’s capabilities.

 

How to Buy Bitcoin in the UK

The method for purchasing Bitcoin depends on the country you are in.

Some countries have stricter control over who can purchase Bitcoin and how easily — China have banned cryptocurrency exchanges entirely. Vladimir Putin has spoken of wanting to ban Bitcoin in Russia, too.

We can’t provide country-specific information for everyone, so we’ll be providing UK-friendly sites here. Some of them may also be appropriate if you’re viewing from other countries .

There are two main ways to buy Bitcoin in the UK:

  • From sites that sell them directly to you (like Coinbase)
  • From sites that link sellers with buyers (following the more traditional ‘exchange’ style, like LocalBitcoins)

The advantage with sites like Coinbase is that it’s typically much easier to get your hands on some Bitcoin.

All you have to do is sign up and purchase using a credit or debit card, or wire transfer, just like you would with many other online transactions.

With exchanges like Bittrex, things can be slightly more confusing, but you’re able to invest in a much greater range of cryptocurrencies too. Coinbase only offers Bitcoin, Ethereum and Litecoin.

You are also able to buy Bitcoin’s in person for cash, depending on the country you live in, using a Bitcoin ATM.

The first thing you need to do is get yourself a Bitcoin wallet.

 

Getting a Bitcoin Wallet

There are different types of wallet available; you can store your cryptocurrency on the exchange you purchased from, but this is highly discouraged due to many people losing money in the past on exchanges like Mt. Gox. 

That site was supposedly ‘hacked’ and then shut down, and thousands of people lost the Bitcoins that they had stored on that site forever.

Other than storing it on the website you purchased your BTC from, or other alternative online wallets which again we highly discourage, you have the choice of:

  • Using a software wallet like Exodus; downloaded to your computer — your coins will be stored on your hard drive
  • Using a hardware wallet like the Ledger Nano S, a physical device and by far the most secure option

When using software wallets, you’ll need to ensure to use multi-factor authentication so that you — and only you — can access your Bitcoin.

You will also need to write down private keys (these are like passwords and will be shown on screen) and then store them in extremely safe places that you won’t forget.

Hardware wallets are incredibly smart, with the aforementioned Ledger Nano S requiring a PIN code to be entered each time it is connected to your computer.

There is no need to write down or remember private keys with the Nano S as they are automatically stored and can never be revealed. No-one can ever see them — yourself included. However, you’ll need to ensure you keep your Ledger in a safe place.

All of that makes the purchasing of Bitcoin sound a lot more complex than it actually is — we just want to make sure that you’re taking security seriously if you want to get into cryptocurrency.

 

Buying Your First Bitcoin

Not everyone can afford to go out and buy a whole bitcoin.

In fact, if you can, you’re in the lucky minority!

However, each bitcoin is broken down into 100,000,000 (one hundred million) smaller pieces, known as Satoshis — or ‘sats’ for short.

1 BTC = 100,000,000 Satoshis.

Think of Satoshis as pence, or cents, compared to bitcoins being pounds or dollars (but much larger!).

Whether you’re looking to go out and buy a large quantity of bitcoins, or if you’re just looking to dip your toes into the water with 0.1 BTC or less, the procedure is almost the same.

However, if you’re looking to purchase in large quantities, you may not be able to do so all in one day — verification checks and anti-money laundering methods prevent new buyers from investing significant amounts straight away.

If you use Coinbase (and if you sign up via this link, you’ll get £7/$10 in free Bitcoin if you buy £78/$100 worth of cryptocurrency), you’ll likely be able to buy anywhere from £250/$300 worth up to around £1,000/$1,200 before you need to start supplying additional verification.

Coinbase has arguably set the standard for ease of use.

If you’re a total newbie, you’ll find it extremely easy to use their site and buy bitcoin.

However, their limits may hamper you if you’re looking to invest more seriously, and their fees are quite large (typically between 2-3% depending on the volume you’re looking to purchase).

The site is also not really a viable option if you’re looking to try to trade the market.

If you’re just looking to buy a small amount of Bitcoin (or Ethereum or Litecoin) and hold it as an investment for a long period of time, then Coinbase will be perfect for you.

If you’re looking for more than just a small investment, you’ll need to start looking elsewhere.

However:

Currently, the waiting times and long verification processes are due to government regulations around fraud prevention and anti-money laundering, with a need for users to provide proof of residence, photo ID and occasionally more.

This is true for all cryptocurrency exchanges at this time, although waiting times and purchase limits can vary.

So, what other options do you have to make additional purchases of BTC, or other cryptocurrency?

And what if you want to look into trading?

LocalBitcoins: on LocalBitcoins you’re able to buy bitcoin from people face-to-face, but also primarily online. The link above will take you to their online platform which is almost like an auction site, where you’ll be buying set amounts of BTC depending on the sales prices that sellers are offering.

It’s recommended that you use LocalBitcoins if you’re looking to make a transaction of reasonable value. If you don’t have too much money to invest, stick to the options mentioned earlier.

Bittrex: Built and operated in the United States, Bittrex has grown in popularity and offers trading functionality throughout the world (full list of available countries here).

The downside with Bittrex is, if your account is unverified, you won’t be able to purchase BTC or other cryptocurrencies with regular money. You’ll need to purchase your BTC on a site like Coinbase and then transfer to your Bittrex wallet until you get your account verified.

Kraken: Also based in the US, Kraken allows Tier 3 and Tier 4 verified accounts to deposit in the following currencies; US Dollar, Great British Pound, Canadian Dollar, Euros and Japanese Yen.

Again, similarly with Bittrex, it will take some time to verify your account to this level.

Bitstamp: A great option for all members of EU-based countries, Bitstamp allows you to deposit pounds and euros via bank/wire transfer (SEPA), and then start exchanging your funds for BTC and other cryptocurrencies.

Coinfloor: This London-based cryptocurrency exchange is one of a very small number of exchanges to allow deposits in GBP (again, via SEPA bank transfer).

Coinfloor place a strong emphasis on security and have relatively small fees (£5 to deposit, £10 to withdraw), and they’re a HMRC-approved exchange.

QuickBitcoin: This site is not an exchange, but a broker, and is ideal for people in the UK. You can get Bitcoin delivered to your own wallet in a much quicker time than via an exchange.

QuickBitcoin is great for both those that want to hold Bitcoin long-term, or for those that want to get some to send to an exchange so that you can trade more quickly and without the long verification delays.

 

What Can You Buy with Bitcoin?

We briefly touched upon the dark web earlier in this guide, but we’re going to avoid talking about that further here.

We want to discuss things that the average person can buy — both legally, and easily.

Well, the types of things you can buy greatly differs based on the country you’re in.

In the US, certain arms dealers accept Bitcoin payments for firearms! And in Vegas, certain hotels are accepting the currency to buy gifts or food in the restaurants.

In Australia, certain pubs accept Bitcoin as a valid form of payment — the beers are on Satoshi!

In countries like Argentina and Hungary, a number of taxis accept Bitcoin for their fares.

In the Netherlands, a Burger King in Arnhem will take your cryptocurrency.

And plenty of big, online companies accept Bitcoin depending on the country you’re based in. These include Microsoft, Dell and Expedia.

There are also a large number of gift card websites that accept Bitcoin, meaning you can buy store credit for the likes of Amazon, Marks & Spencer, Asda/Walmart, Target, Nike and hundreds of other shops too.

We mentioned in the drawbacks of Bitcoin that adoption is slow and that is certainly proving most obvious when it comes to regular day-to-day use of the cryptocurrency.

However, as it is likely that Bitcoin will primarily be a store of value, rather than a regular currency (think back to the gold analogy), it will probably be in the hands of other cryptocurrencies to deliver the ability to purchase things both online and on the high street.

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