Bitcoin (“BTC”) is the cryptocurrency that’s taking the world by storm and making millionaires out of middle-schoolers. Called a “fad” and “worthless” by many economists and financial experts in its early years, it is currently causing many of those naysayers to eat their words. In 2017 BTC cracked the $10,000 US mark. Yes, that’s $10,000 for a single BTC. Now THAT’S real money! Or is it? Just what, exactly, is “cryptocurrency?” You’ll discover the answer, plus how and where to buy a Bitcoin, in this handy guide.
WHAT IS CRYPTOCURRENCY?
Cryptocurrency is digital money. In essence, all money is “cryptocurrency” in that it ultimately exists only in units on paper. However, the majority of the world’s legally-recognized currencies also have a physical form. In the USA, for example, one one-hundredth of one dollar is represented by a penny. One-twentieth of one dollar is represented by a nickel, and so on. One dollar is represented by a piece of paper known as the dollar bill.
No Intrinsic Value
These representations, (particularly paper money), have no intrinsic value on their own. Their only value lies in the units of legal tender they represent on paper, or, technically, on a computer data base managed by the US Federal Reserve. But, really, their true value can only be measured by two main factors: how many individuals agree to trade them as legal tender, and how much demand there is for their use and collection. (This type of money is known as “fiat money.”)
Same As Regular Money
In almost every respect, cryptocurrencies are the same as “regular” money. All, that is, except for one: they have no physical/tangible form; they exist only as units and only online. Otherwise, they have a lot in common with money: they can be traded for goods and services and their value is based on how widely accepted they are and how badly people want them. The more demand there is for them, the more they are worth.
This analogy might help: Let’s say that Jeff, a landscaper, and Megan, a hairstylist, decide to create their own cryptocurrency, called Udio. The two agree that Jeff will cut Megan’s lawn for 30 Udio, and Megan will cut Jeff’s hair for 25 Udio. The system works out well for them, and pretty soon their neighbor Will decides he would also like to get in on this arrangement. Will is a plumber, so he offers to do plumbing for Jeff and Megan at a rate of 75 Udio per hour. Jeff and Megan agree to this arrangement. Jeff also asks to buy 100 Udio for 100 dollars cash, so they each sell him 50 of their Udio for cash.
It’s not long before everyone else on Jeff and Megan’s block want to participate in this new form of currency. As more people start demanding and accumulating Udio, the value of a single unit begins to rise. And this is how a cryptocurrency gains a public hold.
Value Can Fluctuate
Of course, just like regular US money, the value of a cryptocurrency can fluctuate and even lose its value entirely. In fact, cryptocurrency is significantly more unstable than regular, government-sanctioned money. In spite of this, BTC has emerged as the most successful of cryptocurrencies in history.
ARE THERE OTHER CRYPTOCURRENCIES BESIDES BITCOIN?
There are actually many different cryptocurrencies. Ethereum and Litecoin are the most popular and widely-accepted after Bitcoin. However, there are actually more, and this long list includes (but is definitely not limited to):
Bitcoin Cash (a BTC spinoff)
Blip On The Economic Radar
Some of these cryptocurrencies are little more than a blip on the economic radar: not widely accepted and looked at as fads. Others are being seriously traded on major exchanges.
WHERE DID BITCOIN COME FROM?
So if it wasn’t created by a government, where did it come from? Bitcoin was the brainchild of a shadowy and now legendary programming genius known as Satoshi Nakamoto. He or she is so shadowy that the name Satoshi Nakamoto might be a pseudonym.
Nakamoto Launches Software
After launching the software, the figure known as Nakamoto turned the reins over to Gavin Andresen, a software developer who worked with Nakamoto on the Bitcoin program. Andresen now oversees (but does not own or otherwise dictate the course of) BTC. After this transfer of leadership, Satoshi Nakamoto all but disappeared, in Web presence anyway, sparking myriads of conspiracy theories which will undoubtedly continue as long as BTC is alive. (Note: Andresen claims that he is NOT Satoshi Nakamoto and that he did not create the currency himself.)
HOW IS BITCOIN REGULATED?
Unlike US money, there is no treasury filled with BTC, at least, not a physical one. Neither is there some sort of a governing body of people at the top who manipulate the value of it or make any decisions regarding its trade and use. As already noted, Andresen only monitors the program and the Bitcoin community.
This is a significant part of the beauty and the allure of BTC: the program that Nakamoto and Andresen developed is open source. It’s free and it’s wide open for anyone to see. This was all part of their philosophy: to create a currency that no government or other authority had power over. Rather, its trade is monitored by the crowd, the people who use it. Within the program, every individual in the world who owns BTC can see every transaction the occurs with the cryptocurrency, recorded in a block chain. Every time a Bitcoin is traded, it can be seen by all users within the system in a centralized file accessible to everyone. In this respect, BTC commerce is self-monitoring. You can bet that, of the millions of holders of BTC, no glitch in the system will be overlooked, otherwise, the entire currency is threatened and users stand to lose a lot of money.
CAN MY BITCOIN BE STOLEN?
If it’s all just floating around out there in cyberspace, it stands to reason that BTC can be stolen. In short, the answer to that question is “yes,” and if so, isn’t it a very insecure currency?
Part of the reason that it is insecure, as previously noted, is its ability to be stolen. Then again, so can physical US money, which is why people go to great lengths to protect their cash: they limit how much of it they carry with them, they keep most of it in a bank (which has dozens of strong security measures in place to prevent theft), and they limit other people’s access to their debit cards, credit cards and passwords. With all of these measures in place, it’s extremely difficult for someone to steal your cash.
It’s the same for BTC except you can’t physically see or feel these protective measures, so they can be a little befuddling to cryptocurrency newbies. To protect your BTC you need a digital wallet. Wait…What?
HOW DOES A BITCOIN WALLET WORK?
A digital wallet (sometimes referred to as a “Bitcoin wallet”) is a software program for securing BTC. It’s like a digital file that you can only open with a key: a digital key referred to as a private key or seed. When you participate in a transaction where BTC transfers from one owner to another, the wallet is crucial to maintaining the integrity of the transaction as well as to protect both the sender and the receiver of the currency.
The key to the security of the transaction is, well…the key; that is, the “private key.” Every digital wallet has a private key, which is actually a complex and unique code that identifies that wallet. Sending and receiving Bitcoin with a digital wallet is as easy as making an online purchase or sending an e-transfer of money as long as you have that key. The key is used to verify that the sender is the correct one and is sometimes referred to as the “signature,” acting the same way as your physical signature on a check.
The transaction is recorded in the block chain in a ledger within the software program that facilitates the trade of BTC. This ledger plays an important role in the system. It is available to everyone who trades in the cryptocurrency so that every trader is able to see and verify that the trade has taken place and is valid. Trading cannot occur outside of this system, and any shady transactions that happen can be identified by the millions of users and quickly rectified. Users are highly motivated to act as watchdogs, because any losses that occur threaten to wipe out the BTC savings of every single user.
Is A Digital Wallet Really Secure?
In short, it’s as secure that it can possibly be within the system/program that BTC trade was designed to operate and be maintained. If you’re worried, think of it this way: it’s as secure as most US banks are. Banks keep their cash inside of a thick-walled safe made of extremely heavy steel and concrete. It has multiple seals, each with codes that must be input in order to access the next seal. Often each code is known only by one person within the bank, so that it requires multiple staff to actually enter the safe, and staff members do not share their codes with one another, or if there is a single code, access must be witnessed and verified by multiple staff members.
Could someone come into the bank and bomb the safe to gain access? Possibly, but all of the other measures that are in place make this as close to impossible as one can get. Bank doors are locked to the public. There are security alarms and cameras everywhere to discourage and identify potential thieves. There are human security guards posted at doors. Little cash is kept in teller’s drawers, and tellers cannot access the safe. Very few thieves throughout US history have ever penetrated the safe of a bank.
The digital wallet is a bit like the bank. There are many measures in place to prevent anyone other than the wallet’s owner from accessing it. The digital key code is a complex algorithm containing thousands of numbers and symbols that would take years, possibly decades, to generate randomly. The entire system has been designed with security and accountability at the forefront. Your BTC is as safe in your digital wallet as the money in your bank account.
(We’ll provide more information about some of the different digital wallet systems that are available further down the page.)
HOW TO MAKE MONEY FROM BITCOIN
Although Bitcoin is widely accepted as currency compared to other cryptocurrencies, it still hasn’t approached the scope of acceptance that currencies like the US dollar have had for centuries. So investing in BTC is a gamble. Then again, all investments, whether stocks, bonds, SECURITIES, RRSPS, etc, come with a certain level of risk. As risk goes, it is considered medium to high risk. On the other hand, usually higher-risk investments that become profitable end up being highly profitable. Some of the early adopters of the cryptocurrency have gotten very wealthy (at least on paper) thanks to embracing the elevated risk that it posed.
Exactly what is Bitcoin mining? How do you “mine” something that’s only represented in units on a computer program? With a computer program, of course. Still confused? That’s okay, we were too. It’s hard to wrap your mind around mining something that’s not tangible. But then, we all use computer programs every day to do things that aren’t necessarily “tangible.”
Bitcoin mining is required to verify and process individual transactions of trade in the cryptocurrency. When it is traded, it must be added to the block chain in the public ledger. In order to accomplish this, complicated mathematical codes must be deciphered and broken through the use of Bitcoin mining software. It is this process that ensures that the entire system is self-perpetuation and remains publicly-governed.
Bitcoin Mining Is A Tedious Process
However, Bitcoin mining can be a tedious process and requires a certain degree of advanced computer power. Since no one person can control this aspect, the opportunity is provided to everyone within the system to participate in Bitcoin mining and to ensure that Bitcoin mining actually occurs, there are incentives in the form of…you guessed it: BTC rewards.
As part of the overall software system, the total number of Bitcoins that will ever be released has been capped, believed to be somewhere around 21 million. There aren’t even half that many in circulation now, so there are still a lot to be generated. In Bitcoin mining, new transactions are verified and processed. The owner of the computer that completes the process is rewarded with BTC.
Bitcoin Mining Is Very Competitive
Of course, since the Bitcoin mining challenge is open to everyone, there’s a lot of competition to be the first to solve the mathematical codes, because the only one who gets the reward is the first one to crack the codes and verify the transaction. So Bitcoin mining involves downloading the Bitcoin mining software and constantly running it in hopes of catching a transaction and being the first to verify it. Because the Bitcoin mining program must be run 24 hours per day, seven days per week, many miners have entire computer systems dedicated to Bitcoin mining.
To keep the playing field relatively level, and to encourage ongoing Bitcoin mining, the ease with which the codes can be broken by the computers running the Bitcoin mining software varies according to how many computers are making attempts at any given moment. The more computers competing at one time, the harder it is for any individual to break the code because it automatically adjusts to become more difficult. If there are fewer people attempting Bitcoin mining, the code becomes easier to crack. This is what makes the entire system self-sustaining.
Bitcoin Mining Is A Gamble
Yes, Bitcoin mining is a bit of a gamble, especially considering how much computer power is required to be successful at it, not to mention the electricity needed to run it. By the way, the rewards for Bitcoin mining become incrementally smaller as the total 21 million cap is approached, making it that much harder to become profitable. On the other hand, when a single unit of the cryptocurrency is worth $10,000 US or more, even finding one or two may make Bitcoin mining worth the cost and effort.
This involves creating a Website and enticing people to visit it by offering them free BTC, or increments of it, in the form of Satoshis. A Satoshi (aptly named after the elusive creator of the cryptocurrency), is worth 0.00000001 of one BTC. The idea is that you make money running ads on the site, which pays for the Satoshis that you give away, and hopefully you have enough leftover to make a profit. Offering free Satoshis is appealing to visitors who are interested in playing around with the cryptocurrency but may not quite be ready to pay cash for the cryptocurrency.
Accepting BTC as Payment for Goods or Services: Perhaps like Jeff and Megan, you have a skill that’s in demand. Offer that skill in the form of a service and take BTC instead of cash. Maybe you already have an online store, or you sell handmade items on Etsy. Don’t have anything new or handmade to sell? You can resell something old via eBay, because eBay also accepts BTC as payment.
HOW TO BUY BITCOIN
Finally, you can simply purchase the cryptocurrency outright with good, hard American cash. So, want to buy a Bitcoin? You can’t get them from your US Bank. Instead, you can buy a Bitcoin in two ways:
1) By a Bitcoin through an online broker. Make sure you have your BTC wallet set up before you do.
2) Buy a Bitcoin directly from other individual owners. The advantage to this method is that you avoid the middleman (the broker) and the fees and markups associated with brokerages. There are numerous online forums for trading in the cryptocurrency. Again, have your BTC wallet ready.
CHOOSING THE RIGHT BITCOIN WALLET
Earlier we talked about what a Bitcoin wallet is. Now we’re going to tell you how to get one and what to look for. The majority of digital wallets are free; that is, it costs nothing to download the app or set up the wallet. You will pay fees, however, for buying and selling the cryptocurrency. This is known as the miner’s fee, which goes to the miner that confirmed your transaction (again, to ensure that Bitcoin mining continues) The fee is typically based on either the amount of the transaction (a percentage of the total amount you buy or sell) or the size of the transaction (mBTC/kb). Depending on which program you choose, there may be other small fees attached (such as when you use your wallet to purchase goods from a retailer).
Ready to get started? Here are a few to consider:
Coinbase (https://www.coinbase.com) is an extremely versatile wallet for buying, selling and securely storing several types of cryptocurrencies, including BTC. Not only can you buy and sell the cryptocurrency, you can connect your bank account, credit card, debit card and even your PayPal account. You can also pay with it at any retailer that accepts BTC. Coinbase works on both mobile devices and desktop computers. It also has a number of side features not available with other wallet apps. It is free to download and available for Android and Apple devices.
The Mycelium digital wallet (https://wallet.mycelium.com/) platform tags itself as “the default wallet” and claims to have the highest number of stars on Google Play. It was also given the “Best Mobile App” award by Blockchain.info in the year 2014. It offers users full control over their private keys, which remain only on the device they are downloaded to unless exported. Other features include encrypted PDF backup and restoration of single key accounts, the ability to share your wallet address directly on several social media platforms and many others. Mycelium is available for Android and Apple devices.
Copay (https://copay.io/) offers its users the option of having multiple users on a single wallet. (Copay compares this feature to having a joint checking account.) To add security to your wallet, you can set a requirement that all users of the wallet must sign off on any transaction that takes place. It’s also an excellent way for groups of friends or family members to pool their resources and increase their buying power. Copay is open source, so transaction fees are set by the community and are based on the size of the transaction rather than a percentage of the amount of the transaction. It is free to download and is available on Android and Apple devices.
Bread (https://breadapp.com/) bills itself as the simplest BTC exchange platform on the Web. Your wallet is totally private and exclusive to your device; Bread itself cannot access it. Bread is available on both Android and Apple devices.
Bitpay (https://bitpay.com/wallet) supports both BTC and Bitcoin cash. Trade securely in the cryptocurrency with features like on-device storage, multi-signature option and more. You can even integrate your wallet with BitPay Visa and purchase of Amazon.com gift cards. Bitpay is available on both Android and Apple devices.
This digital wallet entices users with a “single sign-on” feature. This eliminates the problem of memorizing multiple passwords. Airbitz is open source and decentralized so your wallet is accessible even if servers are down. Plus, the only party with access to your wallet is you. It is available on Android and Apple devices.
This wallet can be used to pay anywhere that BTC is accepted by simply scanning your QR code. It offers security and privacy as well as ease-of-use. It is available on the Android platform and can be downloaded for free from the Google store.
The GreenAddress (https://greenaddress.it/) wallet is compatible with both desktop computers and mobile phones. GreenAddress providers users with a user-friendly system that is a good balance of convenience and security. It is open source and free to download and is available for Android and Apple devices.
GreenBits is an offshoot of GreenAddress. It offers some extra features, including paper wallet backup and multi-signature confirmation for extra security with each transaction. It is free and available for Android and Apple devices.
Samourai’s (https://samouraiwallet.com/) big selling point is the high levels of privacy that it offers. The user’s private key is stored on the device used to access the wallet. Other privacy and security features include requiring a passphrase to access info, randomized PIN screens in order to beat any spyware that might be lurking about and randomized number of change outputs for each transaction. Samourai Wallet is open source and is available on the Android platform.
The ArcBit (https://arcbit.io/) digital wallet boasts no sign-up and easy download. Users get a single recovery passphrase that is valid forever and which you can use to restore your wallet on another device, as well as your balance and your whole transaction history. It even has a unique “cold wallet” feature, allowing users to create “cold” offline wallets, letting users spend and receive Bitcoins without exposing their private keys. AcrBit is available for both Android and Apple devices.
Blockchain – Bitcoin & Ether Wallet:
Blockchain (https://blockchain.info/wallet) lets users send and receive BTC in mere seconds with confidence that transactions are secure. It has an “Advanced Two-Factor” authentication process for added security. Plus, you get access to support when you need it. Blockchain is available for Android and Apple devices.
This app (https://bither.net/) conveniently lets you run your wallet “hot” or “cold.” Your private key is password protected with Bither. Other features include automatic backup and recovery and access to realtime Bitcoin value on major exchanges. Bither is available for Android and Apple devices.
Bitpie (http://bitpie.com/) offers easy sending and receiving of BTC plus passphrase recovery and backup. Multi-signature function is also available. It even has a built-in escrow function. Bitpie is available for Android and Apple devices.
Coinomi (https://coinomi.com/) is a universal wallet that supports several different types of cryptocurrency in addition to BTC. Users get all of the privacy features they would expect, including private keys that never leave your device, IP blocking and strong encryption. With Coinomi you can even convert between various currencies. Coinomi is available for Android devices.
WHY DO MINER’S FEES FLUCTUATE?
As you now know, miner’s fees apply to the majority of BTC trade transactions. It’s how transactions get verified and, ultimately, ensures that its trade remains uncontrolled, unowned and unable to be manipulated by any private or government source. You also know that the rewards that miners get for verifying BTC transactions is based on factors like how much mining is actively occurring at any given moment. Since rewards fluctuate, the fees that are taken for buying or selling BTC also fluctuate. This is called a “dynamic” fee structure.
Dynamic fees can make it difficult to predict how much a particular transaction is going to cost you. Usually it ends up being a small commission (because there are a lot of miners out there). However, you might occasionally be shocked at the cost of a particular transaction. While some digital wallets charge static fees (i.e. a percentage of the amount of the transaction), the majority charge a miner’s fee based on the size of the transaction. Just be aware of this when buying or selling BTC and remember, Bitcoin mining is what allows the trading to continue.
YOUR NEXT STEPS: HOW TO GET STARTED IN BITCOIN
There are three main ways to get started amassing BTC of your own:
- Buy it from an exchange
- Accept it as payment in your store or business
- Or set up your own BTC mining operation.
Here we’ll give you step-by-step guidance on how to do all three of these things.
Buying Bitcoin from an Exchange
For the purposes of this guide, we are going to use Coinbase as an example. However, even if you choose a different wallet and BTC exchange provider, the process will be similar. To get started buying BTC using Coinbase.com:
1) On the home page, submit your email address and create a password. (Be sure to choose an email that you have unlimited access to.) Your password should contain upper and lower case letters, numbers and at least one symbol. Strive for a strong password to prevent unauthorized access to your new account.
2) On the next page you’ll be asked to provide your mobile phone number. This is so that Coinbase can confirm your identity by sending a code via SMS to your phone. You will have to input this code in the correct field.
3) Supply your basic personal info.
4) Connect your credit card. This is a requirement, another way for Coinbase to verify your identity. To do this, Coinbase will apply two small charges to your card (around one dollar). You will be asked to check your credit card log and verify on Coinbase the exact amounts of those charges. Once you have done this, the charges will be reversed (although this can take from a few hours to a couple of days).
5) Now you’re ready to buy! On your dashboard, simply click on the Buy/Sell link. You’ll be redirected to a new page where you will be asked to input how much money you want to spend on BTC. A minimum applies, but it is very small (a few dollars US). Enter the amount you want to spend, and your credit card will be automatically charged. The amount will be converted to Bitcoin. (Note: There will be a couple of small fees to pay, and these will be deducted from the amount that you choose before your total is converted to BTC. In other words, if you want to spend $10, you’re really only purchasing around $8 US worth of BTC.)
If you ever decide to sell your currency, you’ll be required to connect a debit card. Your BTC will be converted into US cash and deposited into your bank account.
How to Accept Bitcoin in Your Business or Store
To accept BTC as a form of payment for goods or services:
1) Choose a Bitcoin payment service processor (PSP). Some of the most popular ones include Moolah, Coinkite, BitPay and GoCoin. It’s important to note that some PSPs only accept online BTC payments while others are available for in-store payment at brick-and-mortar businesses.
2) Visit the Website of the PSP of your choice and set up your account. You will need a valid and readily-accessible email address, and you’ll be asked to provide some basic personal and business information. You will be asked to verify your identity via email or SMS.
3) Optional: Remove restrictions. The total amount of transactions that you can process in a given period (usually a month) may be limited (a $1000 limit is common). If you want to remove this restriction from your account, you’ll need to provide more detailed personal and/or business info for further verification.
4) Generate your unique QR code. This can typically be done right on the Website. That’s all that’s needed for people to make purchases in your store using BTC.
Of course, the purchaser must have a digital wallet and must have an app on their phone that allows them to pay at the point-of-sale.
Setting Up a Bitcoin Mining Operation
This method for collecting BTC is, by far, the most complicated and expensive. It’s really only for the true technology aficionado rather than the average person because: 1- It’s a bit of a gamble; 2- It’s expensive and, 3- It requires some technical knowledge. Here’s what you need to do:
1) Purchase mining hardware. Once upon a time when BTC was new and there weren’t many miners out there, you could mine using an ordinary desktop computer. This is no longer the case, as the number of miners competing for a little bit of BTC has grown exponentially. Today, you need to have dedicated hardware designed specifically for mining. Depending on their power, they can cost anywhere from $1000 to $3000, or even more.
2) Download mining software to your device.
3) Set up your equipment and let it run.
This is really all there is to it, although we have definitely oversimplified the process a little bit. You do need to know how to set up the device properly, and you will have to let it run your software continuously: 24 hours per day, seven days per week. This is the only way to compete in the mining game. However, if you do manage to mine even one BTC at 2017 value, you’ll have paid for your equipment several times over, as well as the electricity used to operate it.
If you like the idea of Bitcoin mining but don’t have thousands of dollars or technical skill to invest in your own mining setup, you might want to consider cloud mining. Think of this is as joining a mining club: you pay X dollars in membership fees. The club’s creator (the guy with the impressive and expensive mining equipment) invests all of the membership fees into building and running his rig. Any Bitcoin that is mined is then shared between all of the members.
Again, this is a simplified description of cloud mining. There are lots of cloud mining sites, and all of them have their own unique fee structures…but you get the idea. Cloud mining is also a gamble, so think it over carefully before you invest.