Bitcoin Explained - The Only Guide you’ll Ever Need
By Romanon N, Updated on: Apr 07 2023.
Bitcoin is digital freedom. It was created to be a completely open source digital currency that completely belongs to the world. It’s available to every man, woman and child and it allows humanity to conduct business and peer to peer transactions of value in a fast, secure and immutable way without interference by any central authority. Currently it’s more important than ever to know how it works, so let’s not waste any time and learn everything about it.
Table of Contents:
- Dispatch your doubts
- How did it all start?
- What is Bitcoin?
- From Cryptography to Bitcoin
- “But Mom, how does Bitcoin work?”
- What is Bitcoin mining and how does it work?
- What is Bitcoin halving?
- What’s a Bitcoin wallet and how does it work?
- How to buy Bitcoin?
- Can Bitcoin go to 0?
- How to trade Bitcoin?
- Should I Invest in Bitcoin?
Dispatch your doubts
I know what you’re feeling right now. You are a bit frustrated with yourself that Bitcoin now costs a whopping 5 digits of USD or EURO (perhaps even 6 digits) and you are only NOW learning about it. Right?
Don’t be mad at yourself and don’t feel bad. The majority of people are still in the dark about Bitcoin and cryptocurrency. People tend to cling to their internal beliefs and assure themselves that they are not “tech-savvy” enough in order to understand something difficult like Bitcoin.
Nothing can be further from the truth. In fact, knowing about Bitcoin and cryptocurrency will improve the quality of your life and your business decisions in a way you cannot even imagine. If you keep in mind that Bitcoin is nothing more than software (just like the one you are using for reading this article), you’ll understand that it’s all much easier than you think. Besides, if we were back in the 1990’s, you would be one of the few people who first discovered the internet and email, at the time that nobody believed it would take off. Let’s not waste a second and learn literally everything about Bitcoin and why it’s so extremely important.
How did it all start?
Since our early years we are taught very little about money and financial systems. This is done internationally. The owners of the world (Central banks and large organisations) actually WANT to keep us ignorant. This is why we tend to end up working dead end jobs, getting into mountains of debt and eventually becoming depressed and pessimistic, running around like headless chickens. The system is truly rigged against us.
Never has this been more evident than in 2008. If you’re old enough to remember the madness of the last world financial crisis, the images of mass foreclosures, “occupy Wall Street movement” and global protests were all the rage back in the days. The money masters have pulled off another huge cash heist that almost brought down the entire global financial system to its knees. Nobody went to jail for this and the common people like you and me ended bailing out these criminals.
Central banks did what they do best: they printed massive amounts of fiat currency (called Quantitative easing) and bailed out the financial institutions that caused the global mayhem in the first place. Watch the movie called “The Big Short” to understand what happened in even greater detail.
Out of the smouldering ashes of this financial mayhem, an anonymous programmer called Satoshi Nakamoto decided to do something about it. On 3rd January of 2009 he (and a few of his collaborators) unleashed Bitcoin into the hostile and predatory financial world. The rest is history. Over the years Bitcoin went from being an experiment to becoming the new digital gold standard. Let’s size up the nature of this wild digital animal.
What is Bitcoin?
In simple terms, Bitcoin is just software that allows people to send value anywhere in the world over the internet. The software is open source and literally every man, woman and child is free to use it. There is no central authority, no huge bank servers, ATM’s, keyboard banging office plankton and definitely no global restrictions. It’s literally freedom in digital format. Let’s compare Bitcoin and fiat currency against each other:
|Fiat Currencies (eg: USD, EUR)
|Printed out of thin air, unlimited supply
|Maximum supply of 21 million Bitcoins, Inflation set to end in the year 2140
|Billions printed every day
|6.25 BTC are released every 10 min, Supply is cut in half every 4 years
|1 USD divisible by 100
|1 BTC divisible by 10 000 000
|Backed by nothing (gold standard ended in 1972 by U.S president Nixon)
|Backed by energy (Proof of work mining) and math (hashing and SHA256 encryption)
|Fully decentralised and owned by no one
|Can be used as financial weapon (economic sanctions)
|Completely open to everyone with an internet connection
|Created as debt. Fiat money = debt
|Asset like gold and commodities
|Identity can be checked when using digital bank wire payments
|Identity of users is not known IF the user doesn’t make his/her BTC account public
|Cannot be saved due to loss of purchasing power
|One of the best vehicles for saving value over long periods of time
There are more differences, but the point here is crystal clear. Bitcoin has been designed to be everything that the fiat currency isn’t and can never be. It opens the door for so many opportunities and hopefully your brain is already crackling with ideas and examples how Bitcoin is used worldwide. Once you understand that, we will go beyond the triviality of just getting rich from Bitcoin. There’s so much more at play here and now you finally understand how important it all is. Let’s dive a bit deeper under the hood to see how Bitcoin works.
From Cryptography to Bitcoin
There are entire books written on cryptography (yes we have read some of them), but for the sake of saving your time we will focus only on what’s important.
Bitcoin works using private and public key cryptography. Again don’t let the fancy sounding lingo get under your skin. It’s all pretty straightforward.
A private key is just a long string of letters and numbers that looks like this:
This is your literal proof of ownership over your Bitcoin. The crypto OG’s like to say “Not your keys, not your coins”. This is the key they are talking about. Now you know.
From this holy private key we can derive an almost infinite amount of public keys. They look like this:
These public keys are used for spreading around to other people so you can receive Bitcoin payments. This means;
- Private key is like a bank building that you own (pretty cool right?). It’s crucial to keep this private key safe and secure. Whoever owns this key, literally owns your Bitcoin! I repeat: WHOEVER OWNS YOUR PRIVATE KEY, OWNS YOUR BITCOIN!
- Public keys are an almost infinite amount of bank accounts that you can generate from your 1 private key. These bank accounts can be given to other people so they can send you some Bitcoin, hence they can be made public!
Bitcoin has 2 fundamental features. Once you understand them, you will understand the whole point of the big orange coin’s philosophy and security.
- You cannot reverse engineer someone’s private key if you only know their public key (otherwise people would be able to steal each other’s Bitcoin) If you have someone’s bank account (public key) you CANNOT guess what Bank (private key) this person is using.
- Bitcoins Standard Hashing Algorithm (SHA-256) is designed in a way that ANY modification to the data will change the entire code and render any information on the network completely false. This means the blockchain cannot be altered in any way without rendering the whole Bitcoin network completely useless. How exactly?
If we play around with SHA-256 we can generate a code similar to Bitcoin’s public and private keys. When we type the word “Bitcoin”, this is the result:
When we type the same word but with a small “b” (“bitcoin”), the entire outcome changes to:
Notice that ALL the characters are different in both codes. Not only is this cryptography thing pretty badass, but it also allows us to ensure that all the information that’s stored on the Bitcoin network is 100% tamper proof and cannot be altered. If you change 1 letter and get a whole new hash (string of letters and numbers), there’s no physical way to change the entire bitcoin network. This is called immutability.
Imagine you're an attacker. You want to go “back in time” on the blockchain and insert malicious code whereby your BTC balance would go from 0.00001 to 1.000.000,00. Not bad right?
Keeping in mind that when we use SHA-256 hashing method, this will be 100% impossible to do, simply because a change in just 1 block of previous data would render all following blocks completely useless. Remember that just 1 letter changes the whole string of numbers and letters! That’s one hell of a good security! Any attempt of inserving false data is promptly kicked out of the system instantly.
Speaking of security of the Bitcoin network, it’s important to know about Mining. Once you do, not only will you know where new Bitcoin is generated from, but you will also be able to impress your friends and family by explaining this mythical Blockchain in greater detail. Smart is the new sexy! Let’s read on.
“But Mom, how does Bitcoin work?”
In the crypto space, there’s a yearly tradition of spreading FUD (fear, uncertainty and doubt) in order to crash Bitcoin’s price. Don’t worry, this is just the game of the wealthy whales. They own pretty much all the media outlets and by deliberately crashing the price, they are simply helping their Wall Street buddies to buy cryptocurrency at cheaper prices. One of these FUD campaigns has always been “Bitcoin Mining”. No doubt you have seen the headlines;
- Bitcoin mining uses too much energy
- The polar ice caps will melt because people mine Bitcoin
- Bitcoin mining is bad for the environment
- Bitcoin mining uses the same amount of energy as Switzerland
You know the story, not only are all of these statements false, they are released in order to keep people away from investing in cryptocurrency. After all, you wouldn’t want to be investing in something that’s “destroying the earth” right? Bitcoin mining is not only one of the most economic and effective systems there is, it’s actually the way how new Bitcoin is created daily. Let’s see what mining is all about.
When we make transactions on the Bitcoin network, we are using a decentralised system of hundreds of thousands interconnected computers spread across the globe. Each and every one of these computers is securing the network. How does that happen exactly?
- Bob sends some BTC to Alice
(his transaction is broadcasted to the bitcoin network)
- Bob’s transactions ends up in a mempool (a buffer where all pending transactions wait for processing and confirmation)
- A miner (computer) picks up Bob’s transaction and processes it.
- Transaction is successfully processed and appended to the blockchain.
The miner has found the “nonce” (explained later) and proves to the entire Bitcoin network that he’s the only one who has the right to process this transaction and collect the reward for doing so
- Every computer on the bitcoin network agrees that Bob’s transaction is true
- Alice receives her BTC from Bob. She’s a happy camper
- The miner (computer) that processed Bob’s transaction is rewarded with newly created Bitcoin. He collects a Block reward and transaction fee
In this digital orchestra there are different players. All of them have certain incentives and rewards for doing a particular action. The outcome always results in a reliable and secured network. The system is set up in a way that “playing by the rules” is rewarded handsomely.
Bob and Alice like to use Bitcoin, because their governments cannot forbid them from sending value across international borders.
The miners (computers) are incentivised to help Bob's transaction to move through the network in a safe and secure manner. Bob is paying a small network fee to make this possible (look at it as a bribe to the miners for faster processing).
Pretty much every miner connected to the bitcoin network wants to receive the sweet mining reward (currently 6,25 BTC per block, generated every 10 minutes). Because of this competition, all the miners (computers) want to play by the rules and make sure that the whole network is squeaky clean and only registers correct transactions. If they don’t play by the rules, they end up burning electricity for nothing. Tampering in any way is 100% excluded. To sum it up, where do new Bitcoins come from?
- Block rewards (6,25 BTC is distributed every 10 minutes to a lucky miner)
- Small transaction fee that’s paid to the miners. Transactions that have the highest transaction fee are processed first.
One of the oddest events that sometimes occurs during the mining process, is called forking. The miners are racing against each other for the privilege of appending their block of transactions to the whole Bitcoin network. Here’s how a “soft fork” happens
- Miner A (from Australia) has solved the difficult equation and has the privilege of attaching his new block to the blockchain.
- Miner B (From Greenland) has just done the same. Both of them broadcast their data to the Bitcoin network
- Due to time latency (caused by the delay of the network synchronisation across the world) we suddenly have 2 new blocks that literally split the Bitcoin network. For a short time they work in parallel.
- The Bitcoin network is synchronised and one of these “forks” is discarded.
- The LONGEST blockchain survives.
Although this is a simple explanation, the most important thing to remember is that soft forks are absolutely not intentional. They happen due to network latency and are quickly rectified by the whole system. What about Hard Forks then?
Here, the story is much different. A hard fork is an INTENTIONAL split of the Bitcoin network into something new. This usually happens due to disagreements inside the Bitcoin community and plain old bickering. Boys will be boys! Best examples of Bitcoin’s hard forks are Bitcoin Cash and Bitcoin SV. More on forks later on.
Block rewards? Mining? Transaction fees? What is all this gibberish? Again don’t let yourself be intimidated by technical lingo. It’s much more simple than you think. Let’s take a closer look.
What is Bitcoin mining and how does it work?
Mining is a complex computational process that computers perform in order to find a random number (called nonce). The first miner that finds this mythical nonce is the winner. But why?
Because this miner has the privilege of bundling a total of 1mb worth of Bitcoin transactions in a single block of data and attaching this block to the chain of previous blocks; called the blockchain.
When this is done, the miner is awarded the block reward subsidy (of 6,25 BTC) AND all the transaction fees that people awarded to the Bitcoin network in order to have their transactions processed. Nice!
Of course not every computer can just be hooked up to the network and used for earning those sweet block rewards and transaction fees. The system is designed to give every participant a chance at finding a block, but as we know the technology changes and adapts at lightning speeds. Nowadays only the blazingly fast ASIC miners (ASIC stands for Application Specific Integrated Circuit) can mine Bitcoin efficiently.
Mining is much more complex in order to cover all of it in one chapter, so let’s take a moment to cover the myth of high energy use of the Bitcoin network once and for all.
Miners are very mobile guys and gals. In order to have their machines up and running, they need just 3 things;
- Internet connection (mobile or fiber optics)
- Electric power
What the saliva spitting pseudo-journalists fail to realize is that classic power consumers (banks, factories, homes etc) are NOT mobile. The power needs to be delivered TO THEM. When we transport electricity from the power station to the end consumer, a lot of this power is actually wasted in transit. What the miners do (at least the smart ones) is very different. They actually move their mining machines close to the source of power and profit from the low electricity rates.
One Canadian guy uses container units full of ASIC miners and places them right next to oil refineries. The waste gasses that the refinery simply burns away are now being used to power his miners and are helping to secure a nice big part of the Bitcoin network.
Every time you hear another angry Chihuahua on TV talking about the “environmental damage” that Bitcoin is causing, keep in mind that this FUD is shown to the people in order to trick the Bitcoin investors into selling out of fear. Don’t be that person! Real Bitcoin investors know that it’s a long term game. But why exactly long term? Enter the Bitcoin halving!
What is Bitcoin halving?
Let’s get one thing crystal clear! ALL fiat currency (that’s printed out of thin air) ALWAYS ends up losing all of their value. Every damn time in history without exception.
This is why Bitcoin is designed to be deflationary. How?
The miners that help to secure the network and crunch the transactions earn newly created Bitcoin (6,25 BTC anno 2021) for their hard work. This is why the system is called “proof of work” and by the way, every 4 years this block reward is cut by half!
Here’s how it looked like in the beginning;
- 2009 - 2012 Block reward was 50 BTC (Produced every 10 minutes)
- 2012 - 2016 Block reward was 25 BTC
- 2016 - 2020 Block reward was 12,5 BTC
- 2020 - 2024 Block reward is 6.25 BTC
Every 4 years the block reward is cut in half. This is called the “Bitcoin halving”. In 2140 the last block reward will be collected by a lucky miner. Now that you understand that Bitcoin is actually designed to be scarce and ever more valuable as time goes on, you won’t be susceptible to fear mongering by the media and governments.
But what will happen to the miners after 2140 when there’s no more block reward issued by the network? How will they be incentivised to keep their machines running? Funny you should ask. Remember that transaction fee that people pay to the miners? That small bribe in order to have their transaction processed faster. By 2140 Bitcoin will be so expensive, that these transaction fees alone will be a powerful motivator to keep the network alive. Luckily we won’t be alive by then, so let’s move on and see where we can safely store our BTC until that day.
What’s a Bitcoin wallet and how does it work?
By now you still remember that Bitcoin is just software. You also remember those holy private keys, don’t you? A wallet is just an interface that helps to store your private key and uses this key to sign your transactions. That’s all it is! An interface can be:
- Digital hot wallet (connected to the internet) installed on your PC or smartphone
- Hardware cold wallet (not connected to the internet), meaning a physical device that keeps your private key separated from the internet and hackers.
- A simple piece of paper with your private keys scribbled on it.
One very common misconception is that people think that Bitcoins are stored inside your wallet and that is wrong. Your wallet merely holds the control of those Private keys which are the ultimate proof of ownership of your Bitcoin over the network.
If you remember 1 thing from this whole article, remember ALWAYS TO BACK UP YOUR DATA when it comes to cryptocurrency. Passwords, recovery phrases, private keys, you name it! Write down ALL of that information on several pieces of paper and keep that information in different physical locations in case some natural disaster happens. If you lose this crucial information, you lose your Bitcoin PERMANENTLY. You have been warned!
To give you an idea of how important that is, about 20% of the total supply of Bitcoin that can ever be mined into existence is now permanently lost, simply because people fail to backup their information. You may be wondering: What should I back up exactly?
- Difficult wallet password (self explanatory)
- Recovery phrase (usually 12 to 24 words) This phrase restores your Bitcoin wallet in case your computer is stolen or in case you decide to bathe your smartphone in your toilet.
- Private key. If you have the recovery phrase, it’s not always necessary to write down your private keys, but if you store your Bitcoin for years, you MUST write it down as well.
- Anything that you might consider important. You can’t be paranoid enough!
As you see, again hiding behind complicated lingo, there’s an easy to understand concept. A wallet is simply software, hardware (or even paperware) that stores your private keys safely and allows you to use your private keys to sign (meaning authorise and identify) your transactions. Crystal clear! Now let’s discover where we can actually buy some BTC and send it into your wallet.
How to buy Bitcoin?
The fastest and easiest way to buy Bitcoin (and other cryptocurrency) is off course via an exchange. For the sake of objectivity, we will cover ALL ways of actually buying it. Why? Simply because our current fiat currency system is dying. The angry lemmings and weasels who defend this system are shouting from the rooftops that “We need crypto regulation”!
Now that you finally understand how everything works, you’ll easily understand that these people are just defending the system that robs you on a daily basis, making you just another debt slave cog in a massive machine.
This is why you need to know ALL ways of getting your hands on cryptocurrency and Bitcoin, in case the “regulators” want to “protect the little investor to death” by blocking access to exchanges. So how do we get some BTC?
- Centralised exchanges such as (Kraken, Binance, etc)
- Online Brokers
- Mining (Yes you can actually put an ASIC miner at your house and mine some shiny new Bitcoin if you like
- P2P Transfer. You can meet some crypto people and buy some BTC from them using cash, chickens, potatoes and other valuable goods (as long as they want them)
- Getting paid in BTC. You can either work in the crypto space or accept cryptocurrency as payment at your business
- Donations. If you are doing important work that resonates with the minds of millions of people, it’s perfectly possible to ask for donations in cryptocurrency. Many political activists do it
- Decentralised exchanges and “Atomic Swaps”. This technology allows people to be as anonymous as possible and use transactions that fly under the radar. Best example is the Monero - Bitcoin atomic swaps (we’ll cover this subject in later articles)
Now that you know all the ways you can buy Bitcoin, let’s talk about the forms it can take:
- Bitcoin itself (the real deal, which you can withdraw, move, store wherever you want and is in under your full control)
- Bitcoin but enclosed in a platform (still real Bitcoin but inside some platforms that don’t allow withdrawing it or moving them out of there)
- Bitcoin Derivatives (Financial derivatives based on the price of Bitcoin such as Futures or CFDs)
So, which one is the best for you? Well! It totally depends on your intentions!
- If you’re a true Bitcoin believer and you plan to HODL as long as it takes, then you need to buy the real Bitcoin itself and not some form of enclosed alternative or financial derivative. The reason for this is that your true interest is purchasing BTC and transferring it to your personal wallet where only you control your private keys and can be held for as long as you want.
- If you’re also a Bitcoin believer but you’re afraid of not having some sort of business or face behind your Bitcoin, then you can definitely buy your Bitcoin using centralised exchanges such as (Binance, Kraken, Poloniex, Coinbase) which allow you either to withdraw it or to hold it there, but bear in mind that holding over long periods of time in cryptocurrency exchanges is subject to high security risks due to hackers.
- If you’re a trader looking to speculate over the price of Bitcoin and you don’t really care about holding it in your control then you’re definitely best served using a regulated broker which gives you the possibility to either hold under their controlled environment real Bitcoins or to speculate on their price via financial derivatives (with or without leverage).
What matters is that you’re very clear on what you want to make sure that you choose the right way to buy Bitcoin!
Now that you finally got your hands on some Bitcoin, how do you really know if it’s safe or if it will actually hold its value over time?
Can Bitcoin go to 0?
Simple answer: Yes. We are dealing with something new and extremely volatile. When we zoom out and look at the financial world with an honest and sobering view, we are pretty much just monkeys playing with thermonuclear weapons, passing them to each other like hot potatoes.
Bitcoin can go to 0 just like any structure of the almost endlessly complex derivatives, options and other financial wizardry can go to 0. The risk is very real, especially since the arrival of the global pandemic and the mayhem that it brought to the world.
The key to Bitcoin and cryptocurrencies in general, is the asymmetric gains that can be made from them. The (ever present) risk is low in comparison to the gains that can be earned when your strategy is correct. How can you lower that risk even more?
Newsflash! You are doing it right now. Risk can be drastically reduced by actually KNOWING about what you are investing in. Hence, by the time you finish reading, your risk of screwing up in crypto will be reduced 100-fold. Nice!
How to trade Bitcoin?
Time to go to the mirror, take a good look at yourself and honestly answer this question. Am I a good trader? If you suck at trading, then the easiest way to potentially profit from Bitcoin and cryptocurrencies, is just to HODL (Hold on to dear life). This simple strategy focuses on following 2 simple rules and a hell of a lot of patience.
- Buying the fear: Never EVER buy cryptocurrency if you see, hear or read about it in the mass media. You are too late! Remember Elsa from the film “Frozen” and just “Let it go!”. Only buy when literally everyone around you is screaming how terrible crypto and Bitcoin is
- Following the Bitcoin dominance index. When Bitcoin makes up the majority of the capitalisation of the TOTAL cryptocurrency market, the general pessimism and apathy is at its peak
Same goes for selling of course. Don’t be a lemming and only work with numbers. Take your jittery character and lock it up in a safety deposit box. When all of your friends suddenly start getting rich from crypto and Bitcoin, that may be the time to sell!
When your hairdresser is discussing shitcoin tips and the new “Ethereum” killer that just got released, maybe it's time to get out!
When the mass media is interviewing newly made crypto millionaires, time to get out as well!
Keep in mind that trading takes years to complete. Imagine plowing a field of fecal matter with nothing more than your face and you will have a degree of understanding how hard trading really is. It’s not a game of luck or skill alone. It’s a game of constant setbacks and occasional winnings, whereby the player's success is measured by the sheer tenacity and willingness to get back in the game after things go south.
You can learn it. Just please don’t make any illusions about it. Just like any skill, it takes a lot of hard work and time. This is why the easiest way of enjoying the benefits of Bitcoin and cryptocurrency is simply by buying and holding while accepting the potential risks. You can even spend as little as a few bucks each month and “dollar cost average” your way to the top. This granny-like strategy is one of the best ways to accumulate a decent position. In the end, the best strategy for you, is the one that will allow you to have a good night's sleep.
Should I Invest in Bitcoin?
Your head is probably crackling from all the new information, but rest assured! This is just the beginning. There is a lot more very cool information you need to know about Bitcoin and crypto in general. We will get there at our own pace. So, should you invest in Bitcoin?
If having a revolutionary, open source, borderless and permissionless means of wealth transfer is important to you, then Bitcoin is definitely worth exploring.
If you also see how the current financial system is mutating into a toxic concoction of totalitarianism and cyber dictatorship to the point of using the spinning corpse of George Orwell as a means of renewable energy, then Bitcoin is worth exploring.
The previous crypto cycle (culminating in a parabolic crescendo of 2017) was driven by insatious greed. This time the cycle (ending in the winter of 2021) is driven by fear.
Fear that the world is going in a very wrong direction and fear that our system of social security, pensions and other social benefits is coming to a grinding halt. This is a much more powerful motivator than greed.
Knowing all this, the question should be, how far will fear take us?