The following is a basic introduction into what bitcoins are and how you’d go about buying them.
What is Bitcoin?
Bitcoin was introduced as a brand new digital currency in 2009. It is produced by a mathematical formula that is run on specially built computers using a specifically written piece of software. In effect this software solves a maths problem which in turn creates ‘bitcoins’, a digital currency that are then used to trade for services and products in much the same way as a normal fiat currency (i.e.: US dollars, Euros, Pounds Stirling etc.). This is known as bitcoin mining and the coins created, which only exist in the digital realm, are added to an open ledger where all bitcoins are registered. This open ledger is called the blockchain.
The clever thing about Bitcoin
The way traditional currency (money) works is that from time to time in its physical format money can be damaged, lost or destroyed. This means that the government has to regularly produce more bank notes and coins to replace them. The more money that is printed means that each unit, each pound, Euro or dollar, becomes devalued. To balance this drop in value the government has to introduce inflation onto the cost of properties and services. If the value of money never dropped inflation would cease to exist. Because the maximum amount of bitcoins to be created would only ever be 21 million then this means that bitcoin is immune to inflation, and that’s what makes bitcoin such a special currency.
When bitcoins are created or when they are moved from person to person, each transaction or movement is registered on a cryptographic open ledger that anybody can access. Using strict security encryptions to prevent hacking and fraudulent changes every bitcoin transaction is added so that at any one time traders can see where the bitcoin is currently registered and where it has been.
This works just like a bank’s ledger, only without any staff needed to regulate it or carry out the payments. This means payments are faster, cheaper and much safer than with regular money.
How to buy bitcoin
To buy bitcoin you will need to know a few basics to get you started. You will need another currency to pay for the bitcoin, a wallet to store it in, and an exchange to make your bitcoin purchase from.
A bitcoin wallet is a piece of software on your computer or mobile device where you store your bitcoins – much like you’d store actual money in an actual wallet.
Without a wallet you can’t buy bitcoins because, quite simply, you’d have nowhere to put them. You can download a wallet to your mobile phone, tablet or install one on a PC, either on a network or offline. Wallets connected to the internet are considered ‘hot wallets’ because there is always a very small risk they could be hacked, so it is generally considered wise to only hold the amount of bitcoin in one that you would need for your daily spend – just as you would your real wallet. Any hackers who would try and steal your bitcoins are the equivalent to a mugger or a pickpocket who would steal your wallet from you in person.
A ‘cold wallet’ is one where you would keep the bulk, or the remainder of your bitcoins. This wallet shouldn’t be on a network or connected to the Internet. It’s like having a bank without any doors. If no one can get in then they can’t steal your money. That’s as safe as it gets. However, if you lose your wallet, for example by changing hard drives or losing a USB stick where your wallet is stored, then you are in danger of losing your bitcoins too if you don’t have a backup or the means to restore that wallet to another location.
There are also online wallets where your bitcoins are stored by a web-based service, and also multisig wallets that require more than one person’s permission to validate a transaction – much like a business or a joint bank account.
Cryptocurrency exchanges are websites that you can visit to buy bitcoin and then transfer to your wallet. You can buy bitcoin using fiat currency (existing government based currencies, i.e.: US dollars, Euro, Pounds Stirling) or exchange them for other types of cryptocurrency, also known as altcoins.
Not all exchanges deal in fiat currencies. Others will trade bitcoin only for other cryptocurrencies. If an exchange deals in trades using fiat currencies they choose the methods that are preferable to them and also at a rate they believe fair for the service; they can offer to using various payment options from credit or debit cards, bank transfers, to PayPal and more.
Some exchanges will sell you bitcoin direct and act as a broker, deciding for themself the price of the bitcoin and its exchange rate, where others will offer a system where traders can buy and sell from each other through a peer-to-peer system.
Many exchanges will require you to verify who you are and your account before allowing you to trade with them. Some do not require verification but will only allow you to trade a minimum amount each day. Security for cryptocurrency exchanges is paramount so always seek out a renowned and reputable exchange before taking any risks with your money.
Because the exchange rates will change from website to website it’s always worth researching which exchange to trade with to get the best value for your money. As well as the exchange rate you will also want to research any additional fees incurred during the transaction. Some exchanges will charge you to deposit your fiat currency or existing bitcoins into your account where others will charge you purely on your trading transaction for more information we suggest you also look at these cryptocurrency exchange reviews.
In the same way you can buy your bitcoin from a cryptocurrency exchange you can also sell them. Again, the exchange will have its own rates for buying bitcoin as it will for selling them. There may also be associated fees for transferring the money back to your bank account.
Another way of buying bitcoins that is gaining in popularity is via a Bitcoin ATM. You deposit the required amount of cash into the Bitcoin ATM and it scans the QR code created by your mobile wallet app to transfer the bitcoin into your account. At present Bitcoin ATMs rates are higher than the rates offered by the more popular and well used online exchanges.
This is a very basic introduction into buying bitcoin and how the process works. For those interested in making their first purchase in the bitcoin market your next step should be to research wallet systems and which cryptocurrency exchanges are right for you. There are many to choose from and all will have their own advantages and disadvantages. You may also want to research the many different cryptocurrencies, the pros and cons of investing in each of them and their market values.
Whatever you decide, cryptocurrencies are going to be making a bigger impact on how we buy and sell both online and in the outside world. They have expanded into a billion dollar business since their introduction less than ten years ago and stand to become more and more popular with both traders and vendors alike in the future.