Cryptocurrencies
01
Jan
bitcoin investing

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What is Bitcoin? The Beginner’s Guide

Bitcoin is an open-source digital currency. Bitcoin was created by a mysterious person called Satoshi Nakamoto. Bitcoin is a globally distributed network, which is operated by tens of thousands of computers called nodes. Blockchain is the database of Bitcoin. Miners are responsible for maintaining the blockchain by building new blocks every ten minutes.

Bitcoin uses public-key cryptography in network transactions. Bitcoins are stored in a Bitcoin wallet, which can be a computer program, a mobile app, or a cold wallet similar to a USB stick. It is easy for Finns to buy bitcoins from local Bitcoin exchanges.

The future of Bitcoin looks bright. The Ordinals protocol has also brought NFTs to the Bitcoin blockchain in 2023.

What is Bitcoin?

Bitcoin is an open-source digital currency. Bitcoin is also the first cryptocurrency, i.e. a digital payment protocol using cryptography. The official abbreviation of Bitcoin is BTC.

Bitcoin is not the first digital currency in history. The development of digital currencies stretches back to the 1980s. At the end of the 1990s, several different digital currencies entered the market with the internet revolution. They failed one after the other for various reasons.

Bitcoin was created by Satoshi Nakamoto in 2008, but many of the technologies used by Bitcoin are decades old. Satoshi managed to combine different technologies in a way that no one had done before. His invention turned out to be a truly decentralized digital payment protocol.

The most important feature of Bitcoin is that it is outside the traditional banking system. The Bitcoin network is open to everyone, and no one can block Bitcoin transactions. Bitcoin’s development is done by a global, decentralized community. Bitcoin source code is also open to everyone.

Bitcoin hit the mainstream at the peak of the bull market of 2017. For the first time, Bitcoin was mentioned by big media houses almost daily.  Nowadays more than 100 million people have invested in Bitcoin. It is still by far the largest cryptocurrency by market cap.

Basic information about Bitcoin:

Feature Info
Category Currency
Ticker BTC
Circulating supply 19.3M Bitcoin
Max supply 21M Bitcoin
All-Time High (date) $69,000 (10-Nov-2021)
All-Time Low (date) $0.0041 (17-May-2010)

This article is a Bitcoin beginner’s guide. It goes through the history and technology of Bitcoin. We’ll also cover the safe storage of bitcoins and tell you how to buy your first BTC! Finally, we’ll also take a look at the future of Bitcoin.

Bitcoin was created by Satoshi Nakamoto

Bitcoin was created by a mysterious person called Satoshi Nakamoto. Satoshi Nakamoto is a pseudonym. Nakamoto’s true identity is unknown. It is also possible that several people have worked behind this name.

The history of Bitcoin starts on October 31, 2008. This was the date when Satoshi Nakamoto published the Bitcoin white paper on a cryptography mailing list. Bitcoin didn’t attract much interest initially, although a few cryptography professionals did contact Satoshi and expressed their interest.

The Bitcoin blockchain was launched on January 3, 2009. That day is generally considered Bitcoin’s birthday. That’s when the Genesis block was created, which included the first-ever Bitcoin address.

The year 2009 was generally a quiet time for Bitcoin. Just a handful of people were interested in the project. One of them was Hal Finney, to whom Satoshi Nakamoto also sent the first transaction in Bitcoin history. It was ten (10) bitcoins. Below is a tweet by Hal Finney that he wrote just over a week after the Bitcoin blockchain launched. It is the most famous tweet in Bitcoin history.

One of the first Bitcoin developers was Martti Malmi from Finland. In addition to editing the Bitcoin program code, he participated in maintaining the discussion forum. Malmi was also building the first Bitcoin trading platforms.

Bitcoin began to gain wider publicity in 2010. At that time, the discussion about the role of Satoshi Nakamoto also intensified. When the community grew to tens of thousands of people, more and more people questioned Nakamoto’s position as the “overlord” of Bitcoin. Satoshi was the one person in charge of the code updates, for example.

Satoshi Nakamoto left the Bitcoin community in 2011. Since then, Nakamoto has not committed himself to the development of Bitcoin, nor has he transferred his assets of nearly a million bitcoins. You can read more about the early years of Bitcoin and Satoshi’s role in this article: Satoshi Nakamoto and Bitcoin.

Bitcoin is a decentralized payment protocol

Bitcoin is a globally distributed network, which is operated by tens of thousands of computers called nodes. Each of these nodes runs the Bitcoin client software.

The Bitcoin network is open to everyone and the Bitcoin software is freely downloadable. Anyone can run their own node and join the Bitcoin network. There are two types of nodes in the Bitcoin network: a full node and a lightweight node.

A full node is a computer that stores the history of the entire Bitcoin blockchain. The size of the Bitcoin blockchain is 446 gigabytes (January 1, 2023). A lightweight node is a lighter version that only downloads the so-called header information. It utilizes information stored by the full node using the SPV (Simple Payment Verification) method.

The task of nodes is to monitor transactions sent to the network. They make sure that the person performing the transaction has sufficient funds and the authority to complete the transfer. If the transaction is found to be appropriate, it will be forwarded to the miners for processing. Miners are specially-made computers that add transactions into new blocks of the blockchain.

The image below shows the distribution of Bitcoin’s nodes around the world.

bitcoin nodes

Most nodes are in the following countries: the USA, Germany, France, Holland, China, England, and Singapore. You can view the live data at bitnodes.earn.com.

The nodes of the Bitcoin network deliver new transactions to the mempool, which is like a virtual sorting center. It is a pool of tens or even hundreds of thousands of unprocessed transactions, from which miners extract them into new blocks.

Only a limited amount of information can fit into one block, so the block size acts as a bottleneck for the Bitcoin network’s transaction capacity.

Blockchain is the database of Bitcoin

Blockchain is the database of Bitcoin. As the name suggests, a blockchain consists of chained blocks. It is a distributed ledger, where each block is individual data storage. You can think of a blockchain as a set of files linked together.

Each full node of the network stores an identical copy of the blockchain. Each block must be accepted by all of the nodes before it is added as a continuation of the previous ones. This consensus makes it possible for every node in the network to always have an identical copy of the blockchain.

bitcoin blockchain

Blockchain technology makes it possible to use a distributed data ledger. If Bitcoin utilized a centralized data repository, it would be vulnerable to hacks or interventions by governments. Instead, Bitcoin’s blockchain is copied to the hard drives of thousands of computers. No entity can remove all nodes from the network simultaneously, so the Bitcoin blockchain cannot be destroyed.

It is also important to understand that Bitcoin cannot be separated from the blockchain into its own currency. It cannot be printed as banknotes either like euros or dollars. Bitcoin is both a digital payment protocol and a digital currency at the same time.

Read this article if you want to learn more about blockchain technology: what is a blockchain?

Bitcoin’s blockchain is maintained by miners

Miners are responsible for maintaining the blockchain by building new blocks every ten minutes. Mining is needed due to the consensus algorithm used by Bitcoin, which is called Proof of Work. It means that miners have to prove to the network they have done enough calculation work before creating new blocks.

In practice, miners try to solve mathematical equations 24/7/365. These equations are not mathematically difficult, but they require a lot of computing power. You could say that miners try to guess the correct lottery numbers. When enough miners make millions of guesses every second, one of them hits the correct solution and gets to create a new block.

Miners are rewarded for their work with bitcoins. These are called block rewards. Miners also get to keep the transaction fees that are paid by the users of the network.

Anyone can start mining Bitcoins or other cryptocurrencies. However, the mining work requires enormous computing power, which means heavy electricity consumption. It is only profitable specialized mining hardware called ASICs. You also need to have cheap electricity.

Below is a video from inside the world’s largest Bitcoin mining farm.

Mining has two essential tasks: to confirm transactions on the blockchain and to create new bitcoins through block rewards. If the miners stopped working, the Bitcoin network would shut down immediately. Currently, Bitcoin’s biggest limitation is its small block size. It limits the number of transactions the network can process to less than 10 per second.

Bitcoin’s Proof of Work consensus algorithm is considered old-fashioned by many. Its competing alternative is Proof of Stake (PoS) where no mining is required. However, it is Proof of Work that gives the Bitcoin blockchain ultimate security by making it impossible to manipulate.

In 2021, a big change took place globally in Bitcoin mining. China, which previously dominated mining, banned Bitcoin mining. It forced mining farms to move to other countries. This has helped the transition to greener energy sources. The use of renewable energy in mining has become an important topic, especially for institutional investors.

Read more about Bitcoin mining and how to start your own mining farm from our in-depth guide to Bitcoin mining.

Public-key cryptography

Bitcoin uses public-key cryptography in network transactions. This technology is crucial for Bitcoin and many other online protocols.

Bitcoins are linked to public addresses in the blockchain. The accounting in the Bitcoin blockchain accounting goes like this: “X bitcoins are sent from the public address A to the public address B”. You can view any transaction of any block on e.g. blockchain.com. You can click on any Bitcoin address on this site to see its transaction history.

The balance of a Bitcoin address is practically the sum of the transactions related to it in the blockchain. The picture below shows transactions from the Bitcoin blockchain.

bitcoin transaction

As you can see, addresses are strings of numbers and letters. Each address starts with the number 1, the number 3, or the letters bc1. They are case sensitive, i.e. upper and lower case letters matter. Although accounting is public, you cannot associate an address with an individual.

A Bitcoin address is mathematically derived from a public key. Each public key is always paired with a private key. Funds in a public address can only be managed using a private key, which is impossible to derive from the public key for an outsider.

It is therefore an interesting combination of public and private accounting. Anyone can view transactions on the Bitcoin blockchain without knowing who the person behind the transactions is. We only see bitcoins moving from address X to address Y.

Public-key encryption is a technology that has received little attention. However, the entire functionality of Bitcoin rests on this decades-old technology.

Bitcoins are stored in digital wallets

Bitcoins are stored in a Bitcoin wallet, which can be a computer program, a mobile app, or a cold wallet similar to a USB stick. The most popular wallets support not only Bitcoin but also thousands of other cryptocurrencies.

It is good for a beginner to understand that a Bitcoin wallet does not work the same way as a traditional wallet or e.g. an online bank. Bitcoin wallet does not have any bitcoins. All bitcoins are always entries in the blockchain, i.e. Bitcoin’s ledger. The blockchain contains up-to-date information about how many bitcoins are stored at a certain address.

The Bitcoin wallet acts as a GUI (graphical user interface) to the blockchain. When you want to send bitcoins from your wallet, the software announces the Bitcoin network that you have access to to the funds of the Bitcoin address in question. This is done using public and private key encryption.

The Bitcoin wallet can also combine funds from several different addresses into one balance. The Ledger Nano X shown in the picture is the most popular cold wallet on the market. It is a device similar to a USB stick that is connected to a computer or mobile device for the purpose of confirming transactions.

ledger nano x

A novice investor often keeps the bitcoins in the exchange which was used for purchasing them. Transferring bitcoins or managing a wallet can seem dangerous to newbies. Of course, self-storage has its risks, and there are no return functions or safety nets in Bitcoin transactions. If you lose your bitcoins for one reason or another, they are gone forever.

Mobile wallets have become very popular in recent years. They are easy to use and free to download. There are also several free Bitcoin wallets for to be used on a computer. Read more about different Bitcoin wallets in this article: A beginner’s guide to Bitcoin wallets.

Buying Bitcoins is easy

It is easy for Finns to buy bitcoins from local Bitcoin exchanges. Both Coinmotion and Northcrypto are popular services for buying Bitcoin. Both are safe and easy-to-use. Finnish marketplaces are also regulated by the Financial Supervisory Authority.

Below is a picture of Coinmotion’s homepage.

coinmotion

Buying bitcoins is done on a practical level as follows:

  1. Open an account on a Bitcoin exchange
  2. Verify your identity
  3. Deposit fiat (EUR, USD, etc.) with a credit card or bank transfer
  4. Exchange fiat for bitcoins
  5. Think about the right storage solution for you
  6. Hold tight to your bitcoins!

Opening an account is a process that takes about a quarter of an hour. Identity is easily verified in Finnish exchanges with bank IDs. Nowadays, you can transfer euros in real-time with a debit card, and a SEPA transfer usually only takes a couple of hours.

Changing euros into bitcoins takes place with a couple of mouse clicks. After that, you can think about the storage option that suits you. Finally, the most difficult task remains, i.e. holding bitcoins!

You can buy your first bitcoins today at Coinmotion or Northcrypto. We recommend both.

Investing in Bitcoin is no more difficult than using an online bank. The biggest challenges are definitely related to post-purchase events. The reason for this is the extreme volatility of Bitcoin. Bitcoin’s price has collapsed in historical cycles by 70-80 percent. Such a rollercoaster will make the faint of heart give up their coins.

The price rally that occurs every three to four years attracts new investors. Only a small percentage of these will be involved when the next boom starts. Many beginners get greedy, invest too much, and cannot withstand a fierce bear market.

We have written s a comprehensive guide on Bitcoin investing. It provides valuable instructions for a beginner investor.

The Future of Bitcoin

The future of Bitcoin looks bright.  After the 2017 boom, Bitcoin has become a global phenomenon and a new investment class for millions. In the future, Bitcoin will be of increasing interest to traditional stock investors and institutions as well as state-level actors.

The Bitcoin movement has grown from a small experiment to a global community of tens of millions of people. Bitcoin-related services employ hundreds of thousands of employees globally. It is such an important industry that every country and state must take it seriously.

The decade starting in 2020 is all about regulation. The crypto industry is finally getting a framework in both the US and the EU. This is a positive thing for the industry, and also enables even wider institutional participation.

We should also see more news about countries adopting Bitcoin as an official means of payment.

Bitcoin’s position seems stable inside the cryptocurrency market. Although Bitcoin’s market share has dropped over the past five years, no clear competitor has emerged. Bitcoin is a completely unique combination of decentralization and technology – nothing like it can be recreated ever again.

Ordinals Protocol and Bitcoin NFTs

The Ordinals protocol has also brought NFTs to the Bitcoin blockchain in 2023. The protocol has even started an NFT boom! Thousands of Bitcoin fans have stored digital images and videos on the Bitcoin blockchain.

Ordinals is a protocol launched in January 2023. It can be seen as an add-on built on top of Bitcoin. The protocol was originally developed to track individual satoshi in the Bitcoin blockchain and make them unique.

The unscriptions feature of the Ordinals protocol allows metadata to be attached to a single satoshi. Metadata can be text, video, or image. We are talking about NFTs in practice. NFTs stored on the Bitcoin blockchain can be browsed using the inscriptions explorer at ordinals.com/inscriptions.

inscriptions

Thousands of NFTs have been stored on the Bitcoin blockchain every day since the release of Ordinals. At the same time, they have increased the size of the blockchain and brought miners more income from transaction fees.

Although the inscriptions feature has gained a lot of popularity, many hard-line Bitcoin maximalists do not accept the idea of ​​”monkey pictures” on the Bitcoin blockchain. This has caused a heated debate in the camp of Bitcoin supporters.

Time will tell what kind of impact the Ordinals protocol ends up making. Does the excitement wear off after the initial boom? Read more about the background and technology of the protocol in the Ordinals guide.