The First Digital Currency
Bitcoin is the first and most successful digital cryptocurrency in the World, it was invented in 2009 by the person or persons Satoshi Nakamoto, whose stated goal was:
To create a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.
The anonymous Satoshi disappeared in 2011, but he left the code of Bitcoin open source, and since its inception developers have been regularly improving on, and adding to this code allowing it to slowly and safely evolve into what it is today.
What is Digital Currency?
Bitcoin is a digital currency, no notes are printed or physical coins minted. It shares many of the same properties of existing currencies but has fundamental differences from them including:
Altcoins
Bitcoin was the original cryptocurrency but there are now thousands, with the number regularly increasing, these alternatives to Bitcoin are called ‘Altcoins’ or ‘Alts’. The blockchain concept may have been invented for Bitcoin but it has no monopoly on blockchain technology.
Some altcoins are clones of Bitcoin, whilst others have developed their own new code, with small alterations increasing speed, distribution methods, mining algorithms, supply amount, centralisation, and privacy, and all are trying to improve on the original Bitcoin.
It can be argued that these altcoins do not offer anything that cannot be coded into Bitcoin in the future, so they could be seen as even more experimental than Bitcoin. Many altcoin values have fallen to zero value during Bitcoin’s evolution and adoption, and many have exponentially increased in value but nothing has surpassed Bitcoin.
The Blockchain
Satoshi invented a secure distributed public ledger called a ‘blockchain’ which is similar to a spreadsheet or database.
This database is constantly shared on the network amongst thousands of computers around the globe, there is no single point of failure and all records are public and easily verifiable. This decentralisation of the blockchain is one of Bitcoin’s most unique characteristics.
The blockchain is continuously updated with agreed upon valid transactions. The network groups perform an average of 2,000 transactions every 10 minutes into a block and then attaches this block onto the block from the previous 10 minutes creating a chain of blocks or ‘blockchain’.
This creates Bitcoin’s immutability, as once blocks are created and added to the chain they can never be undone. Currently there are over 500,000 blocks in the Bitcoin blockchain that have been created over the past decade.
The transactions are recorded trustlessly peer to peer from one wallet to another wallet. Wallets require no personally identifiable information (PII) so are anonymous, however they are publicly viewable meaning there are ways to identify some wallet owners making them pseudonymous.
Miners create these new blocks and are rewarded with newly created Bitcoin and transaction fees for their hard work. The underlying code will only ever allow 21 million Bitcoins to be created, this guarantees its limited supply, with mining being the only mechanism to create new ones.
History & Culture
Bitcoin rose from the cypherpunk movement that took root in the late 1980s. The best way to understand the groups’ aims and objectives is to read A Cypherpunks Manifesto (1993) by Eric Hughes, one of the original founders of the group.
The key part of the manifesto: Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn’t want the whole world to know, but a secret matter is something one doesn’t want anybody to know. Privacy is the power to selectively reveal oneself to the world.
As the group grew they created the Cypherpunks Mailing List to reach out to other Cypherpunks and the mailing list grew in popularity. This list allowed anyone to anonymously join the discussions centered around the idea of establishing cryptographically secured methods of ensuring privacy.
In 2008 a group or person going by the name of Satoshi Nakamoto sent a paper to the Cypherpunk Mailing List called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. Satoshi Nakamoto and others then went on to create Bitcoin and mined the first block, the ‘Genesis Block’ on 3rd January 2009. Many developers have continued to develop Bitcoin through contributions of new open source code since then.
Wallets
If you are going to be owning bitcoins or any other altcoins then the first thing you need to have is a wallet to store them in. Wallets consist of a public address and a private key similar to a username and password.
You will need to let people know your wallet’s public address for them to send bitcoin, to you but you will need to keep your private key secret as you need that to send bitcoin from your wallet in the same way you would need your email account password to send an email from that account. Public addresses are a complex alpha numeric code so are often displayed as QR codes.
The private key allows you to send your crypto from your balance and the wallet provides a record of everything that you send and receive, as well as an account balance in the same way a bank account does.
If you do hold any cryptocurrencies in an exchange such as Coinbase you will not have any access to your private key, if you are intending to hold onto your bitcoin for the long term then you will need to look at either downloading your own wallet or buying a hardware wallet. Not having access to your private keys means you do not have full control or ownership of your cryptocurrency.
Your bitcoin will always be held on the Blockchain network, it is never actually in your wallet, your wallet holds private keys to access and manage your bitcoin.
You will use a password or pin number to access your wallet, you will not need to remember the long complex private key.
Wallets are described as ‘Hot’ or ‘Cold’ storage. Hot wallets have a connection to the internet whereas cold wallets are offline and so less susceptible to hacking but are less convenient to use.
Bitcoin Address (Public)
1AGqrNbpo7xwpt1VQVvcA5yzoEcgafFvff
Private Key (Secret)
KxSRZnttMtVhe17XS5FhPqWpKAEgMT9T3R6Eferj3sx5frM6obqA
Types of Wallet
There are different types of wallets currently available each with important differences:
Online wallets are the most frequently used Bitcoin storage systems. With an online wallet, like the immensely popular Coinbase, a third party takes care of storing your private keys. As long as they are trustworthy service, this means that you can send, store, and receive Bitcoin without ever having to touch a private key. There are also online wallets like the Blockchain Wallet that let you control your private keys.
The benefits of using an online wallet are:
- Quick and easy setup
- No technical knowledge required
- Accessible from anywhere
- Buying, storing, and selling on one service
A mobile app, very handy for payments and more secure than online but possible problems if the phone is lost or broken. But are very convenient for casual use such as micro-transactions or general quick access to your bitcoin.
Software installed on your computer, safer than online but susceptible to viruses, getting hacked or your computer breaking down. If you do choose to use a desktop wallet you must make sure your computer has all the latest updates and antivirus.
The security offered by a standalone, single-purpose device has no match. There’s almost no risk of your cryptocurrencies being hacked, and it’s not like someone can steal everything with just the device (as with a paper wallet), thanks to the clever PIN systems. The sacrifice of storing in a hardware wallet comes as a loss of usability and accessibility, along with a significant price tag. You’ll obviously need to carry your hardware wallet around with you when you want to spend, and you’ll need some technical knowledge to setup and use it effectively.
Paper wallets are computer printouts or written copy with your private keys and public keys written down. While they might be a little problematic to take care of, there’s certainly no risk of your printed paper being hacked.
Wallet Security
Once you have chosen the type of wallet you want you will then need to set your security settings, remember there is no Bank to protect your money, you are the bank.
Most wallets will not let you use the wallet until you set a seed, which is a set of words, usually 24 but some are 12, where you would have to write a list of words (never make any digital copies of your seed). There are some wallets that will let you use them before you set a seed, but it is highly recommended you set a seed before you store your coin.
After setting your seed you will then be required to set up a password or a pin number. The reason you need to set a seed is that you can recover your access to your coins for example if you lose your hardware (mobile phone, tablet, pc/laptop). When you first load a wallet for the first time you are given two options create a new wallet or recover your wallet. If you select recover your wallet you will immediately be asked for your 24 or 12 worded seed once completed you will see your coins.
Bitcoin Mining
Bitcoin is decentralised and can only be created through the process of mining. Bitcoin mining is the validation of transactions, putting them in a new block and adding them onto the blockchain, for which the miners are rewarded with new bitcoin and transaction fees.
There are only ever going to be 21 million bitcoins created, approximately 17 million have already been mined leaving 4 million to go, with the last bitcoin expected to be mined in the year 2140 – and we will not be able to create more.
Bitcoin miners compile recent transactions into a block and then try to solve a computationally difficult puzzle. The first one to solve the puzzle gets to add the next block onto the blockchain and is rewarded with the newly created bitcoin and transaction fees. The puzzle difficulty increases as the network grows and decreases if miners leave the network.
Miners essentially use brute force to solve the puzzle meaning that the more computing power (hash power) you can use the greater your chances of solving the puzzle, which is why you see large mining farms being set up around the world at great expense.
Today you need a lot of hash power to mine bitcoin, but a way around this for smaller miners is to join a mining pool. Many people now contribute their hash power to mining pools where multiple miners contribute their resources over the network to increase their chances of solving the puzzle together as a group.
Rewards are then split equally in relation to the amount of resources each miner contributed. To use these pool services you will usually pay a % fee to the pool owner and have to invest a lot of money in mining hardware.
This type of mining is called Proof of Work (POW), where an expensive computer calculation is needed to create a new block. Bitcoin mining/creation is an incredibly complex but important aspect of Bitcoin and it is one of its unique differences from FIAT currencies.
How To Safely Buy/Invest
A sad truth is that a lot of retail investors are not aware of how to invest in cryptocurrencies safely. Many millions of pounds have been lost by people, which is why it is very important to educate yourself on the pitfalls of cryptocurrency investing, as most risks can be easily avoided with a little knowledge.
Some tips for how to safely navigate your way around could be:
Watch Out for Scams on and Offline
Visit our ‘Scam Alerts’ section for the variety of ways unscrupulous people may try and part you from your cryptocurrency.Only Use Reputable Exchanges
We recommend Coinbase as the best place to start for beginners.Do Not Leave Cryptocurrency on an Exchange
They are often unregulated and uninsured so losses due to hacking will not be compensated, always triple check the wallet addresses you are sending to for mistakes.Use Two Factor Authentication (2FA)
Use a service such as Google Authenticator and switch on 2FA on everything cryptocurrency related, most importantly on your exchange. Avoid text message 2FA where possible as it is less secure.Do Not Risk More Money Than You Can Afford to Lose
It’s possible you could lose all your money.
Do Not Buy Cryptocurrency on Credit
If it is not your money you cannot afford to lose it.Do Not Tell People How Much You Own
What has little value today may be more valuable in the future making you a target.Own Your Private Keys, Ideally in a Hardware Wallet and Secure Correctly
If you do not possess the private keys of your cryptocurrency then you do not own it and it is at risk, always make sure you take back-up/recovery of wallets seriously.Do Your Own Research
Trust nobody. Do your own research thoroughly on all aspects of cryptocurrencies and specific crypto assets. You are your own bank, always be sceptical and ask questions.
There are many ways to do your own research, for example:
ONLINE! The internet is a wealth of information on all aspects of cryptocurrencies, located on crypto news sites, forums, Twitter, YouTube, Discord and Telegram. There are many educational resources available for free online. But be warned these are not always accurate and can sometimes be a bit misleading.
Join a local Bitcoin Meetup group like ours, meet like minded people and learn from various experts in the real world.
Attend a workshop to learn more about a specific aspect of cryptocurrencies from the experts.
Buy yourself a Bitcoin book (there are a growing number) or join in with our #CryptoLibrary.
Scam Alerts
It has been estimated that $9million a day is being lost to cryptocurrency scams, so it is important to learn about the most common methods to steal your cryptocurrency. With a little knowledge, a healthy dose of scepticism and basic security procedures you can easily secure yourself from these types of scams:
Multi-Level Marketing/Ponzi Schemes/Pyramid Schemes – They operate along the same lines as Ponzi schemes in real life.
Dodgy Exchanges – Only use established and reputable exchanges, and do not leave your cryptocurrency on any exchange.
Pump and Dumps – Never join a price pump and dump group, as you will be the buyer being dumped on.
BOTS/HYIPs – Trading BOTS and high yield investment programs should never be bought or invested in, they rarely deliver what they promise.
Celebrity Endorsement – Often a red flag as most celebrities know little to nothing about cryptocurrencies, so it is a PR exercise.
Cold Calling – No one should ever call you up about cryptocurrencies.
Free Giveaways – Expect nothing for free, particularly if it involves you sending someone cryptocurrency first. Just like that Nigerian Prince.
Wallets Hacked or Faked – Use only reputable and established wallets and protect your private keys and passwords.
Malware – Infected computers can be protected with regular updates to your anti-virus and operating system.
Hardware Wallets – Only ever purchase from the manufacturer, and check all anti-tampering devices.
Cloud Mining Services – They are not always scams but many have been, learn as much about mining before ever considering purchasing a service.
Phishing Scams – Triple check that the website you are visiting is the correct one and not a phishing site, ideally bookmark your exchange addresses and never follow links in emails or adverts in Google.
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