A Kick Start Guide to Understand Bitcoin Concepts


A Kick Start Guide to Understand Bitcoin Concepts


Bitcoin is a digital and global money system currency. It allows people to send or receive money across the internet, even to someone they don’t know or don’t trust. Money can be exchanged without being linked to a real identity.

Why Bitcoin?

Bitcoin empowers the individual. It’s an opt-in opt-out system that is backed entirely by code and the number of users who voluntarily participate by using bitcoin either as a store of value or means of payment. Thousands of years of having to trust sovereign currencies and banks to manage and control our own money has made the value of controlling and securing our own assets far removed from everything we know and practice, but only with such extent of personal security and self-sovereignty can we truly attain freedom in an oppressive world under uncertain economic conditions.

Where do bitcoins come from?

We go more in-depth about this on the page about mining, but here’s a very simple explanation: Some users put their computers to work verifying transactions in the peer-to-peer network mentioned above. These users are rewarded with new bitcoins proportional to the amount of computing power they donate to the network.

Who controls Bitcoin?

As we mentioned above, there is no central person or central authority in charge of Bitcoin. Various programmers donate their time developing the open source Bitcoin software and can make changes subject to the approval of lead developer Gavin Andresen. The individual miners then choose whether to install the new version of the software or stick to the old one, essentially “voting” with their processing power. It is in the miners’ best interest to only accept changes that are good for the Bitcoin currency in the long run. These checks and balances make it difficult for anyone to manipulate Bitcoin.

Why do people use Bitcoin and dedicate computing resources to mine them?

One obvious element would be profit, but even before mining was profitable, there were thousands of people dedicating resources and efforts to the currency. Any visit to a Bitcoin discussion forum provides evidence that an important core of the BTC community consists of libertarian types of all stripes, from those who want to see the end of all fiat currencies, to slightly more moderate and pragmatic supporters. A libertarian tinge permeates some of the most vocal currency’s proponents, who attack established fiat currencies, which they see as anathema to the system of value established by the gold standard. However, most seem to accept that coexistence will be prevalent.

Key Benefits of Bitcoin’s are:

Transparency:One of the key benefits of Bitcoin is that all transactions are publicly available and verifiable in the electronic ledger called the blockchain. This provides an unprecedented level of transparency and peer verification; it is one of the features that transcends currency elements.

Security:Bitcoin’s protocol maintains the integrity of the blockchain, but is also used to sign and secure BTC wallets, providing a mathematical proof that transactions are performed from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued.

Lower transaction costs:While in theory Bitcoin transactions could be free between all parties, the system usually has transaction fees that vary from one exchange to the other. Usually, the transaction fee will go to the miner (as an incentive to miners), and these transaction fees are a function of difficulty. Even with these fees, Bitcoin still boasts lower transaction costs when compared to other payment methods, with some merchants estimating that the average is at one percent, as opposed to other intermediary clearinghouses such as PayPal and Western Union, which charge from two to four percent. However, it must be noted that some researchers believe that low transaction costs will not sustainable in the future.

Anonymity:Bitcoin is theoretically anonymous. A person in possession of BTC in an encrypted wallet can spend it in any service without identification. While the anonymity aspect has clearly made it attractive as a means of payment for illegal goods and services, it could be used for less nefarious purposes, such as funding campaigners in authoritarian regimes.

Resilience:Bitcoin is a decentralized currency with no central authority and no issuing body. This means that it is resilient to attacks, and in theory it also means that it cannot be brought down.

Engine for innovation:While it is easy to ignore some grandiose claims made by some Bitcoin developers, such as the claim that it will destroy fiat currencies, or that it has the potential to combat poverty and oppression, it cannot be denied that its creation has given a much-needed push towards innovation in the way in which we think about money, financial institutions and centrality. Anything that encourages innovation is to be welcomed.

Bitcoin is durable.A currency must be able to stand the tests of weather and time. If you’ve ever pulled some paper bills from your pocket after putting your clothes through the wash, then you understand why durability is important. In the case of Bitcoin, every coin survives for as long as the network survives.

Bitcoin is scarce.The creation of new Bitcoin is controlled by code and there will only ever be 21 million bitcoins in existence. Bitcoin was designed to be a deflationary currency. Look at government-backed currencies like the Venezuelan bolivar or the Zimbabwean dollar which have become hyper-inflated, and it’s clear why having a capped supply of Bitcoin is important.

Bitcoin is transferable. The transactions happen on a distributed blockchain network, whereas a traditional bank transfer occurs on a centralized network. Otherwise, these two types of transfers aren’t all that different.

Bitcoin is fungible.1 bitcoin is worth the same as every other bitcoin at any given moment. Well, to be accurate, there are often price variations from one cryptocurrency exchange to the next. However, the main point is that the Bitcoin network treats every bitcoin equally, and doesn’t care about its fiat value.

This list is not exhaustive and only shows some of the most cited benefits of the virtual currency. There are some benefits that are more difficult to quantify. For example, there is little doubt that whatever may happen with Bitcoin, its creation has revolutionized how we think about money, value and payments in general. It is possible to be skeptical of Bitcoin, yet to be awed by its elegance and the ambitious nature of its implementation. Even if it were to disappear tomorrow, it is possible that some applications of the technology will survive. We will deal with these in the next section.

 5 Ways to Use Bitcoin:

Being new to Bitcoin, you might still be unfamiliar with how it’s actually being used around the world. We’re going to list just 5 ways to use Bitcoin, but there are plenty more.

As an investment– Due to its capped supply, more people learning about and using Bitcoin would lead to increased demand, driving the price up over time. That’s why many people decide to buy some bitcoin and hold on to it long-term.

To pay for goods and services– There are hundreds of online stores that accept bitcoin, including Dell, Expedia, Pizza Hut to name a few.

To support charities– With so many people making personal fortunes as early cryptocurrency investors, the global crypto community has become very philanthropic. One anonymous Bitcoin holder has even pledged to donate $86 million in BTC to charity.

To educate others– Ideas like decentralization have a real chance to make the world a better place. There’s no better tool than Bitcoin to start spreading awareness about how amazing this technology is.

To gamble– If investing in Bitcoin isn’t enough of a gamble on its own, there are also lots of online gambling sites that operate on bitcoin. If you’re interested, a quick google search of ‘bitcoin gambling’ should yield plenty of results.

What are the challenges?

Lack of transparency:

A main selling points of Bitcoin is transparency. The client itself is open source and all transactions are open to scrutiny because all transactions must be verified by the whole, so it is possible to look at each individual transaction in the public blockchain to scrutinize outgoing and incoming wallet addresses. The addresses do not identify the person, only the possessor of the key that unlocks the address. This makes it both anonymous and transparent at the same time, a feature that explains Bitcoin’s popularity with the technical community.

Failing anonymity:

Anonymity is one of the biggest selling points for Bitcoin. This was made evident after an article in the Atlantic described Silk Road, a site where drugs could be acquired using Bitcoins. BTC’s value increased, usage increased and mining rigs were created using supercomputers and graphic cards. Because the currency is encrypted, there is theoretically no method to trace any given transaction to individual users.


Bitcoin has been tremendously unstable throughout its trading history. While generally the overall trend has been upward if we compare today’s value with that of four years ago, the currency has crashed several times and the price continues to swing up and down repeatedly. With wild variations in price, it is possible that you could lose money even before the transaction has been completed. Moreover, even a minor downward swing, which are too common throughout its trading history, could wipe away any profit.

Lack of Replicability:

In danger of over simplifying a complex issue, Bitcoin is nothing more than the ownership of a cryptographic address. In reality, most bitcoins exist only as files in a computer or mobile device; a wallet file has access to a private key used to secure the money. This creates one of the biggest issues with Bitcoin to date: the ease of losing one. If the wallet file is lost, then the bitcoins it contains are lost forever. There are ways to back up the keys, such as by keeping physical copies off-line and similarly the key files can be backed up. But if a backup fails, the value will be forever lost. It is simply irretrievable unless one breaks the very secure encryption built into the system. The public address still exists, but this can only be accessed by the private key, which has been deleted and it would not be possible to recover the lost coins.


Bitcoin is built with scarcity in mind. The idea is that the scarcity will ensure upward valuation of the currency because there is no central bank that can print more money, as the economy requires it. The problem with deflation is that it encourages hoarding, in which case the currency is not being used as intended, namely to exchange goods and services. Moderate inflation is desired in a healthy economy because it encourages investment and spending, as shown in the recent deflationary crises in Japan and the Eurozone. When Bitcoin was experiencing its upward trend, many commentators noted that a rise in value meant that it had entered a hyper-deflationary spiral which made it uniquely unsuitable as a currency because there was no reason to spend BTCs if the price would continue to rise. In the early days of Bitcoin, an individual reportedly spent 10,000 bitcoins to buy a pizza. In a deflationary economy, this person feels that they lost greatly as the currency’s value goes up, and would be less willing to part with their currency in the future.

A stable currency abhors deflation, otherwise it ceases acting as a medium of exchange and becomes akin to scarce commodities, such as diamonds. Furthermore, the decentralized nature of Bitcoin makes it uniquely unfit for banking [89], which would further encourage hoarding by individuals.

Security and BTC theft:

Criminal lawyers and investigators have taken a very significant interest in Bitcoin. An aspect of the trust in Bitcoin is its security, touted as a very secure and anonymous method of transferring value from one computer to the other. The currency works by allocating a public cryptographic key to arbitrary units of value held in a non-proprietary client. Because they are public, the keys can be inspected by everyone, but a private key is needed to make the transaction. These units of value are held in “wallets”, small data files hosted in the computer. This serves two purposes: as long as the keys are secure, only the wallet’s owner will be able to transfer the bitcoins to make a payment; the keys make transactions anonymous.

This is a serious problem with the currency. As exchanges and wallets are the weakest links in the chain, the currency requires some technical knowledge to operate securely, and this could affect average users from adopting the currency. This relative insecurity stands in stark contrast with existing protection given to traditional banking users. The only BTC recourse is reputational: to go online to complain.

Computational inefficiency:

A less-explored area of concern with Bitcoin is that, at least as currently implemented, it might be energy inefficient. Bitcoin generates value by requiring those who participate in the network to dedicate computing power to verify transactions. This presents two problems for the scalability of the network, namely the computational power required to mine BTC and the size of the blockchain itself.

Final Thought:

Bitcoin is a revolutionary idea in achieving decentralization, but the current implementation suffers from libertarian economic dogma and critical mistakes, such as the potential for a large entity with access to large computing power to control the public records. The blockchain could bring everything that is good about Bitcoin and translate it into decentralized applications. This will certainly merit further disinterested independent research in the future, separated from the hype and financial self-interest of the Bitcoin community.

Overblown claims about blockchain enabled virtual currencies may similarly fall by the wayside with less mass mobilization online or off-line. As a site of resistance to free market, virtual currencies may be limited, but as an organizing principle for cooperative sharing alongside the sovereign fiat currency capitalist market, it may have a stronger, if niche, future, just as cooperative movements gained coexistence with mass consumer capitalism in the previous 150 years. A new form of cooperative commons online may be enabled by blockchains, but it will most likely not be built on Bitcoins.

“Assess the requirements, Explore the opportunities and Implement the changes and Succeed – Sky is the limit”.

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