WHAT IS BITCOIN?
Bitcoin can be considered as a form of digital money (or currency). It can also be used to store wealth (think of it as digital gold). Bitcoin is global, so it can be used, and sent anywhere in the world.
Bitcoin is also ‘decentralised’, meaning that no one individual, organisation or government can control it. The software behind Bitcoin is open to view, so anyone can inspect it. There can only be a maximum of 21 million Bitcoins in existence, and this number is fixed and this cannot be changed 1.
What Bitcoin isn’t!
To some, this is a silly statement but I do get asked; Bitcoin isn’t a physical coin. The pictures you sometimes see on the web are for marketing purposes only.
Bitcoin isn’t at risk by a computer crashing somewhere in the world. The technology behind Bitcoin is copied across thousands of computers, all over the world. If one goes down, there are plenty more in reserve.
Bitcoin isn’t stored in your wallet. Your wallet stores the keys to the Bitcoin you own. The Bitcoin themselves live on something called a blockchain (more about this later).
Bitcoin is also not solely used by criminals (no more so that any other currency) 3. Bitcoin transaction records are public and are unchangeable, therefore every transactions ever made can be viewed by anyone 4.
What can you do with Bitcoin?
You can buy 1 whole coin or just a piece of one. The smallest amount available is 0.00000001 Bitcoin, which is known as 1 Satoshi. Therefore, there are 100,000,000 Satoshis in a Bitcoin. You can buy stuff with Bitcoin; there are websites that accept it as a method of payment. There are also high street retail outlets and cafés etc. but these are more limited in number at present.
You are able to send Bitcoin to other people anywhere in the world, without the need of a bank, and at very low cost. You can use Bitcoin to store your wealth, however the price is subject to fluctuation over time. Finally, you can trade it (buy and sell to try and make a profit – best left to the pros…).
How does Bitcoin work?
Bitcoin exists through the use of a blockchain. Everytime Bitcoin it transferred between wallets, the transfer is confirmed and recorded. These records are grouped into blocks, which are linked together, hence ‘blockchain’. Transactions are protected against tinkering by encryption, and by copies of this blockchain being held on many thousands of computers, creating a network.
To maintain the incentive for computers to do the maths calculations required to confirm transactions, the network charges the user a small fee for confirming each transfer between Bitcoin wallets. This is known as the mining fee. This is paid by the sender of the Bitcoin, not the receiver. The fee is the same no matter how much Bitcoin you are sending, or where in the world you are sending it. This fee paid can fluctuate over time, but this is normally by pence, not pounds. In some wallets, you do have the ability change the fee you pay. This can influence the speed with which the transfer takes place. Most of the time it is best to leave it as the default fee amount.
What are the risks in owning Bitcoin?
Crypotcurrency changes the way we manage our finances. It allows us to control every aspect of what happens to it i.e where, when and to whom we send Bitcoin to. However, with this freedom comes responsibility. As only you are in control of what happens to your Bitcoin because only you have access to your private key, it cannot be controlled by anyone else. Therefore, it is your responsibility to keep your private key secure. Do not share your private key with anyone else for any reason. If it compromised, you could lose all of your Bitcoin and there would be nothing you could do about it. Another thing you need to be mindful of is when transferring between wallets, if you send your Bitcoin to the wrong receiving wallet address, you have lost it forever 6.
Bitcoin is subject to daily price fluctuations (as is any currency pair e.g. pounds to euros), however Bitcoin’s price can fluctuate far more servely. That said, if you are only interested in buying and using small amounts of Bitcoin, the impact is minimal (e.g a purchase of £50 worth of Bitcoin, that then fluctuated 5% up or down, would mean that the value of the Bitcoin you hold would fluctuate between £47.50 and 52.50). If you are looking at Bitcoin as long term investment, then there is far more risk (as with any investment).
Warning: There are lots of people who try and con the everyday person out of money by quoting ‘Bitcoin’, along with ‘massive profits’ etc. You will also see lots of internet ads wrongly quoting celebrities, and trying to entice you to part with your cash. Remember, if it sounds too good to be true, it is!
What happens to the Bitcoin you buy?
The bitcoin you own is stored on the blockchain. You access your Bitcoin via a ‘wallet’. This wallet stores two keys, a public and private key. The public key is what you use to receive Bitcoin, the private key is what you use to send it. There are two basic types of wallets, a software wallet (like an app), and a hardware wallet (which looks a bit like a USB stick).
You need to consider that software wallets could potentially be more susceptible to security breaches (hacks) where your private key could be stolen, however they offer much more convenience for everyday transactions. Hardware wallets offer far more security, as your private key cannot be hacked over the internet, but with the inconvenience of having to have it with you when you send Bitcoin to others.
My personal rule of thumb is that I only store an amount of Bitcoin in a software wallet (e.g Jaxx), equal to the amount of pounds (£) I would be comfortable carrying around with me. For any amounts above this, I use a hardware wallet (e.g Ledger Nano S). Other wallets are available such as the Trezor.
Note: 1) There are far more detailed description of Bitcoin available on the web (e.g. https://bitcoin.org/en/). This description of the ins and outs of Bitcoin is meant to be a digestible version for the everyday person, therefore not super techy. 2) There is a lot of misinformation fore and against Bitcoin. Please read multiple sources before drawing conclusions from attention grabbing headlines.