In this article we will learn about the basic idea of what Bitcoin is, how to get Bitcoins, how to store Bitcoins and what are the risks and mitigating measures.
Bitcoin as the Digital Money
In order to understand the concept of Bitcoin, let us first understand Fiat and Digital Currencies. A Digital Currency is money in the digital or virtual form. For example it can be in the form of a code or data which you can use to purchase goods or services. Fiat Currency is the normal paper currency that we use in our day to day lives. Ex: US Dollar, INR, GBP, etc.
Bitcoin is a digital currency. It is a digital currency which can be transferred peer-to-peer, meaning, one can directly send Bitcoin to another person without the involvement of any third party like Banks, Payment Platforms (Paytm, PayPal).
There have been other digital currencies before the advent of Bitcoin, but those were not able to address some of the major issues faced by Digital Currencies such as Double Spend and Byzantine Generals. Like any Digital Currency Bitcoin also needs an online platform or network to transfer Bitcoin from one person to another. Bitcoin uses Blockchain Network as its platform for transactions. Blockchain is a distributed network in which all the members of the network have a copy of the data or transactions which have happened till date. For a detailed explanation of the Blockchain Technology you can refer to my articles below.
Bitcoin as the Protocol
Now the term Bitcoin is also used to represent the protocol which bases the digital currency Bitcoin. a) Just like the Hyper Text Transfer Protocol (HTTP) the Bitcoin is a protocol.
b) HTTP is used to transfer data on the World Wide Web. Similarly Bitcoin is used to transfer or transact Bitcoin.
c) HTTP runs on the Web Browser like Chrome, Firefox, Explorer. Bitcoin runs on Bitcoin Wallets like Mycelium, BitGo, Blockchain, Bitpie, Trezor, etc.
How to Earn Bitcoin
Bitcoin can be earnt via three modes.
- In exchange of Fiat Money (Credit Card, Debit Card, PayPal, Cash)
- Bitcoin Mining
- In exchange of products and services
Bitcoin in exchange of Fiat Money
You can buy Bitcoin using your credit card, PayPal account or cash by registering to Crypto Exchanges like Coinbase, Coinmama. There are yet other Crypto Exchanges around the world which you can use to buy Bitcoin. The basic steps of buying Bitcoins from an Exchange are as follows:
- Create an Account: Sign in with your email id and choose a password to create your account in the Exchange
- Connect your Credit Card or Debit Card into the Exchange
- Verify your ID with the Exchange
- Buy Bitcoins using your Credit Card
Note: Always have a proper research before registering to any Exchanges. Some frauds are imminent if you are not careful. Its advisable to go via a trader.
If you want to buy Bitcoin in India, please refer to this article.
Bitcoin mining is the process of solving complex computational problems using a specialized computer in order to add blocks which contain previous transaction data into the Bitcoin chain or Bitcoin network of blocks (blockchain). This is a way of making the Bitcoin network more secure. More the miners, merrier is the security of the Bitcoin network.
As a reward the Bitcoin Miner is given newly created Bitcoins as the transaction fees.
Hence in a nutshell, Bitcoin mining does the below three functions.
- Secure the Bitcoin Network
- Add Blocks containing transaction data every 10 minutes.
- Issuance of new Bitcoins.
- Steps involved in Bitcoin Mining.
- A Bitcoin Network user performs a transaction (using a mobile application or laptop)
- The Transaction data is sent to the Bitcoin network.
- The Transaction Data waits with other Transaction Data performed by other users of the Bitcoin network.
- Miners (also called Publishing Nodes) add these waiting transaction data in a Block (simply grouping them together).
- Miners compete with each other trying to solve a complex puzzle, using their computing powers.
- The Miner who is able to solve the computationally intensive puzzle first wins and is given the right to add the Block to the Bitcoin Network.
- This winning Miner is awarded with newly formed Bitcoin.
Can you mine Bitcoin yourself
Yes, of course you can do. But remember in order to make profits you need hefty investments also. You need to set up large warehoused like the one shown below and also need cheap electricity (as this will help to lower your cost while using your computer power to solve computationally intensive puzzles).
That’s who you’re up against! It’s simply too expensive and you are unlikely to turn a profit. However:
For hobby mining, we’ll show you some steps you can take to get started mining bitcoins right now.
Step 1. Get a Bitcoin Wallet
This is the first step. You simply cannot mine Bitcoins without having a Bitcoin Wallet. You can read the following section in this guide to understand the different types of wallets available and choose the best suited as per your needs.
Ex: Ledger Nano, TREZOR T, TREZOR One.
Step 2. Register in a Bitcoin Exchange
You might need to pay for the electricity using your coins or buy new coins. Get yourself registered in a Bitcoin Exchange. A Bitcoin Exchange is like a bank where you can buy or sell Bitcoins. We have explained it and the available good exchanges earlier in this guide. Please refer for clarity.
Step 3. Get a Mining Hardware.
You certainly cannot plan to mine Bitcoins in your personal desktop. It will earn you a penny in a year. There are specialized computers developed for the sole purpose of Bitcoin Mining. These are called ASIC miner computers.
Step 4. Select a Mining Pool.
Do not be a solo miner. Always join a Bitcoin Mining Pool. Being a solo miner means, trying to find the Block using your own computer’s processing power. We do not recommend this as this is very difficult to just use your computer processing power (also called Hash Rate) to find a block in the Bitcoin network.
So how does a mining pool help?
1. When you join a Mining Pool you share your computer processing power (Hash Rate) with that of the Pool of Miners. Collectively the Pool of Miners try and find out a block to add to the Bitcoin Network. When a Block is found you are paid out depending on the percentage of processing power (Hash Rate) you contributed to the network. For example if you contribute 1% of the processing power you will be paid out 0.125 Bitcoins (as currently for one addition of Block in the Bitcoin Network one is paid 12.5 Bitcoins).
Step 5. Get Bitcoin Mining Software.
When you have decided to join a Mining Pool then you will need a Mining Software in order to hook your Bitcoin Mining Hardware to the Mining Pool.
Examples. CGMiner, BFGMiner, EasyMiner, BitMiner, BTCMiner, DiabloMiner, MultiMiner, Awesome Miner, etc.
Step 6. Check whether Bitcoin Mining is legal in your country.
This is also an important step. Also check for the Tax Implications, expenditure required.
Step 7. Check for Profitability.
You can write down the expenses and returns to check the profitability of your Bitcoin Mining business. You can use this Calculator developed by Buy Bitcoin Worldwide to calculate your expected profits. It will give you a rough idea of the profits you can make by mining.
How to Store Bitcoin
If there is one thing that I want you to learn from this article, then it will be the below highlighted lines.
“Never store your Bitcoin in the Exchange from where you have purchased it. It is prone to hacking, which has cost millions of dollars to people in the past. Also other errors are encountered when you store your Bitcoins in the Exchange. Always store your Bitcoins in a wallet (physical or application or website)”
Hence we now know that Bitcoins (or any cryptocurrency) should be stored in a Wallet.
A wallet is an electronic device or an application or a website which stores your Bitcoins securely. There are two broad categories of wallets.
- Hardware Wallets
- Hot Wallets
Hardware wallets to be sure is more secure than Hot Wallets. Let us understand their tradeoffs and securities one by one.
A hardware wallet is a physical electronic device or a hardware which is developed for the sole purpose of storing your Bitcoins (or cryptocurrencies). It can be plugged in to a computer, laptop, tablet or mobile to perform any Bitcoin Transaction of buy or sell.
A Hardware wallet is the most secure wallet to store your Bitcoins. See we know that if someone gets access to our Private Keys means he/she will have access to the Bitcoins and perform transactions.
In a Hardware wallet the Private Keys are generated and stored offline. Unlike hot wallets where your Private Keys are generated online and hence vulnerable to the Hackers. Even if someone steals your Hardware Wallet you can secure it by generating a PIN, which will be required as soon as the thief will try and connect your Hardware Wallet with a computer, laptop, mobile or tablet.
Let us examine the Pros and Cons of using a Hardawre Wallet.
- Most secure form of storing your Bitcoins or cryptocurrency.
- Less margin for error; setup is easy for even the less Technical Users.
- Easy to backup and store
- Not free of cost. These wallets have prices starting of $50-$60. Hence in the beginning start with a Hot wallet which are free of cost (can be downloaded in your mobile or laptops) and eventually as you accumulate large amounts of Bitcoins, move to a Hardware wallet.
Pro tip: Always buy a Hardware Wallet with a screen which displays the details of the Bitcoins contained in the wallet. This helps in authenticating (by matching) the data that is displayed in a computer or laptop, when the hardware wallet is connected to one.
These are the wallets in the form of an application or a website which stores your Bitcoin online. Hot wallets are advisable to store only small value of Bitcoins. For the longer run, always prefer using a Hardware wallet.
Hot wallets can be thought of as your wallet which you carry in your pocket for storing some cash to be spent frequently. It is not used for storing your life savings. You need a Bank account. Similarly hot wallets are used when you want to store some Bitcoins and spend them frequently. However you will need a Hardware wallet in order to store your life savings of Bitcoins.
- Easiest way to store small amounts of bitcoin and crypto
- Convenient; spending and receiving payments is easy and fast
- Some hot wallets allow access to funds across multiple devices
- Free of cost (mostly)
- Not safe for the secure storage of large amounts of bitcoins and crypto
- You might forget about the application being installed on your phone
The table below lists the names of some of the best desktop and phone wallets.
|Type of Hot Wallet||Names of Wallets|
|Desktop Wallet||Electrum (compatible with Mac, Linux, and Windows)|
|iOS and iPhone Bitcoin Wallets||BRD, Edge|
|Android Bitcoin Wallets||BRD, Samourai, Mycelium, Edge, Blockstream Green, Bitcoin Wallet|
Should we buy a Hardware or a Hot Wallet.
Start with Hot Wallets and then eventually move to a Hardware Wallet.
Hardware wallets have prices starting $50-$60. Hence in the beginning start with a Hot wallet which are free of cost (can be downloaded in your mobile phone or laptops or desktops or tablets) and eventually as you accumulate large amounts of Bitcoins, move to a Hardware wallet which will keep them more secure.
Bitcoin: Risks to keep a check on
The most vital thing you need to understand in secure keeping of Bitcoins is that it is the Private Key which makes you the owner of the Bitcoins you purchased or got in exchange for products or services or mined. If the Private Key is stolen then the person who has the control of your Private Key will be controlling your Bitcoins and can hence perform transactions. Hence the thumb rule is to secure your Private Key. Let us see how.
- Generate your private keys in a secure, offline environment. (Except if using trivial amounts, in which cases keys may be created in a hot wallet).
- Create backups of your private keys. This helps to protect against the loss of your bitcoins due to hard drive failure or some other problem or accident. Ideally you should have a duplicate set of backups kept off-site to protect against the possibility of fire, robbery, etc.
- Encrypt wallets to provide additional security. This helps prevent the physical theft of your funds in the event that your device or hardware wallet is stolen.
Hence we now conclude this guide to Bitcoin by saying that Bitcoin is a good investment as long as you are patient and holding your investments. It is a volatile market, and one needs to be optimistic while holding the investments even when the price goes down. Going by the trends the adoption is increasing and is expected to rise even more.