Bitcoin for Beginners | How Bitcoin Works

There's a lot of talk about bitcoin in the cryptocurrency world, but what exactly is it and how does it work?

When Bitcoin was released in 2009, it came onto the scene without any media coverage, speculation, or government scrutiny. As a small group of developers worked towards a common goal, it was impossible to know that the software they were testing would change the course of history. 

In the following years, Bitcoin has become a global phenomenon, drastically changing lives, disrupting markets, and revolutionizing how people interact with money.  

Despite all the attention Bitcoin receives today, there’s still a lot of confusion about what exactly Bitcoin is. So what is Bitcoin? How does it work? Is it too late to get involved? If you’re ready for a comprehensive guide to Bitcoin for beginners, this article is for you.  

What is Bitcoin?

Bitcoin is a digital, decentralized, peer-to-peer payment and value transmission network that uses cryptography to verify and secure transactions.  

There’s a lot to unpack in that sentence, so to start with, a better question might be: 

What can Bitcoin do for you? 

Bitcoin is a digital currency. When using Bitcoin, the concept is similar to how you’ve always interacted with money. Like the cash in your pocket, you can spend Bitcoin, send Bitcoin, save Bitcoin, and yes, you can lose Bitcoin.  

But there are several key differences between the cash in your pocket and Bitcoin, and this is where the power of this technology begins to shine through.  

Understanding how Bitcoin works for beginners can seem complicated, but Bitcoin is a possible solution to an age-old problem: our monetary system may not work for everybody.  

To see how Bitcoin offers an alternative, let’s revisit that first sentence and discuss some of Bitcoin’s key features. 

Bitcoin is a Digital, Decentralized, Peer-to-Peer Payment Network 

Digital

Bitcoin exists purely as a digital asset. Unlike the cash in your pocket, Bitcoin cannot be physically withdrawn, handled, or felt. It exists purely within a new type of computer architecture called a blockchain. 

Decentralized

Decentralization is one of the crucial factors that separates Bitcoin from every currency that came before it. Whereas fiat currencies, like the cash in your pocket, are issued by central authorities— The Federal Reserve Bank in the U.S. or the European Central Bank in the E.U., Bitcoin is issued programmatically based on pre-set rules and secured by a vast global network of computers called nodes. These computers work together to verify and record every Bitcoin transaction. What’s more, unlike the traditional system, bitcoin can be accessed and interacted with without intermediaries like banks. The widely distributed, decentralized aspect of the network eliminates the ability of any single individual or entity to control the system. 

Peer-to-peer

One of the most surprising things to learn about Bitcoin for beginners is that the entire protocol is based on open-source software that does not rely on centralized intermediaries to function.  

By allowing anyone to participate in the network and removing central authorities like banks, payment processors, and intermediaries, Bitcoin enables true peer-to-peer connectivity. This means that anyone in the world can transact with anyone else regardless of nationality, ideology, or geographic location.  

Now that you understand the basics of Bitcoin, you might be wondering where all of this came from. Next, we’ll look at the origins of Bitcoin and its enigmatic creator, Satoshi Nakamoto.  

The History of Bitcoin

People often cite 2008 as the year when Bitcoin was invented, but this doesn’t tell the whole story. The concept of a censorship-resistant digital payment network has its roots back in the early 1980s.  

Inception Era 1983-1999

In 1983 a computer scientist and cryptographer named David Chaum published a paper proposing the development of a digital payment network that would allow people to transact across the internet securely and anonymously without the need for a central authority. Having also developed the code to implement his idea, David Chaum is widely regarded as one of the  Godfathers of Cryptocurrency.  

Though Chaum developed his e-cash payment network and took it to market in the mid-1990s, it never quite hit. This early era saw innovators like Wei Dei, Nick Szabo, Adam Back and others striving, and important technological breakthroughs in projects like B-Money, Hashcash, and Bit Money. The push towards a secure, independent digital payment network remained an unrealized dream until 2008. 

Satoshi’s Innovation -2008-2009 

In September of 2008, a pseudonymous person or group of people writing under the name Satoshi Nakamoto published a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” 

In the paper, the author outlined a digital payment network that would leverage cryptography to allow people to transact directly with one another without the need for a central authority like a bank or a payment processor.  

The paper addressed long-standing issues that had hampered previous projects by outlining a new type of computer protocol called a blockchain.   

On January 9th, 2009, Satoshi Nakamoto released Bitcoin as an open-source software client, and the Bitcoin network was born.   

Early Adoption & Growth Era 2010-2016

Bitcoin was primarily used by a core group of developers and enthusiasts during its first year in existence. The first exchange rate between Bitcoin and U.S. Dollars was established in October of 2009, and the first purchase of physical goods using Bitcoin took place in May of 2010. In February of 2011, the value of Bitcoin reached $1 for the first time, and this threshold earned the nascent cryptocurrency its first wave of media attention.  

Bitcoin adoption grew steadily between 2012 and 2016. Media coverage during this time wavered between dismissive and alarmist, with illicit activity and security compromises dominating coverage of the cryptocurrency. As Bitcoin’s valuation wavered during this period, advocates of the protocol expressed the growing need for a censorship-resistant, peer-to-peer payment network in the modern era, and adoption continued to grow. 

Modern Era 2017-Present 

2017 is viewed as a pivotal year in the history of Bitcoin. The value of one bitcoin reached the milestone of $1,000 for the first time at the beginning of the year and surpassed $3,000 that spring. These milestones garnered significant media coverage, pushing adoption to new heights.  

2017 also saw contentious arguments about scalability within the Bitcoin developer community, resulting in a hard fork, or split of the Bitcoin blockchain and the birth of Bitcoin Cash (BCH). The “block size wars” would have a dramatic impact on the ethos of the bitcoin community. 

By the end of the year, driven in part by Initial Coin Offering (ICO) madness, Bitcoin soared to more than $20,000, before coming back to earth and settling for a long crypto winter between early 2018 and 2020.   

Despite the 2018 market correction, Bitcoin had entered mainstream consciousness. Over the course of 2018 and 2019, many new parts of the crypto industry that would come to be significant later (such as DeFi and NFTs) were being worked on outside of the pressures of a frothy bull market. 

2020 saw explosive growth both in value and adoption of Bitcoin. In the wake of the COVID-19 market crash - and the incredible influx of monetary and fiscal support for global economies that followed, a new thesis around Bitcoin as an inflation hedge came into the market. Publicly traded companies began adding Bitcoin to their balance sheets for the first time, and the year closed with Bitcoin reclaiming new all time highs and heading into 2021 with the wind at its back.  

In early 2021, bitcoin’s price continued to increase, eventually reaching a new high of more than $64,000 per BTC, before being beset with a new set of challenges including a ban on Bitcoin mining in China.  

Interest in Bitcoin remains high today, with unprecedented numbers of both independent and institutional investors participating in the market. The cryptocurrency industry is still growing rapidly.   

How Does Bitcoin Work?

We've established what Bitcoin is and had a look at Bitcoin's history, but it can seem like a daunting task to understand how bitcoin works for beginners. In this section, we'll take a look under the hood of this revolutionary technology. 

The Blockchain

One of the most significant issues that plagued early attempts at digital currency was the problem of double-spending. Digital currencies are nothing more than bytes of data, and if you’ve ever copied and pasted a snippet of text before, you already know that data can be replicated. A key challenge then of digital currencies was how could a system ensure that the balance in one account was, in fact, different from the balance in all other accounts? And more specifically, how it could ensure that without a centralized intermediary like a bank who was relied upon as a trusted arbiter?  

Bitcoin overcomes this problem by implementing an innovative technology called the blockchain. Outlined in Satoshi Nakamoto’s whitepaper, the blockchain is a universal, decentralized ledger that timestamps and records every Bitcoin transaction that has ever taken place. The blockchain’s entire recorded history exists on every computer connected to the network and is constantly updated as new transactions occur.

When someone sends bitcoin to another person, they broadcast a message to the network informing everyone of the transaction. Miners on the network then solve cryptographic algorithms to verify the transaction. The first Miners to verify an entire block of transactions adds it to the chain and is then rewarded with a small amount of bitcoin. 

The process of verifying and recording transactions is called mining, and it’s how new bitcoin is created. In order to keep the blockchain running smoothly, there is a small fee attached to each transaction. This fee, along with the newly created bitcoin, acts as an incentive for miners to keep the network running and secure. The reward for adding a bitcoin block is halved every four years, reducing the total new amount of bitcoin created over time ultimately to zero. This is why Bitcoin holders are secure in the knowledge that there will only ever be 21,000,000 BTC created: it is programmatically built into the network’s monetary policy, mining reward and token emission schedule. 

Bitcoin was the first real-world use-case for blockchain technology, and it has morphed from a loose network on the fringes of the internet into a global economic phenomenon.  

Now you have a good idea of Bitcoin and how it works. Let’s look at how to get started trading in Bitcoin for beginners.  

How Do I Begin Trading Bitcoin? 

Getting started in Bitcoin is easier than you might think. Here are 3 ways that you can get started today. 

1. Buy Bitcoin on an Exchange 

One of the quickest and easiest ways to trade Bitcoin is to buy Bitcoin directly from an exchange.  

To buy from an exchange, you simply need to create an account, verify your identity, and link your bank account or credit card. Once your account is set up, you can start buying and trading Bitcoin.  

Most exchanges will allow you to buy a small amount of Bitcoin with a credit card to get started. If you want to buy larger amounts, it’s highly recommended to link your bank account.  

There are hundreds of exchanges that sell Bitcoin, so it’s important to research and make sure that you buy from a reputable source.   

2. Trade Bitcoin Through a Brokerage Firm 

These days, people are beginning to trade Bitcoin through their stockbrokers.  

Buying bitcoin through a stockbroker isn’t as popular as buying directly from an exchange, but an increasing number of brokerage firms allow you to buy and sell Bitcoin.  

The number of these companies is growing every year, and each company has a unique position in the market, so be sure to do your research before.  

3. Buy Bitcoin Through a Retailer

Retailers and payment processors like Paypal have also begun to add support for Bitcoin. Paypal has 392 million active users, so it was a big deal when the company decided to integrate Bitcoin into its services.  

While Paypal's adoption of Bitcoin means that many more people can gain exposure to cryptocurrency, services like Paypal don't give customers full control of their coins. This means that while you can buy and spend bitcoin on Paypal, you can't withdraw your coins from the platform, preventing you from engaging with the broader Bitcoin ecosystem. 

Lastly, we'll cover how to buy Bitcoin through a reputable crypto exchange like FTX.  

Get Started Trading in Bitcoin with FTX  

FTX is a cryptocurrency and digital derivatives exchange that allows you to buy and trade Bitcoin, Ethereum, and over 300 other cryptocurrencies. Built by veterans of some of the world’s leading investment and technology firms, FTX offers a full suite of products designed for first-time purchasers and advanced traders alike.  

FTX is a great place to start with in bitcoin for beginners because its extensive ecosystem of tools and innovative financial products allow you to hone your skills.  

FTX gives crypto traders a safe and intuitive platform coupled with some of the lowest fees in the industry, making it the premier destination for beginners and advanced traders alike. 

To get started, you simply need to create an account and verify your identity. Once your account is verified, you can easily deposit money and start trading Bitcoin. 

FTX is a US-regulated exchange, so you can trade with the confidence of knowing that your money is safe.  

Trading in cryptocurrency does involve risk, so make sure you research any asset or product before committing your funds.

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