Welcome to Brave New Coin’s Bitcoin 101. First-timers, we’d like to introduce you to the wonderful world of cryptocurrency; where payment is frictionless, free and instantaneous, and pizza could cost you $5 million dollars (more on that later). Sections 1-6 will cover the essential things you need to know about Bitcoin.
To our experienced readers, welcome back. Sections 7-10 contain some more advanced ideas and fun trivia. Read up, get to know Bitcoin better, and discover how cryptocurrency could change the world. Let’s get started.
Bitcoin is many things. It is decentralised, digital, frictionless, volatile, pseudonymous (not anonymous, the difference is important), highly divisible, irrevocable once sent, and very confusing if not explained well. Lets clarify these buzzwords.
Decentralised - This is a key property of the Bitcoin network. Decentralisation means no single entity has control over Bitcoin. It also increases the network’s security by eliminating points of vulnerability. The network is a peer-to-peer (p2p) network, much like BitTorrent.
Digital - Imagine Bitcoin as an email application that allows you to send money. Payments can be sent and received on any computing device with an internet connection, instantly, anywhere. Just like you can access your email account on any computer in the world with an internet connection, the Bitcoin network allows you to access your money wherever you are if you wish to.
Highly Divisible - People often ask “if one bitcoin is worth so much money, how can I possibly pay for small things?” The answer lies in the fact that a bitcoin is highly divisible. Like a dollar can be divided into 100 cents, a single bitcoin can be divided into 100,000,000 satoshis - that's a hundred millionth of a bitcoin!
This allows payments to be extremely precise, and means bitcoin can function flawlessly with prices much higher than today. (In fact, an individual bitcoin would need to be worth $1 million dollars for a satoshi to equal one cent).
Frictionless - As said before, a bitcoin can be sent to anyone, anywhere, at any time, for free. Transaction fees are drastically lowered for both consumers and merchants using bitcoin. This feature, combined with bitcoin’s divisibility, allows you to pay one tenth of a cent or a million dollars without transaction fees.
Volatile - Bitcoin’s price volatility has been a major cause for concern amongst people new to the currency. Whilst this is an issue, bitcoin’s volatility is a product of it being a new, young, and illiquid market. This dangerous volatility will pass as bitcoin becomes more established. In addition to this, there are easy ways for merchants accepting bitcoin to overcome these volatility problems.
Pseudonymous - Media sources report bitcoin as being an “anonymous”currency like cash, this is incorrect. Bitcoin is not anonymous. Since every transaction that ever takes place in the Bitcoin network is recorded in the blockchain, the identity of any person involved in a transaction is only protected by their ability to deny their association with that bitcoin address. Once your identity is linked to a bitcoin address, everything you do through that address can be tracked.
Users can protect their privacy by generating a new address every time they make a payment, but this has not proven to be a foolproof answer to maintaining financial privacy. This is because once one address is known, a little bit of snooping around can reveal all other addresses associated with it (and you).This association between addresses is called “taint” and by analysing it, stolen bitcoins can be tracked.
Irrevocable once sent - Like cash, once you pay someone, there is no way to get that money back without the recipient’s approval. For merchants accepting bitcoin payments, this is useful, since credit card payments can be revoked up to a week after payment.