Bitcoin is a hot topic in the digital world. And when we say hot, we mean Carolina reaper/Sahara Desert hot. Chances are you think of Bitcoin as some sort of cryptocurrency, electronic cash, or digital currency. But do you really know what it is, where it came from, how it works, or how to use it? If you don’t, then buckle up amigos!  Because we’re about to break down the basics of Bitcoin (minus most of the technical mumbo-jumbo of course!).

So What is Bitcoin?

When people use the term “Bitcoin” they may be talking about one of two things: the Bitcoin token or the Bitcoin system. The Bitcoin token is a piece of code that shows ownership of a digital concept. In essence, this is the digital cash that comes to mind when most of us think of Bitcoin. You can use Bitcoin to buy cool gadgets, order fast food, pay bills, or do tons of other awesome stuff where Bitcoin payments are accepted. The Bitcoin system or protocol enables digital transactions to be made without using a bank, payment gateway, or any other central authority.

For the purposes of this article, we’ll use the term “Bitcoin” primarily when referencing the digital cash and “Bitcoin system” when speaking about the protocol. Confused yet? Don’t worry, it gets easier!

How Bitcoin Got Started

The “Bitcoin.org” domain was first registered on August 18, 2008 by an unknown individual or group. On October 31st of that same year, a white paper that detailed the philosophy and functionality of Bitcoin was released. This paper, entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published under the pseudonym “Satoshi Nakamoto.”

Bitcoin was created to help users transfer funds with increased privacy, greater control, no middlemen, and ridiculously low transfer fees. By using a decentralized system and making transactions transparent, Bitcoin also seeks to eliminate corruption and neutralize the threat of cyber-attacks.

Bitcoin: How It Works

Bitcoin uses an extensive public ledger (also known as a blockchain) to display confirmed transactions. A block contains a digital signature (a private cryptographic key + a public cryptographic key), a timestamp, and any relevant information about the transaction. As each block is added, it is shared with the entire peer-to-peer network of users for validation. Confirmed transactions are added to the end of the blockchain in chronological order for everyone to see.

As we mentioned before, Bitcoin can be used to buy merchandise or pay for services. How is this any better than paying by check, bank wire, or cash? One major benefit we want to highlight is increased privacy.

People who send or receive money via traditional payment systems such as banks or online wallets like PayPal must provide proof of identification and address to comply with anti-money laundering legislation. In stark contrast, the Bitcoin system does not require personal information from senders or receivers to process transactions. The protocol simply checks that the sender actually has the number of Bitcoin he or she wants to send as well as the authority to process the transaction. A Bitcoin user is only identified by his or her wallet address, which is string of numbers and letters that is mathematically related to his or her public key.

While increased privacy is great for all of us, it’s important to keep in mind that Bitcoin transactions are not completely anonymous. In fact, some law enforcement agencies have developed ways to identify Bitcoin users they suspect of criminal activity. So don’t start fantasizing about hiring that hitman for your mother-in-law’s birthday. Remember, all Bitcoin transactions are public and transparent.

Bitcoin is not backed by gold, silver, or any other physical commodity (and FYI neither is the US dollar, the euro, or the pound sterling). Instead, Bitcoin are based on mathematical proofs validated by a public ledger using blockchain technology. Failed Math? Not a problem. All you need to know is that this ledger or blockchain records all confirmed transactions and helps to build trust in the system.

Bitcoin also differs from national currencies in that it is not controlled by a single entity. So no governments, banks, or companies have their sticky fingers in the mix. Instead, the system operates on the principle of decentralization and gives all its users access to its open-source software.

How to Acquire, Spend, and Store Bitcoin

Want to get your hands on some Bitcoin? Whoa! Hold your horses for a sec! Before you try to get any Bitcoin it’s crucial that you sign up for a cryptocurrency wallet. This will ensure you can keep your Bitcoin safe. Wallets store the private key that allows you to access your Bitcoin address and they are usually mobile, web, or hardware based. Of course, you can use a piece of paper to jot down your public and private keys. Just make sure you never EVER lose that piece of paper!

Once you’ve got your wallet, you’re ready to get some Bitcoin. You can buy them from a number of places. Bitcoin can be purchased on a Bitcoin exchange using your national currency. In the United States and Canada, popular options are Coinbase and Coinsquare. If you live in the UK, you can try BitBargain or Bittylicious.

Bitcoin may also be purchased from a cryptocurrency exchange such as CoinCorner using other forms of electronic cash. Another option is to sell goods or services for Bitcoin.

If you want to buy stuff with your Bitcoin or send them to another person, you need to publish your intention. One of the easiest ways to do this is by using your software wallet. Just log in, click the “send” tab, enter the recipient’s Bitcoin address, and the number of Bitcoin you want to transfer. Click the “send” button to have the system validate your intention and complete the transfer. Merchants may also provide a QR code that you can scan with your smartphone.

Bitcoin transactions are secure. The use of cryptographic keys in combination with a vast distributed network means it’s extremely hard for third parties to make unauthorized transactions. Another important fact is Bitcoin transactions are permanent. Once transactions are confirmed, they cannot be reversed. There are absolutely no returns, refunds, or repeals (remember, there is no central authority!)

Tips for Protecting Your Bitcoin

So you’ve got your Bitcoin and we’re sure you don’t want to lose ‘em. Here’s how you can keep them safe. Only store a small number of Bitcoin in your wallet for everyday use. Keep the larger portion in a secure location. Ideally, this is an offline wallet that is disconnected from your network.

Encrypt your wallet and back it up regularly. Equip whichever device your Bitcoin wallet is on with a strong password (birth dates and anniversaries are no-no’s). Keep your software updated and consider using the system’s multiple signature feature which requires multiple approvals to proceed with a transaction.

Is Bitcoin Worth the Risk?

Bitcoin transactions are fast. While some payments methods may take days to clear, Bitcoin transactions are confirmed within a matter of minutes. They save you time and money as transactions fees are lower than those used by credit card companies or electronic payment services like PayPal.

You’ll never have to worry about your Bitcoin being taken away by “the man” as the system’s decentralized nature means no one has that type of control or power. Your Bitcoin are yours and yours only. The Bitcoin system also eliminates worries about inflation as there is a fixed number of Bitcoin that can be produced at any one time and the demand is super high.

But everything isn’t peaches and cream with the Bitcoin system. It’s a regular target for hacks and scams. Even BitFenix, a well-known Bitcoin exchange, was hacked in 2016. The main menaces are Ponzi schemes as well as Bitcoin exchange, mining, and wallet scams.

In the end, only you can decide if Bitcoin is a good fit for you. But in a world that is becoming more digital, you owe it to yourself to keep abreast of the changes that decentralized technology has brought (and will continue to bring) since the emergence of Bitcoin.