Explore this Vocabulary Guide:
- What is Digital Money?
- What is Bitcoin?
- Who Created Bitcoin?
- How Does Bitcoin Work?
- The History of Bitcoin
- How to Get Bitcoins
- Bitcoin Wallet
- Bitcoin Key
- How Much is Bitcoin Worth?
- Bitcoin Price History
- How to Avoid Bitcoin Scams
- Other Types of Cryptocurrency
Electronic forms of money and electronic payment methods are becoming increasingly more popular every year. There is even some speculation that digital currency could someday completely replace physical money.
Whether that will ever happen, it’s hard to say. But it seems digital money is here to stay in the meantime.
What is Digital Money?
Digital money is any form of money or payments that are in online, digital, or electronic form. Digital money refers to the sums of digital money sitting in our bank accounts right now. When you pay for something with a credit or debit card, make a payment online, or “swipe” your phone to use Samsung Pay, Google Pay, or Apple Pay at the register you are using digital money.
Digital money can have many other names as well, like cryptocurrency, digital currency, or electronic funds. Bitcoin is also a form of digital currency.
What is Bitcoin?
Bitcoin is a unit of digital currency in the way that dollars or pounds are units of currency in their countries. The bitcoin unit of currency doesn’t belong to a specific nation though. Instead, Bitcoin is a peer-to-peer, transparent money system that isn’t connected to any third parties.
Bitcoin is basically a computer program that creates a digital money system that uses bitcoins or bitcoin tokens as the digital monetary unit.
Who Created Bitcoin?
Bitcoin was created by Satoshi Nakamoto. However, this name is most likely a pseudonym (a fake name). No one has been able to connect the name of Bitcoin’s creator to an actual person or group.
Many people and organizations have claimed to be Satoshi Nakamoto, but none of these claims have been proven. That is why the creator of Bitcoin remains a mystery to this day.
How Does Bitcoin Work?
Bitcoin works in a similar way to how precious metals work in the market. There is only so many units of precious metals in the world, just like there are only so many units of bitcoins. There are 21 million bitcoins in total supply.
Bitcoins are also “mined” in a similar way to how precious metals have to be mined before they can be owned, used, or circulated. But bitcoins aren’t mined from the ground, they’re mined through data.
Bitcoin miners use data mining to discover new blocks that are then added to the Bitcoin blockchain. They often use complex systems like Application-Specific Integrated Circuits (ASIC) or Graphic Processing Units (GPUs) as a type of digital mining rig or mining Bitcoin blocks. Bitcoin miners are then rewarded with bitcoins each time they mine a new block.
The History of Bitcoin
Bitcoin first began near the end of the year 2008. The first Bitcoin blocks were mined in the beginning of 2009, and Bitcoin has grown into what it is today since then.
October 31, 2008: Satoshi Nakamoto announces the creation of Bitcoin, calling it a peer-to-peer electronic cash system.
January 3, 2009: Block 0, the genesis block, the very first Bitcoin block, is mined.
January 9, 2009: Bitcoin block 1 is mined and Bitcoin increases in popularity ever since.
2010: Bitcoins were used to make a real-life purchase for the first time when a miner bought 2 Papa John’s pizzas with 10,000 bitcoins.
2012: More stores start accepting bitcoin as a form of currency for purchases.
2014: The Mt. Gox bitcoin exchange goes under losing around 850,000 bitcoins.
2017: The worth of bitcoins reaches $1,000 USD. By the end of 2017 bitcoin value would spike up to around $20,000.
November 2018: Bitcoins worth drops dramatically again down to $3,500.
2019: Bitcoin prices rise and fall again, reaching around $10,000 in June and back down again to $7,000 later that year.
2020: Bitcoin’s high for this year was just below $10,000, hit a low of $5,000 in March, and has been slowly rising again since.
How to Get Bitcoins
How does bitcoin mining work? Bitcoin miners can get bitcoins through using digital mining rigs to digitally mine for data blocks to add to the Bitcoin blockchain. Every time you add to the Bitcoin blockchain you are rewarded with a few bitcoins. This is the primary way to get bitcoin tokens.
You could also invest in Bitcoin by buying bitcoins from miners who are looking to sell. There are many sites you can find online where you can invest, buy, sell, or trade-in the Bitcoin market to get bitcoins.
How to Mine Bitcoins
The primary way to collect bitcoins is to mine for them. When you’re mining for bitcoins, you’re actually data mining for Bitcoin blocks. These Bitcoin blocks get added to the Bitcoin blockchain, and then you as the miner get a reward in bitcoins for each block you are able to add to the blockchain.
1. Set up a Bitcoin Mining Rig
The first thing you want to do if you want to start mining bitcoins is to get yourself some bitcoin mining hardware or a bitcoin mining machine. Some of the best bitcoin mining systems are ASIC chips or GPUs. These computer systems can provide 100 times the data mining capabilities of a regular CPU.
If you don’t want to spend big money on expensive computer hardware, you can also use a Bitcoin cloud mining service, but these services leave you more open to Bitcoin scams.
2. Download Bitcoin Mining Software
Once you have your Bitcoin mining hardware, it’s time to download the appropriate software so your computer can start mining. There are a few Bitcoin mining software programs you could choose from but CGminer, BFGminer, and EasyMiner are some of the most popularly used.
3. Join a Bitcoin Mining Pool
Bitcoin mining pools are groups of Bitcoin miners who join forces to mine faster and get more Bitcoin blocks and thus more bitcoins. Otherwise, Bitcoin mining can take a really long time, even years, before you get any bitcoins. With a group, the Bitcoin mining process can go a lot faster.
4. Get a Bitcoin Wallet
Once you start getting bitcoins you’ll want to set up a Bitcoin wallet to put them in. Once again, there are many different Bitcoin wallet systems for you to choose from, but Copay is one of the more popular Bitcoin wallets.
How long does it take to mine a bitcoin?
When Bitcoin was first starting out it could take a Bitcoin miner only 1 day to mine 1 BTC. But how long it takes to mine bitcoins increases every day as more and more miners take on the challenge.
How long it takes to mine a Bitcoin block is known as the hash rate or hashing rate. A hash actually refers to the cryptographic puzzle that the mining system has to solve in order to successfully “mine.” This rate of mining difficulty increases every 2016 Bitcoin blocks or about every other month.
Alone it can take up to 50 months to mine a single bitcoin. But with cloud mining and mining pools, you can take this time down from 50 months or more.
How to Invest in Bitcoin
Investing in Bitcoin can be a really profitable way to expand your financial portfolio into cryptocurrency.
As you enter the Bitcoin investment world you’ll want to figure out your long-term goals for this investment and manage your Bitcoin investments according to your goals.
1. Find where to buy bitcoins
First, you’ll want to find where to buy bitcoins. You can buy bitcoins at a cryptocurrency exchange. Most cryptocurrency exchanges will charge you a percentage of the bitcoins you purchase, so do your research before you pick the exchange you want to buy from.
Some cryptocurrency exchanges are also easier to use than others and will let you link to your bank account. Also, Bitcoin isn’t the only form of cryptocurrency. If you’re interested in other investments, like Ethereum or Litecoin, then you’ll want to choose a cryptocurrency that includes these forms of cryptocurrency as well.
Bitcoins go up and down in price every year. One bitcoin right now is worth $9,718.50. But you don’t have to buy $9,718.50 worth to start investing in Bitcoin. You can also invest in fractional Bitcoin shares so you can invest as little as $25 to get into the game.
2. Choose a broker
Ideally, you’ll also want to hire a broker or use a stockbroker program that knows how to deal with investments in cryptocurrency. Robinhood and TradeStation are 2 examples of investment platforms you can use to help manage your Bitcoin investments.
3. Set up a Bitcoin wallet
Once you have a system for buying, selling, and trading in Bitcoin, you’ll want to set up a Bitcoin wallet so you can safely store and use your bitcoins.
A bitcoin wallet is like an electronic bank account to store your bitcoins. You need a bitcoin wallet in order to start working on the bitcoin network so the bitcoin tokens you earn have a place to go.
You can find the right bitcoin wallet for you by answering a short questionnaire on the official bitcoin website, bitcoin.org/en/choose-your-wallet.
Hot Bitcoin Wallets
Hot wallets store bitcoins online and are connected to the internet. Bitcoins are stored on a cloud where you can access your bitcoins via an app on your phone or a website on your computer.
Most cryptocurrency exchange sites will offer a free hot wallet to store the cryptocurrency you buy. But many bitcoin investors choose to get a separate hot wallet from a provider like Coinbase, Electrum, or Blockchain.
Cold Bitcoin Wallets
Cold wallets store bitcoins offline on a portable hardware device and are not connected to the internet. Cold wallets can cost more but are often more secure. With a cold wallet, you can download your bitcoins and carry them around with you.
How much does a cold wallet cost? A cold wallet for your bitcoins can cost anywhere between $60 to $170 depending on the provider you choose.
The Best Bitcoin Wallets
The best bitcoin wallets will provide you all the features you want and need to effectively invest and use your bitcoins. You’ll want to first decide whether you want a hot or cold wallet, and take a close look at each Bitcoin wallet provider to compare all the pros and cons.
- Coinbase (hot wallet)
- Electrum (hot wallet)
- Blockchain (hot wallet)
- Mycelium (hot wallet)
- Trezor (cold wallet)
- Ledger Nano (cold wallet)
A Bitcoin key is your personal passcode that allows you to access and use your bitcoins. It operates similarly to how a 4 digit code for phone lets you into your phone or a 4 digit code that you type in to authorize a transaction at the register after swiping your debit card.
The difference is that a Bitcoin key is a 256-bit number, not a 4 digit code. A Bitcoin key also represents your bitcoins more directly and are not just how you access your bitcoin funds, but how you use up each specific bitcoin.
How Much is Bitcoin Worth?
Is bitcoin mining profitable? Bitcoin prices are fluctuating all the time. Each Bitcoin block is worth a certain amount of bitcoin tokens. Every 210,000 blocks that get added to the total Bitcoin blockchain cause this bitcoin token reward to get cut in half. For example, in 2009 the reward for one block was 50 bitcoins in 2009. In 2020, the next bitcoin reward per block halving should occur again, making each mined block worth 6.25 bitcoins.
Since bitcoins are not connected to any government or organization, it isn’t legal tender. But as Bitcoin gained popularity it gained monetary value. The Bitcoin price USD or the Bitcoin price live can be found on a number of sites tracking the USD value of the bitcoin. Right now, 1 bitcoin is worth $9,718.50 USD.
Bitcoin Price History
As you can see from the chart above, bitcoin prices fluctuate a lot. Like any stock on the market, the price of Bitcoin fluctuates depending on the amount of supply and demand. The reason that bitcoin prices fluctuate so much is that the demand for bitcoins changes so frequently.
The reason the demand for bitcoins fluctuates so much is that there isn’t a national economy to back up Bitcoin. Instead, Bitcoin operates without third parties. The disadvantage to this is then that demand can skyrocket high and dip down incredibly low all in the span of a single year.
|Date||High Bitcoin Price||Low Bitcoin Price|
|Jan 01, 2020||$7,254.33||$7,174.94|
|Jan 01, 2019||$3,850.91||$3,707.23|
|Jan 01, 2018||$14,112.20||$13,154.70|
|Jan 01, 2017||$1,003.08||$958.70|
|Jan 01, 2016||$436.25||$427.52|
|Jan 01, 2015||$320.43||$314.00|
|Jan 01, 2014||$775.35||$754.97|
How to Avoid Bitcoin Scams
Whenever you’re dealing with investments and funds you want to be careful to avoid scams. Bitcoin scams aren’t too different from other money scams you might already know to look out for.
One of the primary ways to distinguish a scam from something legitimate is to check that the site you are using is secure and authentic.
You’ll also want to follow basic scam protection guidelines to keep yourself safe from Bitcoin scams:
- don’t click on unfamiliar links that get emailed or texted to you
- never give out your private Bitcoin key
- don’t give out personal information because you feel pressured
- perform a thorough background check of Bitcoin wallet providers and exchanges before using them
- never trust an unsolicited email, phone call, or text message
- use private browsers for extra security
- make sure the site you’re using is secure with the locked symbol and https:// before the web address
- don’t trust people offering you deals that sound too good to be true
- avoid MLM ploys that want you to recruit others for higher rewards
- keep the antivirus software on your devices up to date
- check reviews online
- check online to see if others have received the messages you’re receiving as well
Other Types of Cryptocurrency
Bitcoin isn’t the only form of cryptocurrency, though it is a very popular one. There are actually many forms of cryptocurrency available now.
Litecoin was one of the first cryptocurrencies to launch after bitcoin. Litecoin was first launched in 2011 while Bitcoin was launched in 2008. Litecoin is similar to Bitcoin in that Litecoin is also an open, peer-to-peer digital currency system. Litecoin is also a decentralized form of digital currency, meaning that like Bitcoin, it isn’t backed by any government or agencies. But Litecoin is different in that it offers faster transactions and has a higher coin limit of 84 million rather than 21 million.
Litecoin currently has a USD value of $46 USD for each litecoin.
Next, Ethereum was created in 2015. Ethereum, like Bitcoin, also has a blockchain. One of the principals of Ethereum is that it allows internet users to own their own data. Ethereum is also programmable. This means that developers can use Ethereum to build new apps.
Ethereum currently has a USD value of $242.05 for each ether.
Investopedia. “What is Bitcoin?” by Jake Frankenfield.
Bitcoin.org. “Bitcoin: A Peer-to-Peer Electronic Cash System,” by Satoshi Nakamoto.
Bitcoin.org. “How does Bitcoin work?”
Investopedia. “Digital Money,” by Mitchell Grant.
Investopedia. “Could Cryptocurrencies Replace Cash?” by Nathan Reiff.
Investopedia. “Bitcoin’s Price History,” by John Edwards.
Coin Desk. “Bitcoin Price.”
Bitcoin Chaser. “Why Do Bitcoin Prices Fluctuate So Much?”
Coin Market Cap. “Historical data for Bitcoin.”
Coin Market Cap. “How to Invest in Bitcoin,” by Kevin Voigt.
U.Today. “How Long Does it Take to Mine a Bitcoin?” by Alex Dovbnya.
Ethereum.org. “What is Ethereum?”