How to Use Bitcoin?
Guest article by James Page
See also: ¿Cómo utilizar Bitcoin?
Bitcoin, the world’s first digital currency, is becoming more mainstream every day with some major company or another announcing their interest in the digital asset, or expressing their intentions to accept payments in kind. These are the footsteps of an approaching new era of electronic money and payments that might just catch you unprepared if you don’t know how to use Bitcoin.
You don’t need to worry, though, as we prepared a guide to explain the basics of how to use Bitcoin. We will explain what it is, how you can buy it, and how you can spend it without getting too technical, so that you have all the information you need to get started with Bitcoin.
What Is Bitcoin?
To put it simply, Bitcoin is a trustless and digital way of investing in and spending value. It is different from fiat currencies (regular currencies) like the Dollar or Euro because it isn’t managed by any government or central authority. Instead, Bitcoin functions by its code and the willingness of people around the globe to accept it as a unit of value.
Think about it this way: we use fiat currencies because we put our trust in the nation states that issue them and the central banks that manage them. We trust the banks to keep our financial accounts in order and depend on them to manage our money. Cryptocurrencies like Bitcoin, however, introduce a new account keeping system that can replace these traditional structures with a secure and decentralized alternative that doesn’t depend on third-party authorities.
Essentially, our financial system depends on our trust in the relationship between complex structures, such as states, financial markets, and banks. We put our trust in these systems to protect and manage the value of money.
When you take out a loan or send a check to pay your rent, you depend on the bank or the government to keep a record of the transaction as proof that it actually happened. But what if there was another way to keep such records and have proof that your accounts are in order without any input from intermediaries?
That might sound a little bit out there at first, but it is actually a revolutionary and feasible idea. Bitcoin is essentially a software anyone can interact with on their own, in order to control their own digital money.
Let’s see how Bitcoin makes that possible by exploring the underlying technology behind Bitcoin and other cryptocurrencies.
What Is a Blockchain?
The blockchain technology that launched with Bitcoin allows people to transfer value to each other without oversight and with the definite proof that people own what is in their accounts, without needing (or accepting) audits from any authority.
Blockchain might sound complex but it is actually quite a simple concept. It is a collective and public ledger that is protected by cryptography to ensure that people are spending their own funds without taking advantage of Bitcoin’s digital nature. Anyone can interact with the Bitcoin ledger to make a Bitcoin transaction, and once the transaction is recorded on the blockchain, it becomes immutable and open to the public.
That is not to say that all of our Bitcoin transactions are completely transparent. Bitcoin blockchain is pseudonymous, meaning that even though all transactions can be traced from one account to another, it is not possible to see who is behind each account simply by looking at the blockchain. All anyone would see would be Bitcoin addresses, representing Bitcoin accounts.
However, Bitcoin is not anonymous either as people thought it was during its early years. In fact, the nature of blockchain is such that authorities can easily track how stolen BTC flows through one Bitcoin address to another, which makes Bitcoin a pretty secure system. There are no offshore accounts or money laundering mechanisms with Bitcoin that work in the long run. Even infamous hacks that result in stolen bitcoins can be traced back to hacker addresses on the blockchain.
How to Use Bitcoin
Now that you have a basic understanding of how Bitcoin works, let’s discuss what you need to use Bitcoin. As stated before, using Bitcoin is simply a matter of interacting with the Bitcoin blockchain. Since the Bitcoin blockchain is a peer-to-peer online ledger, you need to be able to join the Bitcoin network and send commands to execute your transactions. That means you need a way to interact with the Bitcoin software through a program i.e. a Bitcoin wallet.
Bitcoin wallets are not like traditional wallets. They don’t actually hold any currency. They simply provide you access to the blockchain, where your funds exist as information. The wallet software interacts with the blockchain to facilitate transactions and allow you to manage your funds.
Once you get a Bitcoin wallet, the program interacts with the blockchain to provide you with a set of keys. These keys are known as public and private keys that show which addresses on the blockchain belong to you and that you own the BTC in those addresses.
A public key is like an account number other people use to send you bitcoin, or to confirm that the funds you send have come from you. A private key, on the other hand, is like a password and should be kept secret. You can make transactions and prove that you own your Bitcoin only with that private key.
There are different kinds of Bitcoin wallets. Some you can access from a browser, or from your desktop or even your mobile phone. These are known as hot wallets because they are connected to the internet either directly (via browsers) or through apps on your devices.
It is also good to make a distinction between custodial and non-custodial wallets. Custodial wallets are often exchange accounts, such as your LocalBitcoins wallet. If you’re using a “non-custodial” wallet, you would have to store the private keys to your wallet yourself.
You can also use offline wallets, such as hardware wallets that resemble USB sticks, or paper wallets, pieces of papers that contain your private and public keys.
How to Start With Bitcoin
The first step to owning and spending Bitcoin is getting a Bitcoin wallet. There are many Bitcoin wallets on the market that you can choose from but it is important to pick a trustworthy wallet. Remember, a wallet holds all the necessary information to make Bitcoin transactions and prove that you own your funds on the Bitcoin blockchain. A compromised or lost wallet can deprive you of all your funds.
That said, Bitcoin beginners usually start with a web service wallet connected to Bitcoin exchange platforms. A Bitcoin exchange platform is basically a marketplace where bitcoins are bought and sold.
There are many Bitcoin exchanges on the internet, such as LocalBitcoins, the first peer-to-peer Bitcoin exchange where users can trade Bitcoin directly with other users, or centralized exchanges like Coinbase that act as intermediaries that offer Bitcoin wallet services.
Once you sign up with a Bitcoin exchange platform, you can buy bitcoins through the methods that platform offers, such as via credit/debit card or bank transfer. These bitcoins are then transferred to your exchange wallet and you can keep trading on the exchange. Alternatively, you can have multiple wallets. That way you can transfer your funds to another wallet, such as to a desktop wallet or a hardware wallet, after you’ve bought Bitcoin from an exchange.
A Few Words Before You Go…
It seemed like a fringe dream that people across the globe could use Bitcoin to pay for goods and services. But Bitcoin exceeded expectations and became a tour-de-force in online payment services. Barely a decade after its launch, major companies like PayPal, Microsoft, and more recently, Twitter, announced their intentions to give the world’s first cryptocurrency a chance. These days, you can use Bitcoin to shop for furniture, buy movie tickets, make donations, or tip your favourite social media user.
