Bitcoin For Dummies, 2nd Edition
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Bitcoin ― what an enigma! It seemingly came out of nowhere, and 13 years later is worth hundreds of billions of dollars, even though few people understand how it works.

The information in this Cheat Sheet should help reduce some of the mystery and confusion so that you can begin your Bitcoin journey with confidence.

Learning the Bitcoin lingo

There is no Bitcoin, actually. There’s nothing tangible, of course, but there’s not even some kind of digital representation of a coin. Rather, Bitcoin is represented by records of Bitcoin transactions in the Bitcoin “ledger,” which is stored in a “blockchain” ― something else that few people understand.

It can all be a little confusing, so here’s a quick breakdown of a few important terms.

  • Blockchain: A blockchain is a special kind of database, a computer file that stores structured data. Actually, in the case of the blockchain, the database is distributed; copies of the Bitcoin blockchain are sitting on thousands of computers spread across the world. Because all the copies have to match up, this combination of blockchain copies is unhackable.
  • The Bitcoin ledger: A ledger is a record of financial transactions. Ledgers were originally handwritten in books. Today, the Bitcoin ledger stores digital information about Bitcoin transactions in the Bitcoin blockchain. By the way, the Bitcoin ledger is not encrypted; it’s a public, open system that allows anyone to peer into the blockchain and see what’s going on, using a “blockchain explorer.”
  • Bitcoin: Initially, this is confusing for people, but unlike dollars, euros, pesos, and pounds, not only is there no physical Bitcoin, but there’s no digital Bitcoin either — nothing you can point at and say, “Look, there’s a Bitcoin.” Instead, the Bitcoin is just represented by the ledger saying that the Bitcoin exists. In January 2009, information was added to the Bitcoin ledger — this is what’s known as the Genesis Block — saying, in effect, “50 Bitcoins were added to the ledger.” From then on, Bitcoin existed because the ledger said so!
  • The Bitcoin network: Just like the internet is home to an email network, and to the world wide web — a network of websites — there’s also a Bitcoin network. The Bitcoin network is made up of thousands of computers all communicating together across the Internet. Some of these computers are nodes, which hold a full or partial copy of the blockchain. Some are also involved in the “mining” process in which new Bitcoin is created. But most are the wallet software programs employed by Bitcoin investors and users.
  • Address: Inside the blockchain, all the Bitcoin is associated with various addresses, which are long, unique numbers. You may own an address that, in the Blockchain ledger, is associated with, say, a tenth of a Bitcoin (or a thousandth, or five Bitcoins, and so on). You control the address (and associated Bitcoin) through the use of cryptography.
  • Transaction: A Bitcoin transaction occurs when someone sends a message to the blockchain saying, in effect, “Take x Bitcoin from my address, and move it over to this other address.” Let’s say you have half a Bitcoin, and want to convert it to dollars; you find someone willing to buy your Bitcoin — a Bitcoin exchange, for instance — and send a transaction to the blockchain moving the Bitcoin from your address to the buyer’s address. The ledger will show a transaction saying, “Half a Bitcoin was moved from address x to address y.”
  • Wallet: No, a wallet is not where the Bitcoin is stored. There’s no Bitcoin in a wallet! Rather, the wallet stores information that enables you to control the address in the blockchain with which your Bitcoin is associated. Software wallets allow you to send messages to the Bitcoin network and enter transactions into the Bitcoin ledger.

Do you understand money?

When you think of money, you likely think of paper bills and coins. However, the world’s major currencies do not have coins and bills for all of the money in circulation. Around 90 percent of a major currency has no physical representation! It’s just (to quote historian Yuval Noah Harari) “nothing more than entries on a computer server.”

Money is merely a concept, a way for humans to store value and exchange it in the future for real goods and services. Money can be represented by polished shells, banknotes, gold, salt, barley, coins, large stone disks ― it can be many different things. If you believe in the representation, then whatever is being used to represent it can function as money.

Well, there’s another requirement. It can’t be too easy to make more of the representation. “Shells?” you say, “I can pick those up on the beach.” Not so fast! Past cultures that used shells to represent money used a very particular type of shell, required that it be worked extensively, and even used shells from an area far away. There was no simple way to flood the market with new money.

So, yes, Bitcoin can act as a form of money, or at least a “store of value.” It’s in very limited supply; a fixed but ever-diminishing supply is “mined” each day. And millions of people believe in it.

Blockchain bewilderment

How does this blockchain thing work? Well, the blockchain is a form of database (like data stored in a spreadsheet or in a personal finance program). And it’s copied across thousands of computers across the Bitcoin network.

But there’s more. First, there’s the term block. This refers to blocks of data. Blockchains can be used for many different purposes, but in the case of the Bitcoin blockchain, each block contains records of transactions. A new block of data is added to the blockchain — and replicated across all the copies — every ten minutes or so.

Then there’s the term chain. A blockchain is, perhaps not surprisingly, a form of database in which blocks of data are chained together. How? Well, it’s a little complicated, but blocks are chained together using hashes.

A hash is a long number, and acts like a digital fingerprint. It uniquely identifies a block of data. So, you hash a block of data to create this digital fingerprint. Then that fingerprint — the hash — is stored with the block of data. When the next block of transactions is ready, the Bitcoin software grabs the hash from the previous block, then hashes all the data — the transactions along with the previous hash — to create the current block’s hash…which will then be added to the next block, and so on.

This chains the blocks together in a way that makes it impossible to change even a single character of text or a single number; if you did that, the edited block’s hash would change, which would change the next block’s hash, which would change the block after that, and so on.

The end result? The Bitcoin blockchain is essentially unhackable.

Cryptography ―the crypto in cryptocurrency

Cryptocurrencies, such as Bitcoin, use cryptography — in particular, public-key encryption — to provide a way for owners to prove ownership. Here’s a quick rundown of how public-key encryption works:

  • Encryption: When you “encrypt” data, you scramble it. You take, for instance, a message that you want to keep private, readable by the recipient only, and scramble it up so that it’s totally illegible. It can only be read if it’s decrypted (unscrambled).
  • The key or password: In order to encrypt the message, you use a key or a password. For instance, perhaps you use a personal finance program such as Quicken. In order to get into the program, you have to enter a password, which is used to unlock the program. In effect, you take the data you want to unlock, add the key or password, pass it to the program, and the program uses the key to unlock the data file. Only that specific key will unlock the scrambled data.
  • Public-key encryption: In the previous example, opening a data file such as a Quicken file, you would use a single key to encrypt the data and to decrypt it. Public-key encryption systems are different. They have two mathematically (and uniquely) associated keys, a public key and a private key. You cannot decrypt the data with the key you used to encrypt it.
    Instead, if you encrypt the data with the public key, you can only decrypt it with the private key; and if you encrypt the data with the private key, you can only decrypt it with the public key. How does this work? Who knows?! Very, very few people understand the horrendously complex mathemagics that go into public key cryptography. That’s fine, you probably don’t know how your smartphone works either. It just does.
  • Public key: A public key is just that, a key that is made public in some way. You don’t have to keep it secret.
  • Private key: It’s essential that you keep a private key private…secret.
  • Address: Your Bitcoin is associated with an address in the blockchain. Specifically, the private key, the public key, and the address are all mathematically — and uniquely — associated. The address is associated with your public key, and only that public key. And your public key is associated with the private key, and only that private key.
  • Encrypting a message: When encrypting secret messages using a public-key encryption system, you encrypt the message using the recipient’s public key. The only person who can decrypt the message is the recipient, because only the recipient has the private key.
  • Signing a message: Using public-key encryption, you can sign a message. Remember, the public key is just that, public knowledge. If you encrypt a message using the private key, it’s not very private — anyone with the public key can decrypt it, and the public key is public! But if you can decrypt it with the public key, it means the message must have come from the person holding the private key associated with the public key. In effect, the message was assigned by the person who owns the public key.
  • Signing messages to the Bitcoin blockchain: Public-key encryption is used by Bitcoin, but not to create secret messages that are sent to the blockchain. Rather, it’s used to sign messages. When you send a message to the blockchain transferring Bitcoin from your address to another, your wallet software uses the private key to encrypt the transaction information, adds the public key, and sends the message. Sure, the message has been encrypted, but it’s not secure, as it can be decrypted by anyone.
    The Bitcoin node processing the message takes the public key and decrypts the message. It also checks to see if the public key is associated with the address specified in the message. If it is — remember, public key, private key, and address are all mathematically and uniquely associated with each other — the node knows that the person who owns the private key used to encrypt the message must “own” the address associated with the public key used to decrypt the message.

Protecting your Bitcoin

If the blockchain is unhackable, how do people lose their Bitcoin? Well, there are two ways:

  • You lose your private key: If you lose your private key, you can’t prove that you own the address in the blockchain with which your Bitcoin is associated. So you can’t send transaction messages to the blockchain…your Bitcoin is stuck. Forever, if you can’t find the private key!
  • Someone finds your private key: If someone else finds your private key, they have access to your Bitcoin. They can send messages to the blockchain “proving” that they own the address and associated Bitcoin. Whoever has the keys, owns the Bitcoin!
    So protecting your private key is essential. You really need to make sure you can never lose your private key — floods, fire, hardware malfunctions notwithstanding — while at the same time ensuring that nobody else can get to your private key unless you want them to.

Ways to buy Bitcoin

When it comes to buying Bitcoin, you have several options. Each option has its pros and cons.

  • Bitcoin ATMs: Expensive, but quick and easy; you can be a Bitcoin owner the next time you do your groceries.
  • Cryptocurrency exchanges: Choose from a wide array of exchanges, some selling scores or hundreds of different cryptocurrencies. But pick wisely. Pricing varies, and some exchanges are more reputable than others.
  • Retail stores: CVS, Rite Aid, and MoneyGram are a few examples. But they’re also likely expensive.
  • Payment-transaction and financial services companies: Buy from Venmo, PayPal, Robinhood, and others.
  • Person-to-person trades: Very risky! You’d better really know what you’re doing.

A (short) Bitcoin timeline

Bitcoin has had a wild ride since 2008. It started slow. In the early days, of course, Bitcoin was essentially worthless. In fact, it wasn’t until the middle of 2010 that a Bitcoin user first made a purchase of a tangible product (and as you’ll see, he probably regrets that now!).

But by early 2011, a Bitcoin was worth a dollar, and although it continued a gradual increase in value, in mid-2017 the world took notice and it shot up in value.

Here are a few highlights in the crazy history of Bitcoin, the first blockchain cryptocurrency:

August 18, 2008: The domain name bitcoin.org is registered.

October 31, 2008: Satoshi Nakamoto publishes “Bitcoin: A Peer-to-Peer Electronic Cash System,” a document describing how Bitcoin could work.

January 3, 2009: The first Bitcoin comes into existence, when Satoshi Nakamoto sets up the Bitcoin blockchain and creates (“mines”) the first 50 Bitcoins.

January 9, 2009: Open-source Bitcoin client software is released.

January 12, 2009: In the world’s first Bitcoin transaction, Satoshi Nakamoto transfers 10 (worthless) Bitcoins to cryptographer Hal Finney.

May 22, 2010: Laszlo Hanyecz pays 10,000BTC for two pizzas. This is the first commercial Bitcoin transaction, and will turn out to be the most expensive pizza in history. At a fraction of a penny per Bitcoin, it probably seems a reasonable price. By April 2021, it will be worth over $600 million.

February 2011: Bitcoin hits a dollar a coin.

June 2011: Wikileaks begins accepting Bitcoin.

June 23, 2013: The U.S. Drug Enforcement Agency reports seizing 11.02BTC — the first reported government seizure.

October 10, 2013: Bitcoin trades at $130, before it begins a big run-up.

October 2013: The FBI seizes 26,000BTC from the Silk Road darknet black market.

December 3, 2013: Bitcoin peaks at $1,151. (It will drop back to around $800 by the end of the year.)

December 4, 2013: Alan Greenspan, one-time Chairman of the Federal Reserve Bank, calls Bitcoin a bubble.

February 2014: Mt. Gox, one of the world’s largest exchanges, stops withdrawals after reports that 744,000 Bitcoins have been stolen.

January 13, 2015: After a little over a year of decline, Bitcoin trades at $178.

January 2015: The Bitcoin exchange Coinbase raises $75 million in funding.

March 31, 2017: Bitcoin trades at $1,080, but the price is going to start trending up rapidly.

April 2017: Japan accepts Bitcoin as a legal payment method and Russia plans to regulate Bitcoin.

Summer of 2017: The press is starting to take notice of Bitcoin in a big way.

December 15, 2017: Bitcoin peaks at $19,497 — and then drops.

January 2, 2018: Billionaire investor George Soros calls Bitcoin a bubble.

February 4, 2018: Bitcoin is back down to $6,955.

December 14, 2018: A bad year…Bitcoin trades at $3,253.

June 25, 2019: Things are looking good. Bitcoin is once again trading at over $13,000.

March 13, 2020: Okay, not so good. Bitcoin falls back to $5,200. But hold on, things will change.

October 2020: PayPal announces it’s getting into the Bitcoin business.

March 14, 2021: After a year of climbing, Bitcoin is at $63,110!

June 8, 2021: El Salvador makes Bitcoin “legal tender.”

July 19, 2021: Well, that didn’t last. Bitcoin trades at $29,807.

December 31, 2021: Closing out the year at $47,687.

 

About This Article

This article is from the book:

About the book authors:

Peter Kent is an e-commerce consultant who specializes in search engine optimization (SEO). He’s also delved into cryptocurrency, including creating the online course Crypto Clear: Bitcoin & Cryptocurrency Made Simple. A former vice president of web solutions at a national internet service provider, and vice president of marketing and SEO expert at Indigio, Kent has been involved in the online world since 1984. He's been writing about the internet since 1993. He’s the author of nearly 60 books, as well as hundreds of articles. Tyler Bain is a professional engineer who specializes in the electrical grid. He is also a Certified Bitcoin Professional who focuses on system resiliency and mining mechanics.

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