How Does Bitcoin Work: A Step by Step Guide

What is bitcoin

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Just over a year ago, in March 2020 – at the height of the pandemic – the financial markets crashed. Bitcoin was at a respectable £3,600. Now, Bitcoin has broken its all-time high record on numerous occasions and currently sits at over £40,000; and counting. Don’t worry though, I’m kicking myself too. Maybe not as hard as the guy, who spent 10,000 Bitcoins on buying pizza in 2010. At the time of writing this, that would have been worth an eye-watering £415 million. Ouch!

At The Guy Bible, we’re giving you a crash-course breakdown of this controversial currency. You’ll find out how it works, why it’s so valuable and how you can get your mitts on them. That’s if you have £40,000 spare.

What is Bitcoin? – the third-highest searched phrase in 2018

What is bitcoin

Introduced in 2009, Bitcoin is a digital currency, also known as cryptocurrency, that operates on a decentralised system called a blockchain. This is literally a chain of blocks that store information. Blockchains are considered to be the most secure transaction method as they timestamp digital documents so they cannot be backdated or tampered with. It is a distributed ledger meaning that it is available to be viewed by the public. Are you still with me?

Bitcoins were primarily made to replace fiat currency, which is traditional, paper money that is backed by a government promise rather than a commodity, such as gold. Only 21 million Bitcoins will ever be mined, which is set to stop in 2140. To put that into perspective for you, there are approximately 46.8 millionaires in the world. This means that there will not be enough Bitcoin for half of the world’s existing millionaires to own just one each. This has caused massive speculation as to how this will influence the price of the cryptocurrency in the future, especially as fiat currency is unlimited.

Who invented Bitcoin?

For a currency as controversial as Bitcoin, it’s only right that there is a controversial story behind its inception. While the founder is Satoshi Nakamoto, it’s not all black and white. Nobody knows who Nakamoto really is, since he went off the grid in April 2011. Since then, multiple efforts have been made to uncover his identity but he has proven elusive. Three candidates have been proposed; however, Dorian Nakamoto and Nick Szabo vehemently deny it, while Craig Wright continues to make dubious claims that he is the inventor – for obvious reasons.

Nakamoto’s identity has once again been thrown into the spotlight after Coinbase (we’ll speak more about them soon), sent him a copy of their public filing for their IPO later this month.

How can I buy and store Bitcoin?

Bitcoin is the world’s ninth most valuable asset and you can purchase it by using crypto-exchange platforms such as Coinbase, Binance and Kraken. These act as an intermediatory between buyers and sellers for a small transaction fee. Consequently, Brexit has meant that many providers have placed restrictions on transferring currency into British pounds or linking your account to a British bank. This will soon change once the dust settles, so be sure to keep an eye on this as the situation develops.

Additionally, they possess storing methods such as cryptocurrency wallets. These are known as ‘hot wallets.’ They are connected to the internet and are the most popular option used by cryptocurrency holders since they are free. They are also convenient and mobile, compared to their counterpart, ‘cold wallets.’ Cold wallets are offline and reside on an external hardware device. Unfortunately, the average cost for this kind of storage is around £70 and on top of that, can only store a limited variety of crypto.

With this being said, cold wallets are the most secure, which is a huge advantage. Crypto-currency exchanges are very prone to security breaches and nearly 50 platforms have been hacked since 2011.

Is Bitcoin legal?

From a global perspective, Bitcoin is not recognised as a legal tender. Although you can use it to purchase a Tesla, a Virgin flight to space and even order from Amazon, you will find difficulty using it to make everyday payments. Hm, Bitcoin in Tesco’s? Now that’s a thought. With this being said, many cryptocurrency-exchange platforms, including have attempted to facilitate this through Visa credit cards. This leverages your Bitcoin (or any eligible cryptocurrency for that matter) against Fiat currency to make purchases.

Furthermore, since it is not widely recognised as a currency, it operates the same as any other item. Its value is determined by Fiat currency, such as dollars, pound and euros, and stands on the opposite side of money in a transaction. To be a legal tender, this status must be granted by law in a country’s mandate.

Many countries view cryptocurrency as a threat to their economy and have proposed legislation banning its exchange. Recently, India has declared that those who hold, trade or mine Bitcoin will face a very hefty fine.

Is Bitcoin sustainable?

Even though Bitcoin analysts claim that the cryptocurrency will soon be powered by renewable energy; a study by the University of Cambridge has found that the network uses more than 121-terawatt hours a year. This ranks the cryptocurrency in the top 30 highest electricity consumers in the world overtaking Ukraine, Argentina and Sweden! This is due to the increasing demands for Bitcoin since the financial markets crashed during the Coronavirus pandemic.

Other analysts have argued that this energy consumption should only be measured against other assets and commodities, including gold, which is thought to consume over 475 million gigajoules of electricity annually. While this is still less than Bitcoin, it does not account for renewable energy. The gold mining industry is one of the most unsustainable practices in the world and must reduce its carbon emissions by 92% in less than 20 years to meet the criteria of the World Gold Council’s climate accord.

Bitcoin seems to be divisive across the board but all signs point towards it being the currency of the future. Let us know in the comments whether you have invested, will be investing or are looking at alternative cryptocurrencies.