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Bitcoin for Beginners: What is Bitcoin & How it Works?

Donny Gamble
January 9, 2022
Bitcoin for Beginners
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Bitcoin is the ultimate cryptocurrency, but what do you really know about it? How does Bitcoin work, and how can you stand to make money from it?

You see it in the news, read about it on forums, and people are always talking about it on social media.

What is Bitcoin? It’s a digital phenomenon turned real-world investment strategy, and there’s still time to get in on it.

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How Does Bitcoin Work?

At its core, Bitcoin is a string of code. It’s software, which can be viewed as an asset, investment, or currency (not that anyone is using it to buy pizza anymore). It’s a currency that prevents fraud through the way it’s created, so there can be no counterfeits or scams with the currency itself.

Bitcoin can be stored in a digital wallet or a cold storage wallet for safety (Bitcoin is safe, but your computer/connection that you access it from might not be safe), and it can later be sold on cryptocurrency marketplaces as a means of cashing in on your asset.

How Bitcoin Mining Works?

Mining is a process where new Bitcoin is created. Computers work together to solve complex mathematical problems, and the computer or hardware that solves it is awarded in Bitcoin.

Then the network continues to work together and the next Bitcoin is created, and so on. Eventually, Bitcoin will no longer be mined, but miners may receive compensation (in their local currency) in exchange for keeping the network transactions going with their hardware.

In short, anyone can buy a rig and begin mining Bitcoin, but not everyone will be awarded Bitcoin. This creation process is the backbone of the block that Bitcoin runs on, and it’s a vital process.

How to Buy Bitcoin: Step-by-step Process

Buying Bitcoin isn’t a daunting experience in the slightest, it just requires a little bit of setup time, and you’ll be good to go. This is the basic four-step method to buying Bitcoin.

Step 1: Choosing an Exchange

Cryptocurrency exchanges, such as FTX, Binance, or Coinbase, are all sites and services where you can buy crypto. You can also buy it through apps such as Robinhood and Webull, the choice is yours and the options are vast.

Once you decide on a marketplace, make your account, and make sure you have a safe place to store your information. You should also use a secure network to connect to it.

Step 2: Setting Up a Payment Source

Now it’s time to turn USD into BTC—you have to fund the account you just made, which typically happens through ACH bank transfers. It can take some time to get your account funded after you first make it, but afterwards it should be a relatively simple process.

Some marketplaces allow you to quickly fund your account with PayPal, Venmo, and other quick means of transferring money online. Then again, you could always use apps like CashApp, which allow you to buy Bitcoin directly in-app.

Step 3: Buy Order

In a marketplace, you have to put in a buy order, which tells the market how much of what type of cryptocurrency coin you want. The money is then withdrawn from your balance, and the cryptocurrency is placed in your digital wallet.

It’s as simple as that.

Step 4: Cold Storage

If you plan on making Bitcoin or any cryptocurrency into a steady and long-term investment strategy, it’s important that you know about cold storage.

Cold storage is an offline wallet for your cryptocurrency code. Essentially, a depository will keep your cryptocurrency in a safe place, similarly to gold, except they’ll make it available via the marketplace once you request it. 

Cold storage takes longer to access, so you won’t be available to sell instantly if there’s a price spike, but it’s much safer.

How to Invest in Bitcoin

Buying Bitcoin is one thing, but how about investing in it? It’s actually similar to gold in the way that it accrues value. If you’re going to buy Bitcoin, it’s not because you want to sell it relatively quickly to turn a mild profit (that’s what day trading isf or).

You can invest in Bitcoin by buying and holding. While the price is likely high right now ($60K+ total capitalization in November 2021 shows it’s not slowing down), it’s only going to get higher as it becomes more scarce.

The longer you (and others) hold onto it, the more valuable it’s going to be over time.

Bottom Line

Bitcoin is always going to be expensive because of the way the system works. It was designed to be scarce, and operate like a stock (just like a lot of blockchain).

If you invest in Bitcoin, you’re investing in the most historically profitable cryptocurrency to date, and it’s not exactly an easy area to break into.

Buy fractional Bitcoin, hold it for as long as you can, and one day, you’ll be one of the few people who can still buy it. Supply and demand is only going to get worse, so while there will be Bitcoin dumps when they soar to all-new highs, holding for the long-term seems to be the best strategy based on historical data and information.

Bitcoin FAQ's

How does Bitcoin make money?

Competition, regulation, supply and demand—these are the three pillars for how Bitcoin is valued. Bitcoin makes money through scarcity, because everyone wants to own something with exclusivity, especially when that something can be used in most developed nations as currency.

Bitcoin miners can use specialized PC hardware to help the blockchain network secure and legitimize data transactions, which is what keeps Bitcoin and other cryptocurrency alive.

By doing this, Bitcoins are rewarded to the miners for their electricity costs, time, and a bit of luck. This is how new Bitcoin is generated.

Will Bitcoin ever run out?

There is a limit of the total number of Bitcoins that can be mined, and that number is 21 million. However, through complex arithmetic and the blockchain systems, Bitcoin rewards for mining will continue to be halved until the final Bitcoin is mined roughly 100+ years from now. 

At that point, thanks to complex math, the final Bitcoin will be one one-millionth of a fraction between 20,999,999 and 21,000,000, so technically, Bitcoin will never reach its cap.

However, miners will stop earning so much money from it in the near future, or stand to gain very little.

Is Bitcoin safe and legal?

Despite being around for a while, Bitcoin only became “legal” in June of 2021. This simply means that now the IRS has enough interest in it that it had to develop laws surrounding it, which does take away from the whole decentralized aspect in a way, but is understandable at the same time.

Bitcoin is as safe as a stock at this point. It not only has IRS laws surrounding it, but the peer-to-peer network means that it’s not something that can just be taken from you. In fact, you can make Bitcoin even safer with cold storage wallets in a Bitcoin IRA.

Why is Bitcoin so expensive?

Bitcoin is akin to gold in one aspect—scarcity. There’s so little of it (relatively speaking of course), so the less that’s in supply, the more demand it has.

Bitcoin continues to rise as the volume of available Bitcoin decreases. While it has its own value due to being a truly decentralized currency, the fact that it’s being purchased and held is only driving the price up further.

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About the author 

Donny Gamble

I’m Donny. I’m a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

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