This beginner’s guide covers the basics, from understanding what Bitcoin is and how it works to setting up a wallet, choosing an exchange, making your first transaction and how to store it safely.
Ready? Let’s get into it…
What is Bitcoin?
Bitcoin is a decentralized digital currency, created in 2009, aimed at eliminating banks and governments…
Bitcoin does not exist in physical form like traditional paper money. Instead, it is based on blockchain technology, through which transactions are verified and recorded on a distributed public ledger called the blockchain.
Units of Bitcoin are created and exchanged electronically through a decentralized peer-to-peer network, with no central bank or government authority controlling it. The total supply of Bitcoin is limited to 21 million coins.
How does Bitcoin work?
When people refer to Bitcoin, they usually are talking about the Bitcoin network and the digital currency (bitcoin with a lowercase b) that exists on that network.
The Bitcoin network relies on a technology called blockchain. Imagine a public spreadsheet that everyone can see but nobody can change without consensus. In Bitcoin’s case, this consensus involves tens of thousands of computers distributed worldwide.
The spreadsheet is updated on average every 10 minutes as computers, known as miners, race to solve complex mathematical puzzles. The miner who solves the problem first wins the ability to update the spreadsheet based on the last batch of transactions.
These transactions are validated by a network of thousands of nodes who maintain a copy of the spreadsheet and the ruleset that governs it. As long as the transactions in the last batch match Bitcoin’s rules, they are adopted, and the spreadsheet is updated.
As these updates are made, they are stored in a block of data which is added sequentially to a chain of prior transaction blocks… a block… chain. Get it?
How does Bitcoin increase in value and make money?
Bitcoin derives its value from several factors:
Scarcity — Bitcoin’s total supply is limited to 21 million coins, so it cannot be devalued by excessive production like fiat currencies.
Utility — Bitcoin’s blockchain technology and permissionless nature make it useful for payments, investments, and other use cases. The more it is adopted, the more utility and value it has.
Perception — Bitcoin is worth what people think it is worth. If confidence and demand grow, the price increases. Some view it as digital gold to hedge against inflation.
Speculation — Speculation on future price appreciation is a major driver of Bitcoin’s value. If people believe the price will go up long-term, they may buy and hold.
Like gold or other scarce assets, Bitcoin can increase in value and be sold later for a profit. Early Bitcoin investors who bought or mined coins years ago have seen massive gains.
How is Bitcoin Different From Money?
While Bitcoin resembles money in many ways and can be exchanged for goods and services, it has some significant differences from fiat currencies like the U.S. dollar:
Bitcoin is decentralized — No central bank or government controls the Bitcoin network, while fiat currencies rely on central banks.
Fixed supply — Only 21 million bitcoin will ever exist. Central banks can freely print national currencies, inflating the money supply. It’s fixed supply has lead industry experts to make some lofty Bitcoin price predictions.
Transaction irreversibility — Bitcoin transactions are immutable once enough confirmations are recorded on the blockchain. Cash transactions can be reversed.
Borderless — Bitcoin can be sent globally with no restrictions. Moving national currencies across borders is often restricted.
Pseudonymous — Bitcoin ownership is not linked to real-world identities by default. Fiat currency is tied to identities via bank accounts.
In summary, bitcoin functions like money but has different properties and governance. This gives bitcoin unique advantages, and risks compared to fiat money.
Is Bitcoin a good investment?
The potential returns from Bitcoin investing can be astronomical, but it also comes with significant risks and volatility. Here are some of the key pros and cons:
Decentralized and immune from government manipulation.
Finite supply and deflationary nature increases scarcity over time.
Bitcoin Cons
Extremely volatile — prices can crash rapidly, erasing gains.
Regulatory risks, as governments are still assessing how to treat them.
Hackers and scammers target Bitcoin investors, exchanges, and wallets.
Still very new, may think it is still proving itself.
Whether bitcoin is a good investment depends on your goals and risk tolerance. It offers a high-risk, high-reward asymmetric bet on the growth of blockchain and crypto. Bitcoin allocations should match your knowledge and volatility tolerance proportionately.
Learn more about the best Bitcoin investment sites here.
Storing Your Bitcoin with Cold Wallet vs. Hot Wallet
Once you acquire bitcoin, your next step is learning how to store it securely to protect it from hacking or theft.
Here are the main options:
Hot Wallet
A hot wallet refers to any bitcoin wallet connected to the internet. This includes:
Mobile, desktop, and web wallets provided by exchanges.
Mobile apps like Blue Wallet and Sparrow offer hot wallet functionality.
Hot wallets are convenient for frequent transactions but have higher security risks. The keys are stored online and may be vulnerable to hacks or malware.
Cold Wallet
A cold wallet stores bitcoin offline on devices not connected to the internet.
Cold wallets provide superior security via offline storage. However, they are less convenient for frequent transactions.
A combination of hot and cold storage is recommended for large Bitcoin holdings. For safety, keep a small spending balance in hot wallets while storing the bulk of coins in cold storage.
Check out our Top 5 Bitcoin Wallet Review for 2024 here.
Why Invest in Bitcoin?
Despite the risks, there are compelling reasons why bitcoin has become such a popular investment asset class:
Large growth potential if mass adoption continues. Bitcoin is still in the very early innings.
Rising inflation and currency debasement make bitcoin’s finite supply attractive.
Decentralization solves the problems of government manipulation and quantitative easing.
Bitcoin’s brand and first-mover advantage give it staying power. It would be very hard to displace at this point.
An alternative store of value and portfolio diversification from stocks and bonds.
Does Bitcoin burn a TON of energy and is not good for the environment?
A common criticism of Bitcoin is that mining coins consumes excessive amounts of electricity and is environmentally destructive. This is a nuanced issue with arguments on both sides:
Yes, Bitcoin mining does use large amounts of electricity. It is resource-intensive by design to ensure network security.
However, Bitcoin incentivizes using renewable energy sources like solar and hydropower. Miners hunt for the cheapest power, which is often renewable. Studies show much of Bitcoin’s energy comes from renewables.
Bitcoin’s energy usage must be weighed against the benefits of a secure, global financial system that grants anyone access. Almost any human system uses energy.
Bitcoin consumes significant amounts of electricity but is rapidly evolving in the energy space. Its energy usage enables a decentralized system with unique benefits.
In the first episode of a new series called 21 Voices, Daniel Batten, a pioneering entrepreneur and climate tech leader, reveals how Bitcoin mining can significantly mitigate methane emissions, turning the entire Bitcoin network carbon-negative.
Discover the untold environmental benefits of Bitcoin mining and how it combats negative press while driving renewable energy infrastructure. Learn about Bitcoin’s true potential in shaping a sustainable future.
Learn even more about why Bitcoin’s energy usage isn’t a problem.
Bitcoin is so volatile; why invest in it?
Bitcoin’s frequent and wild price swings can deter some investors. Why invest in an asset that can lose 20% of its value overnight?
Here are some counterpoints for why Bitcoin volatility isn’t necessarily bad:
Volatility works in both directions — Bitcoin often gains value rapidly, too.
Smart investors use price dips when Bitcoin is oversold to accumulate more coins at a discount.
Bitcoin’s long-term trend has been consistently upward despite volatility.
New technologies often stabilize as they mature. The internet was once very volatile, too. Amazon lost 90% of its stock valuation — twice!
Short-term volatility is just noise for true believers in bitcoin’s long-term potential.
Other hedging assets like gold are volatile too but remain popular investments.
So Bitcoin’s volatility requires strong nerves, a long-term savings mindset and smart position sizing. But volatility alone is not necessarily a reason to avoid bitcoin, especially if holding long-term.
A Bitcoin ETF (exchange-traded fund) is an investment vehicle that would hold Bitcoin and derive its value from the price of Bitcoin. It seeks to provide exposure to bitcoin prices for stock market investors.
Here are some key facts about Bitcoin ETFs:
Provides easy exposure to bitcoin prices by purchasing a stock instead of buying coins directly.
Bitcoin ETFs are traded on major stock exchanges and held in brokerage accounts like regular stocks.
Investors won’t have to worry about securely storing bitcoin themselves with an ETF.
However, unlike owning bitcoin directly, you don’t have possession or control with an ETF.
Fees vary greatly. For the latest fee information check out our Swan guide here.
Overall, Bitcoin ETFs allow mainstream stock investors to get bitcoin exposure via traditional brokerage accounts. The ETF Race is On…
Learn more about what Bitcoin ETFs mean for Wall Street, you. and ETF fees.
What are Bitcoin IRAs?
A Bitcoin IRA allows investors to hold bitcoin in a tax-advantaged Individual Retirement Account. Here’s how it works:
The Bitcoin IRA is self-directed and held by a custodian specializing in alternative assets.
Within the IRA, you can buy and sell Bitcoin without triggering capital gains taxes.
Bitcoin enjoys tax-deferred or tax-free growth inside the IRA, just like other investments.
There are no mandatory RMDs (required minimum distributions) for Bitcoin IRAs after age 72 to force you to sell.
However, stricter IRA contribution limits apply vs. regular bitcoin purchases. And penalties apply for early withdrawals.
Overall, Bitcoin IRAs provide meaningful tax benefits for long-term, buy-and-hold bitcoin investors who want to save for retirement.
Learn more about the best Bitcoin and crypto IRAs here and here.
Can I earn Bitcoin without buying it?
Yes! There are several methods to accumulate bitcoin without having to buy it outright:
Bitcoin Mining
Mining allows you to validate transactions and earn new bitcoin. However, it requires advanced hardware, computer hashrate and technical skills, and it’s generally not profitable for amateur miners anymore unless you join a mining pool.
Get Paid in Bitcoin
Some employers, such as tech startups or crypto companies, pay employees partially or fully in bitcoin. This allows you to stack sats without spending any fiat.
Bitcoin Affiliate Programs
You can earn commission payouts in the form of bitcoin through affiliate programs like Swan Force. Refer your friends and family to exchanges like Swan, and you can earn Bitcoin when they make purchases.
So get creative! With the options above, you can grow your bitcoin stack without buying from an exchange.
Step by Step of How To Start Buying Bitcoin
Ready to become a bitcoin owner? Here is a step-by-step guide to purchasing your first bitcoin:
Step 1 — Bitcoin storage: Self-custody or Bitcoin ETF?
First, decide whether to hold Bitcoin directly or via an ETF. With self-custody, you control your own private keys, while with an ETF, the provider handles storage and security.
An ETF may initially be easier for beginners, but with an ETF, you don’t truly control your Bitcoin.
Step 2 — Bitcoin buying — find & pick an exchange
To buy Bitcoin and transfer it to your own wallet, you need to open an account on an exchange like Swan. You can compare fees, security, payment options, and verification requirements there.
Swan currently offers zero fees on your first $10,000 in Bitcoin purchases!
Step 3 — Bitcoin fees — Top Watch Outs
Watching out for network fees is one of the most important parts of taking self-custody. Every time you withdraw Bitcoin into self-custody, you are effectively creating a digital bill of sorts, often referred to as a UTXO or Unspent Transaction Output.
The more UTXOs you need in a future transaction, the more fees the network will charge you to process a transaction.
A common rule of thumb is to withdraw your Bitcoin only once you have reached 0.01 BTC or greater.
Doing so can save your future self from holding unspendable Bitcoin because you withdrew too often and in too small amounts.
Step 4 — Storing & Safety of your bitcoin
Store your bitcoin in a digital hot wallet or cold wallet. Use strong, unique passwords and enable 2FA for protection against hacking. For large amounts, use a hardware wallet. The BTC Sessions YouTube channel is perhaps the best place to learn how to use Bitcoin tools like hardware wallets.
Step 5 — HODLing your Bitcoin
Now that you’ve bought Bitcoin, decide on your investing strategy. Since Bitcoin moves in bursts over short timeframes, it’s generally not advisable to try to trade it! The best mindset in the Bitcoin space is to treat it as a long-term savings vehicle.
With applications like Swan, we make it easy to calculate a 'recurring purchases' on autopilot to grow your Bitcoin stack over time.
Top 10 Bitcoin for Beginners FAQ
Q1: What is Bitcoin?
A: Bitcoin is a digital currency or cryptocurrency operating on a decentralized network using blockchain technology. It allows users to conduct transactions directly without the need for intermediaries like banks.
Q2: How does Bitcoin work?
A: Bitcoin transactions are recorded on a public ledger called the blockchain. Miners use computers to solve complex mathematical problems, validate transactions, and add them to the blockchain. In return, miners are rewarded with new Bitcoin.
Q3: Is Bitcoin legal?
A: Bitcoin’s legality depends on your country. Buying, selling, holding, and transacting in Bitcoin is perfectly legal in many places. However, a few countries have restrictions or outright bans on using cryptocurrencies.
Q4: How can I buy Bitcoin?
A: You can buy Bitcoin on cryptocurrency exchanges using traditional money or trading with other cryptocurrencies. Popular exchanges include Coinbase, Binance, and Kraken. After setting up an account and undergoing a verification process, you can purchase Bitcoin through these platforms.
Q5: How do I store my Bitcoin safely?
A: Bitcoin can be stored in digital wallets, which come in various forms, such as hardware wallets, software wallets, and mobile wallets. We recommend using hardware wallets that store your Bitcoin offline for maximum security.
Q6: Can Bitcoin be converted into cash?
A: Yes, you can convert Bitcoin into cash through cryptocurrency exchanges, Bitcoin ATMs, or peer-to-peer transactions. Once sold on an exchange, you can withdraw the money to your bank account.
Q7: What are the risks of investing in Bitcoin?
A: The primary risks include high price volatility, potential regulatory changes, and security vulnerabilities in exchanges and wallets. It’s essential to perform thorough research and consider your financial situation before investing.
Q8: What are the advantages of Bitcoin over traditional money?
A: Bitcoin offers lower transaction fees, enhanced security through cryptography, no need for banking intermediaries, and the ability to make transactions anonymously. It’s also accessible to anyone with internet access, regardless of geographical location.
Q9: How is the price of Bitcoin determined?
A: The price of Bitcoin is determined by supply and demand dynamics within various exchanges where it is traded. Market sentiment, technological developments, and geopolitical events can influence its price.
Q10: What is Bitcoin mining?
A: Bitcoin mining is the process of creating new bitcoins by solving complex mathematical problems that confirm transactions and secure the network. Miners are rewarded with new bitcoins and transaction fees.
And that’s it! With these steps, you can buy your first (or next) bitcoin and become part of the Bitcoin revolution. As with any investment, it’s wise to educate yourself thoroughly first and not risk more than you can afford to lose. Bitcoin offers huge potential but also carries risks. Take it slow and be cautious initially.
Swan is here for you every step of the way…
Welcome to Bitcoin: 101 Series
Swan understands that learning about Bitcoin can be daunting, and articulating its concepts to your loved ones can often appear like an insurmountable task.
So, we created this free 1-hour Welcome to Bitcoin: 101 Series. It’s the best way to orange-pill your friends and family.
With host Natalie Burnell, you’ll learn the many ways Bitcoin can benefit you, such as:
Inflation Protection: Protect your savings from inflation and manipulation.
Investment Opportunity: Potential for substantial returns driven by its scarcity and growing adoption.
Prosperous Future: Decentralized money that serves as a store of value for your hard-earned wealth.
Help kickstart your and your loved ones Bitcoin journey — sign up for Swan today.
Mickey Koss
Mickey Koss became a freelance writer in the Bitcoin space in an attempt to build a proof of work portfolio for when he left the Army. He graduated from West Point with a degree in Economics before serving in the Army for nearly a decade. He became orange pilled in graduate school and is now a regular contributor to Forbes, Bitcoin Magazine, and Bitcoin News. He’s been on popular podcasts such as BTC Sessions’ Why Are We Bullish, and is a regular on Café Bitcoin.
Discover how Swan Vault puts you in full control of your Bitcoin with a simple, secure setup. See just how easy it is to safeguard your wealth and unlock your monetary autonomy.
