Getting started with Bitcoin

As prices of goods continue to soar across the world, people are looking for ways to better position themselves financially. Many are waking up to the fact that the government isn't actually looking after their best interests and are seeking alternatives to government backed promises.

Many of the people I meet and talk to about bitcoin are interested, but are intimidated as the idea of diving into something completely new is scary. This post is to serve as a quick on-boarding guide for those interested in learning more and are ready to do the work.

Unlike fiat, which is imposed upon you via taxes and the threat of imprisonment for not paying them, Bitcoin is entirely opt-in, thus the first step to bitcoin is to learn about it. Nobody is forcing you to adopt it, but the more you learn and the more you stack, the easier and more enjoyable life gets. Take the orange pill.

On October 31, 2008, an entity by the name of Satoshi Nakamoto posted a paper to a cryptography mailing group. This paper, known as the "Bitcoin Whitepaper," details the workings of Bitcoin and describes a "system for electronic transactions without relying on trust."

This was not the first attempt at an electronic cash system, but Bitcoin was the first to rely on a distributed network of nodes. It solved a previously unsolvable problem in computer science known as the "Byzantine Generals Problem." To understand Byzantine Generals Problems, consider the following image:

Imagine an army planning to conduct an attack on an enemy city. The only way the attack will succeed is if all armies attack simultaneously. If one army does not get the memo or fails to attack on time, the entire attack will fail, and our army will perish.

How can one party (the General) relay a message to another party (his armies) and:

-> 1: Be sure his message was sent to the correct parties,
-> 2: Be sure the message has not been tampered with en route to its destination,
-> 3: Ensure the message was received by the intended party.

Similarly, how can each individual army be sure that the orders they received are:

-> 1: From whom they expect (the General),
-> 2: Legitimate,
-> 3: Acknowledged by others.

In the modern age, most of our money is digital. While you might have cash in your wallet, cash only makes up a small percentage of the total money in circulation. The majority of transactions are conducted electronically.

The problem with current digital money is ensuring that when you spend $100 from your bank, you can't immediately turn around and spend the same $100 at another vendor. This is called the "Double Spending Problem." To prevent this, we rely on third parties to keep track of financial records. Banks and financial institutions play this role, ensuring that money is not spent more than once through their centralized systems.

This is a major flaw because it only works if you trust that the centralized authority is acting fairly. History suggests that fair play is not guaranteed. Just look around—has the world improved or worsened since you were a kid? Despite technological advancements that lower production costs, have any goods actually become cheaper? Why are prices still rising even as innovations make work more efficient and should theoretically reduce costs?

Why are the people in charge ignoring these questions and basic facts? Is there a hidden agenda?

This can get technical, but for now, we will keep it high level and just introduce core concepts, some of which you may have heard of. These core concepts are:

-> Bitcoin Nodes
-> The Blockchain
-> Mining
-> The Difficulty Adjustment
-> The Halving

A bitcoin node is just a computer that is running the bitcoin software. They are free to run, and I will show you how to run your own in another guide.

These nodes are responsible for taking the role of the bank. They operate by maintaining a record of every transaction that occurs on the Bitcoin network and continuously checks its entire transaction history to ensure that each unit of Bitcoin hasn't been spent more than once. Each node contains the entire history of bitcoin all the way back to 2009, the year at which the first block was mined.

The blockchain is exactly what it sounds like—a chain of blocks of transactions that are built upon each other.

Each new block contains a reference to the previous block, forming a continuous chain. This structure ensures that any attempt to alter a single block would require changing all subsequent blocks, making the blockchain extremely secure.

For a miner to add a block to the blockchain, they must perform an enormous number of guesses and checks until they "find" or "mine" a value that yields a hash meeting the current block difficulty. This process is known as Proof-of-Work (PoW).

Miners can be thought of as exchanging electrical power for attempts at finding the right hash to add a block. This process is extremely costly, incentivizing miners to play by the rules. If a miner attempts to cheat, every other honest node on the network will reject their block. Consequently, the cheating miner will lose the substantial resources they invested in trying to be sneaky (most likely tens of thousands of dollars). This is the power of a distributed network of nodes— corruption-free money for the first time in humanity. Would you recognize it if you saw it?

Something that hasn't been covered in this guide until now is how new Bitcoin is created. When a miner successfully mines a block, they are rewarded with the block reward, which currently stands at 3.125 Bitcoin per block. Additionally, Bitcoin has a hard cap on the total supply, with only 21 million coins ever to be mined. Currently, over 19 million coins are in circulation, meaning that new miners are competing for a diminishing supply of available Bitcoin, despite increasing their mining power.

Moreover, the Bitcoin network undergoes a "halving" event approximately every 210,000 blocks (roughly every four years), where the block reward is cut in half. This mechanism ensures that the supply of new Bitcoin decreases over time, adding to its scarcity.

If this were silver or gold mining, an increase in the number of miners would drive the price of the asset down due to their abundance (silver is more abundant than gold). However, in Bitcoin, the number of miners dedicating power to mining does not affect the issuance rate. The network adjusts its difficulty to ensure that blocks are mined approximately every 10 minutes, regardless of the total mining power. This mechanism makes Bitcoin immune to inflationary pressures that would normally reduce the value of an asset as more of it is produced. Bitcoin is unlike anything we've ever seen before.

"It might make sense just to get some in case it catches on."
- Satoshi Nakamoto

Now that you know a bit about the inner workings of Bitcoin, you'll realize that there really isn't anyone you need to trust when it comes to Bitcoin. The only person you’re trusting is the one whose node you’re using to interact with and get your information from the blockchain.

If you run your own node using the free and open-source Bitcoin software, you do not have to trust anyone. Instead, you verify for yourself that the records are correct.

In Bitcoin, we say "don’t trust, verify," and now you know why.

However, an exception to this is if you buy Bitcoin on an exchange and leave your funds there. In this scenario, you aren’t controlling your Bitcoin at all. Instead, you’re trusting the exchange to take care of it for you. If that exchange fails (and there are plenty of examples of this happening), you lose your Bitcoin.

To avoid this risk, learn to self-custody and hold your own keys. This ensures that you maintain full control over your Bitcoin and are not reliant on any third party.

You can create your own Bitcoin wallet for free and exercise self-custody. I wrote a couple of guides about that if you are ready to get started:

-> Create Your First Bitcoin Wallet with Sparrow
-> How to Buy and Withdraw Bitcoin from Coinbase