there’s more! We’ve not only put together a book that explores bitcoin, but we’ve also compiled some online bonus bits (at www.wiley.com/extras/bitcoin) to take things further:
✔ An online Part of Tens with tips on how bitcoin can help you.
✔ Two other online articles that cover certain aspects of bitcoin and banking, plus more about the blockchain.
✔ A handy e-cheat sheet (at www.dummies.com/cheatsheet/bitcoin) to keep important info handy at all times.
As with all For Dummies books, you can start anywhere you like: Each chapter is designed to be as self-contained as possible. That said, we don’t like to repeat ourselves too often, so you’ll spot plenty of references to other chapters throughout.
If you’re not sure where to begin and don’t feel like engaging in the usual practice of “starting at the beginning,” here are a couple suggestions:
✔ Chapter 9 is a great place to get started: Before you find out too much about bitcoin itself, this chapter will tell you whether bitcoin is used (and legal) in your country.
✔ If you want to plunge straight in and set up a bitcoin wallet, enabling you to acquire and spend bitcoin, flick through to Chapter 5.
✔ Chapter 10 is a good place for the level-headed to begin; it looks at bitcoin security, outlines the relative safety of using it, and suggests precautions you should consider taking.
✔ Chapter 12 provides you with some ready-made inspiration – it’s all about what you can do with bitcoin once you have some. In other words, spend, spend, spend.
Having said that, you can certainly start at the very beginning … it’s a pretty good place to start after all. Wherever you kick things off, we hope you enjoy and get something valuable from this book.
Part I
Bitcoin Basics
In this part …
✔ Get familiar with the basics of what bitcoin is, how it came to be, and how it works.
✔ Find out how to obtain your own bitcoins and where to keep them once you have them – and where not to.
✔ Check out the advantages and disadvantages of bitcoin as a currency and a technological system.
✔ Read all about mining, funding, trading, and earning bitcoin.
Chapter 1
Introducing Bitcoin
In This Chapter
▶ Getting to know a bit about bitcoin
▶ Understanding how bitcoin benefits us all
▶ Staying safe and stashing your cash
So, bitcoin … you know it’s a new form of money – a digital currency, to be exact – but just how does it work? Sit yourself down comfortably, and we will begin with the basics, the three major aspects of bitcoin:
✔ Origin: How it came to be
✔ Technology: How it works behind the scenes
✔ Currency: Using bitcoins as money
Exploring each of these aspects will help you understand bitcoin (or BTC, as it’s sometimes known) and find out whether and how it can help you. Don’t worry – we will stay top-level for now. Later chapters dig deeper.
Ready? Let’s go.
The most important aspect of bitcoin may be the concept behind it. Bitcoin was created by developer Satoshi Nakamoto. Rather than trying to design a completely new payment method to overthrow the way we all pay for things online, Satoshi saw certain problems with existing payment systems and wanted to address them.
The concept of bitcoin is rather simple to explain: During the financial crisis of 2008, people from all over the world felt its debilitating economic effects. And at the time of this writing (early 2016), many are still feeling the effects in terms of the dwindling value of their fiat currency (the currency approved by a country’s government). As the global financial system teetered on the brink of collapse, many central banks engaged in quantitative easing – or in simple terms, turned on the printing presses. Central banks flooded the markets with liquidity and slashed interest rates to near zero in order to prevent a repeat of the Great Depression of the 1930s. The effect of this was large-scale fluctuations in fiat currencies and what has since been termed currency wars – a race to competitively devalue so that an economy can become more viable simply by its goods and services being cheaper than those of its neighbors and global competitors. The response of central banks around the world was the same as it always has been when these things happen: Governments had to bail out affected banks and they printed extra money, which further devalued the existing money supply.
In bailing out the banks, there was a net transfer of debt to the public purse, thus adding to future taxpayer liabilities. This created a sense of social injustice among some quarters. Aside from that, no one really knows what the long-term effects of quantitative easing will be. Perhaps inflation at some point in the future and a further devaluation of those fiat currencies who engaged in the schemes? What seemed clear is that central bankers, supposedly acting independent of governments, were taking many economies into the unknown and were prepared to devalue their fiat currencies at will just to keep the wheels turning. In doing so, they bailed out the very same institutions and bankers whose reckless behavior had brought about this crisis in the first place. The only other option would have been to let the whole system collapse and be purged, as for instance happened in Iceland. That country defaulted on its debt and endured great economic turmoil in the aftermath of that event.
Therein lies the genesis of bitcoin: a decentralized financial system taken out of the hands of a few elite global decision-makers.
Satoshi Nakamoto decided it was time for a new monetary system, one so different from the current financial infrastructure that you could even call it a disruptive force. Whether or not bitcoin was ever intended to completely replace the financial infrastructure remains unclear, but we do know that multiple banks are looking at the technology that powers bitcoin, because they see its potential and want to adopt this technological power for their own use. They are free to do so, of course, as the core bitcoin technology – known as a blockchain (much more on that in Chapter 7) – was open source from day one for everyone to see. Creating bitcoin as open source meant that anyone was allowed to come up with their own improvements and build platforms on top of it.
Viewed from this angle, bitcoin could
