As seen on:
ntv-logo sky-logo comedy-central-logo

What is Bitcoin? A beginner’s guide

Bitcoin is currently the most well-known and popular cryptocurrency on the virtual currency market. Stories of Bitcoin millionaires have hit the mainstream news as well as plenty of cautionary tales of those who have lost money trading the popular cryptocurrency. If you are thinking of investing in Bitcoin, read our beginner’s guide to get an idea of exactly what Bitcoin is and whether it’s a sound investment for you.

  • What exactly is Bitcoin?
  • A brief overview of the history of Bitcoin
  • How do you acquire Bitcoin?
  • How do you trade Bitcoin?
  • Advantages and disadvantages of Bitcoin

What is Bitcoin?

Bitcoin is a well-known and frequently traded cryptocurrency (also referred to as a digital currency or virtual currency). It can be bought, sold and traded against other currencies on online exchanges and through online brokers who may specialise in cryptocurrencies or provide a wide range of other financial instruments as well. Bitcoin can be used online as cash to pay for goods and services in any outlet where the seller accepts Bitcoin as a payment method. This is entirely at the discretion of individuals and companies, so while there are plenty of online retailers that accept Bitcoin, it’s not as common as it was once expected to be.

Bitcoin, like other cryptocurrencies, really is a virtual currency. Each Bitcoin is basically just a computer file along with the private code that is associated with it. When you see pictures of Bitcoin online, these are simply novelty coins used as a visual representation of the currency, but you won’t ever ‘see’ your virtual currency in real life. They are stored in an online digital wallet, and they can be transferred between wallets when trading the coins or used to pay for goods and services.

Top 3 Crypto Broker Comparison

1
of 18 Crypto Broker eToro
Crypto currencies 10
Max. Lever 1:2
Min. deposit $ 200
BTC spread 1,50%
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 18 Crypto Broker GMO Trading
Crypto currencies 33
Max. Lever 1:2
Min. deposit $ 100
BTC spread varied
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 18 Crypto Broker IQ Option
Crypto currencies 13
Max. Lever 1:1
Min. deposit $ 100
BTC spread 6 percent
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.

Bitcoin transactions are recorded in a public list called the blockchain, which makes it possible to track the movement of Bitcoins through the virtual economy. A single Bitcoin is now so valuable (each one is worth over 12,000 USD at the time of writing) that it is possible, and often necessary, to use fractions of Bitcoins in everyday trading and transactions. For this reason, Bitcoin is most commonly expressed in one of three denominations:

  • Bitcoin (BTC) – 1 full Bitcoin
  • MilliBitcoin (mBTC) – 1 thousandth of a BTC
  • MicroBitcoin (uBTC) – 1 millionth of a BTC

It is also common to hear those who work with Bitcoins on a daily basis refer to satoshis. The satoshi is currently the smallest unit of the Bitcoin currency recorded on the blockchain. It is a one hundred millionth of a single bitcoin (0.00000001 BTC). The unit is named after the somewhat mysterious original creator of Bitcoin, Satoshi Nakamoto.

A brief history of Bitcoin

Bitcoin was first created in 2009 by someone known as Satoshi Nakamoto, whose true identity has never been confirmed and who may be an individual or group of individuals. What Bitcoin was, how it was supposed to function and how the blockchain network would work was all laid out in a 2008 white paper called Bitcoin: A Peer-to-Peer Electronic Cash System, published under the name Satoshi Nakamoto. The first recorded purchase of goods made with Bitcoin was in May 2010. It was a purchase of two pizzas at a cost of 10,000 BTC. At that point, one Bitcoin was worth less than one US cent.

Bitcoin slowly increased in value. It reached parity with the US dollar in early 2011, and by July of that year, it reached a value of 31.00 USD before sharply dropping again to just 2.00 USD by the end of the year. Since then, Bitcoin has fluctuated wildly, reaching a high of 18,000 USD in December 2017. The currency has continued to show a lot of volatility but was valued at over 12,000 USD in June 2019. Bitcoin has now become an accepted, if still relatively uncommon, way to pay for goods and services and is now a commonly traded currency on international exchanges. It has also paved the way for other digital currencies that work in similar ways, with over 1,000 coins now on the market.

Bitcoin

How do you acquire Bitcoin?

There are a few different ways that individuals and companies can acquire Bitcoin. You can buy Bitcoin on online exchanges using ‘real’ money, also known as fiat currency. Fiat currency is basically any currency that is issued by a national government. It is usually regulated and controlled by the central bank of the country in which it is legal tender. You can also, of course, buy Bitcoin using other digital currencies, and many traders specialising in cryptocurrencies may well trade different digital currencies against one another, speculating on the rise and fall of prices to potentially make a profit.

It is also possible to acquire Bitcoin by selling something online and accepting payment in Bitcoin. As already mentioned, some online retailers will accept Bitcoin for a wide variety of goods and services. There are even online casinos where you can gamble with Bitcoin.

Lastly, Bitcoin can be created, or ‘mined.’ Mining for Bitcoin is not easy, but it is the backbone of the Bitcoin network as Bitcoin miners provide security and confirm Bitcoin transactions across the network. Bitcoin miners use powerful, specialised computers to solve complex problems and chain together blocks of transactions (thus the term ‘blockchain’ for the process of recording Bitcoin transactions across the world wide web). Bitcoin miners are rewarded for their work with newly created Bitcoins. This process of mining for Bitcoin is a complex and difficult one and is certainly not the easiest way to acquire digital currency.

What is the difference between Bitcoin and Bitcoin Cash?

You may have noted that many online brokers state that you can trade with them using both Bitcoin and Bitcoin Cash. Bitcoin Cash was developed in 2017 by Bitcoin miners and developers who were concerned that Bitcoin itself had various limitations, specifically related to scalability.

In practice, there is very little difference between using Bitcoin or Bitcoin Cash. Bitcoin Cash (BCH) has its own blockchain and is created through mining, just like Bitcoin. However, the technological differences between the two means that Bitcoin Cash allows for more transactions per second, which generally means faster transfer processing times and lower transfer fees. Put simply, a Bitcoin Cash “block” (in the blockchain) is significantly bigger than a Bitcoin block, making BCH faster, cheaper and more scalable.

Is Bitcoin legal?

There is some confusion over the legality of Bitcoin due to the fact that it is not legal tender in any country, but this does not mean it is illegal. It simply means that it is decentralised and unregulated. Unlike fiat currencies, which are legal tender, Bitcoin is not issued by a national government or controlled by a central bank. It is however legal in most countries to trade Bitcoin and also to mine it, use it as payment (where accepted) and send and receive it online.

There are a few countries that have made Bitcoin illegal, and others that have restricted it in some way. It is important to check the current legal status of Bitcoin in your country because some countries have a tendency to keep recategorising it. China, for example, has banned and unbanned Bitcoin over the years and also placed legal restrictions on its use. In some countries, there are no legal guidelines at all, meaning that Bitcoin is neither illegal nor officially legal. In many countries including the UK, the US, Australia and most of Europe, Bitcoin is, at the time of writing, completely legal and unrestricted, but as already mentioned, this could easily change.

How do you trade Bitcoin?

There are two main ways to trade Bitcoin. You can buy and sell the currency direct on cryptocurrency exchanges, of which there are many, with new ones emerging all the time. Alternatively, you can trade through a broker who provides cryptocurrencies among their tradable assets. This may allow you to use contracts for difference (CFDs) to speculate on the value of the currency without ever owning the underlying asset itself. CFDs are legal in many countries, but not all. You cannot trade CFDs in the US, for example.

How to trade Bitcoin

If you’ve used CFDs before when trading other financial assets, you will be aware of the advantages. However, you won’t get the leverage you would expect on other assets (and in particular other currencies) when trading Bitcoin and other cryptocurrencies. To start trading Bitcoin with a broker, you will need to open an account, verify details and deposit funds. If you are already registered and verified with an online broker, you may be able to start trading cryptocurrencies with them, but first check if this is the case. Not all online brokers offer digital currency trading as it is quite specialised.

Bitcoin exchanges are popular and work the same way as other financial exchanges, allowing traders to buy and sell Bitcoin to and from other members of the exchange. They generally operate 24 hours a day, 7 days a week, which is an advantage, bearing in mind how volatile Bitcoin can be. Setting up an account may also be quicker and less involved. Some exchanges do not require verification to start trading digital currencies as they would for other instruments. Every transaction is still, of course, recorded and stored publicly on the blockchain, so the sense of anonymity may be misleading, but the system is certainly quicker and easier to set up.

Why is Bitcoin valuable?

In short, Bitcoin is valuable because people believe it is. At first glance, this may seem odd and even worrying, but it is actually the way many other things (including fiat currencies) work. Things have value because we agree they do, whether that’s gold and silver coins or virtual ones. The paper money we exchange every day also only has value because we’ve all agreed that it does. Cryptocurrencies have value because people are willing to exchange them for goods, services, other currencies and cash.

Bitcoin is often seen as a risky investment because its value is not backed by a specific national government or underpinned, controlled and manipulated by a national bank as fiat currencies are. However, the unregulated nature of Bitcoin is exactly what makes this and other virtual currencies so appealing to many investors. Cryptocurrencies are seen as being outside the control of the financial industry, and their value is purely market-driven, allowing for some spectacular profits (and of course, equally significant losses).

Advantages of investing in Bitcoin

Many investors reasonably worry about safety and security, but Bitcoin fraud is less easily accomplished than you might imagine. Every transaction is recorded in the blockchain, so it's very difficult to fake or copy Bitcoins, or spend ones you don't own.

Bitcoin investments and transactions are relatively anonymous. Although every transaction is recorded in the blockchain, your details are private, and there is no way for anyone to know which account is yours unless you let them know. The unregulated nature of cryptocurrencies means there is no one tracking your data in order to market goods or services to you.

There is a certain amount of flexibility as well. Bitcoin can be easily and quickly electronically transferred across the globe, either to your own account or someone else’s. Money can be easily sent and received, and there is no need to be concerned with the sort of things that usually affect currency transfers such as exchange rates, cross-border limits or national holidays.

What is Bitcoin

Bitcoin allows a high level of control over your own transactions. There are no extra ‘hidden’ fees applied as may be the case with credit cards or other methods of online payments. High security also comes from the fact that transactions can be made without an exchange of bank details, credit card numbers or indeed any personal information at all. Transfers and transactions completed with Bitcoin are also usually fast and cheap.

Lastly, the volatility and frequent price movements of Bitcoin offer traders a big potential to make a profit, although this can, of course, go both ways. It’s true that some of those who invested heavily in Bitcoin in its infancy became the famed “Bitcoin millionaires.” Others have, of course, lost money through speculating on the currency. The currency’s volatility is related to the fact that there is a limited supply of coins, and at least 80% of available coins have already been mined, so there is an increasing demand for them. Many speculators believe that this means the price will go up and now is a good time to invest, but there is no guarantee this will happen.

Disadvantages of investing in Bitcoin

While digital currencies are more secure than some people assume, there are still some security issues with Bitcoin. It is possible to lose your Bitcoin wallet or delete your Bitcoins accidentally and lose them permanently. There have also been Bitcoin thefts from websites that allow digital currency owners to store Bitcoins remotely.

Bitcoin is highly volatile, as mentioned above, and its value has both increased and decreased significantly since it was created in 2009. For this reason, it is highly possible to lose money when trading Bitcoin, so many traders are understandably wary of trading it and will only invest what they can afford to lose. It should be noted, however, that trading most currencies (as well as other financial instruments such as stocks and shares) can be risky, especially for inexperienced traders.

1
of 29 Forex Broker Pepperstone
Currency pairs 70 Currencies
Max. Lever 1:30
Trading size Mini-Lot
Minimum deposit £ 200
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 29 Forex Broker GMO Trading
Currency pairs 60 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 250
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 29 Forex Broker XM
Currency pairs 55 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit $ 5
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
4
of 29 Forex Broker iTrader.com
Currency pairs 50 Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit £ 250
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 29 Forex Broker ETFinance
Currency pairs Currencies
Max. Lever 1:30
Trading size Micro-Lot
Minimum deposit £ 250
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
1
of 6 ETF Broker IG
ETFs w/ discount 1200
Custody fee 0 GBP
Min. deposit £ 0
Trading from 5 GBP
Go to Broker

74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

2
of 6 ETF Broker Fidelity
ETFs w/ discount 93
Custody fee 0 GBP
Min. deposit £ 2.500
Trading from 25 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 6 ETF Broker AJ Bell Youinvest
ETFs w/ discount
Custody fee 0 GBP
Min. deposit £ 0.00
Trading from 1,50 GBP
Go to IG
Risk warning: Capital can be lost. Terms and conditions apply.
4
of 6 ETF Broker Bestinvest
ETFs w/ discount 216
Custody fee 0.4% annually
Min. deposit £ 500
Trading from 0 GBP
Go to IG
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 6 ETF Broker DEGIRO
ETFs w/ discount 740
Custody fee 0 GBP
Min. deposit £ 0
Trading from 1,75 GBP + 0,004%
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
1
of 10 Stock Broker eToro
National fees £0.00
Custody fee £0.00
Intl. fees £0.00
Dep. Protection £50.000
Go to eToro
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 10 Stock Broker Interactive Investor
National fees £7.99
Custody fee £9.99 monthly
Intl. fees £7.99
Dep. Protection 50.000 GBP
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 10 Stock Broker IG Stock
National fees £ 8,00
Custody fee £ 8,00
Intl. fees 10 EUR
Dep. Protection 50,000 GBP
Go to Broker

74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

4
of 10 Stock Broker Calamatta Cuschieri
National fees £ 7.50
Custody fee £ 0.00
Intl. fees £ 7.50
Dep. Protection 100.000€
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 10 Stock Broker Hargreaves Lansdown
National fees 11,95 £
Custody fee 0,00 £
Intl. fees 11,95 £
Dep. Protection 50.000 £
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
1
of 29 CFD Broker Pepperstone
FTSE spread 1 Point
Dep. Protection £ 50.000
Max. Lever 1:30
Min. deposit £ 200
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 29 CFD Broker GMO Trading
FTSE spread 1 Point
Dep. Protection € 20.000
Max. Lever 1:30
Min. deposit $ 100
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 29 CFD Broker XM
FTSE spread 1.0 Point
Dep. Protection £ 50.000
Max. Lever 1:30
Min. deposit $ 5
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
4
of 29 CFD Broker iTrader
FTSE spread 1 Point
Dep. Protection € 20.000
Max. Lever 1:30
Min. deposit £ 250
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 29 CFD Broker ETFinance
FTSE spread 1 Point
Dep. Protection € 20.000
Max. Lever 1:30
Min. deposit $/€/£ 0
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
1
of 18 Crypto Broker eToro
Crypto currencies 10
Max. Lever 1:2
Min. deposit $ 200
BTC spread 1,50%
Go to eToro
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 18 Crypto Broker GMO Trading
Crypto currencies 33
Max. Lever 1:2
Min. deposit $ 100
BTC spread varied
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 18 Crypto Broker IQ Option
Crypto currencies 13
Max. Lever 1:1
Min. deposit $ 100
BTC spread 6 percent
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
4
of 18 Crypto Broker iTrader
Crypto currencies 33
Max. Lever 1:2
Min. deposit £ 250
BTC spread Floating
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 18 Crypto Broker ETFinance
Crypto currencies 5
Max. Lever 1:2
Min. deposit £ 250
BTC spread 1%
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
1
of 7 Social Trading Broker eToro
Underlying assets 866
Dep. Protection 50000
Min. deposit £ 200
Max. Lever 1:30
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 7 Social Trading Broker ZuluTrade
Underlying assets 200
Dep. Protection
Min. deposit £ 0
Max. Lever 1:30
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 7 Social Trading Broker Ayondo
Underlying assets 90
Dep. Protection 1000000
Min. deposit £ 2000
Max. Lever 1:30
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
4
of 7 Social Trading Broker Tradeo
Underlying assets 122
Dep. Protection 20000
Min. deposit £ 250
Max. Lever 1:30
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 7 Social Trading Broker FXTM
Underlying assets 247
Dep. Protection 20000
Min. deposit £ 10
Max. Lever 1:30
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
1
of 9 Spread Betting Broker City Index
FTSE spread 1 Point
Dep. Protection 50000
Max. Lever 1:20
Min. deposit £ 100
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
2
of 9 Spread Betting Broker FX Pro
FTSE spread 1.5 Points
Dep. Protection 50000
Max. Lever 1:30
Min. deposit £ 100
Go to Broker
Risk warning: Capital can be lost. Terms and conditions apply.
3
of 9 Spread Betting Broker IG
FTSE spread 1 Point
Dep. Protection 50.000
Max. Lever 1:30
Min. deposit £ 0
Go to Broker

74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

4
of 9 Spread Betting Broker Core Spreads
FTSE spread 0.8 Points
Dep. Protection 50000
Max. Lever 1:30
Min. deposit £ 10
Go to IG
Risk warning: Capital can be lost. Terms and conditions apply.
5
of 9 Spread Betting Broker OANDA
FTSE spread 1 Point
Dep. Protection 50000
Max. Lever 1:30
Min. deposit £ 0
Go to IG
Risk warning: Capital can be lost. Terms and conditions apply.

Bitcoin is completely unregulated. While this is something that excites the risk-takers, it’s another reason the risk-averse should steer clear. There is no bank or government that will step in to manipulate Bitcoin if it crashes: no quantitative easing or any of the other measures that authorities take to control currency fluctuations. There is no national or international authority that has a vested interest in keeping the currency afloat. Bitcoin, like all cryptocurrencies, carries unusual and complex risks as well as opportunities.

Bitcoin is still developing. Many investors feel that there are features of Bitcoin that need to be improved, specifically in terms of making the currency more accessible, more stable and more widely acceptable by businesses and other entities. Bitcoin is still evolving, and while it might be the old man of cryptocurrencies, it is still really in its infancy at barely ten years old and likely has some growing, changing and evolving to do before it reaches its full and final form.

In spite of original speculation, Bitcoin has never become the handy cash alternative it was intended to be. The businesses and websites that quote prices in Bitcoin and readily accept payments in the currency are still few and far between. The development of online payment systems such as PayPal and Neteller has probably reduced the need for a low-cost, easy-to-transfer currency that needs minimal personal information to function as that’s very similar to what these systems aim to do. While Bitcoin is still potentially an interesting asset to trade and profit from, being able to easily buy goods and services online is no longer a big incentive for Bitcoin investors.

Interested in learning more about cryptocurrency trading? Check out our extensive archive of articles on digital currencies.