How Bitcoin Works, Mining & Creating a Wallet

Hello there, and congratulations! If you’re reading this article you are in the process of taking the first step toward buying, selling, and saving the first and largest cryptocurrency in the world, bitcoin. I’m going to divide this article into two sections. If you already know what bitcoin is and you are ready to get started, then feel free to skip to the second section. If this is your first time using the currency, then I highly suggest reading the full article. Understanding what you are working with is just as important as knowing how to work with it.

What is Bitcoin?

Bitcoin is the world’s first cryptocurrency. A cryptocurrency is something that cannot be held in one’s hand. As the name suggests, it is based on cryptography and exists entirely on the Internet. You cannot walk down to the store and hand over 1 BTC and get some change in return. What you can do however, is use it to buy and sell online, gamble, and invest. The currency was created in 2009 by a developer known by the pseudonym ‘Satoshi Nakamoto’.

Bitcoin first came into the world’s eye in early 2013, when the value spiked from $20 in February to $200 in April. The value plummeted almost immediately, hitting eighty dollars before balancing out around a hundred dollar value until October of 2013. In October, its value began to climb exponentially, going from a hundred dollars to well over a thousand in the space of a month. Since then, the cryptocurrency’s value has fluctuated wildly, gaining and losing hundreds of dollars in a single day. Many investors have made profit off its wild price swings.

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Bitcoin mining

The process of generating bitcoins, or ‘mining’ rewards users for securing the network. Your computer would solve complex algorithms to mine a block of a set number of BTC, which halves every 210,000 blocks mined. The network rules are such that the difficulty is adjusted to keep block production to roughly 1 block every 10 minutes. This means that as more miners are competing to solve a block, the harder it is to actually succeed.

Since it would be extremely difficult to mine all by yourself (solo mine), you can team up with other users through a group known as a pool. Any rewards your pool manages to receive will be divided amongst the users according to how much they contributed. Although you can use a standard graphics card, you will likely have to purchase a specialized mining device known as an ASIC for maximum profit.

Creating a wallet

A wallet, as you might guess, is a file containing your addresses and their private keys. For the purpose of this article then, I will be explaining two ways to store your bitcoins: online wallets and offline wallets.

The online exchange service that I use is coinbase.com. Signing up is extremely simple. You simply have to go to the site, and register your name and email address. You can link your bank account to purchase coins. Once you have done that, you can begin buying and selling. Remember, that this is almost the same as opening a bank account. Your information will be on file with them, and they will have access to your bitcoins in the same way a bank has has access to your money. If that scares you, then using an online wallet is not for you.

Using an offline wallet may be less convenient, but it certainly can be more secure. I recommend Bitcoin-QT, the official client created by Satoshi. It requires you to download the full blockchain, but it is still a good choice. It is widely used, and it contains only necessary features.

If you’re looking for something with more bells and whistles, you could try using Bitcoin Armory.  It allows for greater control over your wallet, with features such as ‘cold’ or offline storage.

So, now you have a wallet. What next? Well now you have to do something with it. Start small, invest maybe a few dollars or even just a few cents in bitcoin. Get a feel for the market you’re working with, and start finding important news articles on bitcoin. The advice given to new investors in the stock market applies here as well. Prices can vary wildly, and nothing is stable. Bitcoin is one of the most volatile investments you can make. Buy low and sell high, and if you want to try and have fun while making money check out some of the gambling sites we have reviewed here.