When Bitcoin was first introduced, it wasn’t straightforward for people to understand. Now that we better understand the technology and what it can do, there’s no need to be intimidated by phrases like “hash rate” or “blockchain”. This Bitcoin for Beginners guide is an awesome starting point to understand Bitcoin better. Going over the Bitcoin dictionary will provide knowledge and better confidence to start investing in Bitcoin! To further dive into the rabbit hole, check out my list of recommended Bitcoin podcasts to continue your learning journey!
Bitcoin for Beginners: Basic Terms
Who is Satoshi Nakamoto?
Satoshi Nakamoto is a paper name for the person or people who designed Bitcoin and created its original reference implementation. The name is considered a legend in the Bitcoin community.
Satoshi’s identity has been the subject of speculation, as well as investigations by journalists and security researchers. However, it’s unclear who the creator of Bitcoin is. People have been trying to figure this out for years, and it sounds like journalists are now taking a crack at it too!
In 2008, he released Bitcoin’s design paper to a cryptography mailing list. He also published an English language translation of this paper in 2009 on SourceForge. After early disagreements about increasing transaction fees or changing the block size limit, he left his involvement with Bitcoin in 2010.
What is Proof of Work?
The term Proof of Work has been coined by Bitcoin founder Satoshi Nakamoto. A proof of work is, simply put, is a piece of data that is difficult to produce but easy for others to verify. Bitcoin uses the Hashcash proof of work system, and to generate it, one must perform a lot of trial and error before getting lucky enough to find a valid one. When Bitcoin Miners want to add a new block, they must find a Hash that would match the block with enough trailing zeros. This hash is very difficult to find but easily verifiable by others.
Why is Bitcoin limited to 21 Million Coins?
The reason Bitcoin is capped at 21 Million is to create hard money that has a finite limit. Generally speaking, money that is not scarce will eventually inflate and lose value. Having a limited amount of coins makes every coin’s value eventually rise without depreciating over time, unlike fiat currencies. There’s no single answer to why 21 million was chosen as the limit. Satoshi Nakamoto probably chose the limit quite arbitrarily.
What is Fiat Currency?
A Fiat currency is money that is not backed by gold or other assets. This refers to money that governments create out of thin air based on their confidence in the system. Basically, it’s all the money we use, dollars, Euro and more. It is money governments and print endlessly and inflates the market.
The term fiat derives from the Latin word fiat, meaning “let it be done”[used in the sense of an order, decree or resolution. (wikipedia.org)
What is Sound Money
Sound Money refers to currencies with limited supply without a way to generate arbitrarily more of them. Historically Gold and Silver acted as sound money until the 20th century, where the dollar’s fixation on gold was removed.
The concept of sound money has been around for centuries, but it was in the nineteenth century when most countries adopted the gold standard. Nowadays, it’s become commonly associated with commodity money or hard currency.
Bitcoin is considered Sound Money as there’s a limited supply of 21 Million Bitcoins and no way of generating more.
What is Debasement of Money?
Debasement means lowering the value of a currency. Historically, debasing currencies meant mixing base metals with precious metal coins to lower their weight and lower their value.
Today, governments can print more money when they don’t have enough output to keep up with inflation (increasing prices) or need more money for some other reason.
The government will print out new bills, which process is called “debasing.” When printing new bills, it reduces the worth of the existing money in the market, causing inflation and eventually can cause market instabilities.
What is the Falling down the Bitcoin Rabbit Hole?
Falling down the Bitcoin Rabbithole is a term used to describe people discovering Bitcoin, later being hooked to infinitely many other related topics. When you start researching Bitcoin, you learn about philosophy, technology, Blockchain, and more. You learn about the usage of money, warm and cold wallets, and more. There is so many surrounding Bitcoin that touchpoints from different aspects of life. You’re hooked after reading about the benefits, so you keep reading more and more about them.
What does Don’t Trust, Verify mean?
The Don’t Trust, Verify slogan was popularized by Bitcoin and cryptocurrency communities. It’s a meme that has been going around in various forms for a few years now. It is not just important to use this as an idea for finances, but also with other facets of your life.
Basically, it means you should never trust the information presented to you without verifying it yourself. Verify the sources, read for yourselves, make sure you understand. Do not take anything for granted until you verify it yourself.
Lots of misinformation surrounds the Bitcoin ecosystem. Many forces are driving the market. Some are good, some are bad. Be sure always to verify, learn and research before trusting.
The Don’t Trust, Verify slogan also refers to the Bitcoin technology itself. The blockchain is a system that’s designed not to trust its peers. Many cryptographic mechanisms are built into the algorithm to ensure that information is verified and that no single node can introduce fraud into the system. Members of the network work together to verify transactions and ensure that cryptography guards the system.
What is a Block Reward?
A Block reward is the only way to get “new” bitcoins and is relevant for Bitcoin miners. These are the new bitcoins that enter the cycle when a new block is added to the blockchain.
The block reward is basically the additional Bitcoins miner nodes receive when they successfully mine a node or add a node to the chain. It is the “payment” for taking part in the Blockchain network and enabling transactions. The Block reward is present at the beginning of each complete and signed block to which a valid hash was found. It is important to note that block reward amount decreases over time. The reward is halved every 210,000 blocks, approximately every 4 years, and currently stands at 6.25 BTC per block.
What is Network Difficulty?
The bitcoin network difficulty is the amount of time required to complete a block hash. When miner nodes try to find the block hash, they need to find a number that starts the block’s hash with zeros. This number of leading zeros changes periodically to maintain a 10 minute block period on average; it’s a mechanism to keep the network balanced, even though some chains have shorter block periods.
What is a Seed Phrase
A seed phrase is a sequence of 12 or 24 words that represents the key to your wallet. These words are the only proof and key to open your account on the Blockchain if you lose access. Protect these words, both physically and online, to make sure you never lose them!
What is a HODL and who are Hodlers?
HODL is a misspelling of hold that has become popular in the crypto community. This term was coined by someone on the Internet forum bitcointalk.org and can be attributed to drunkenness or just being sloppy with spelling (as often happens online).
It became more relevant after the run-up of bitcoin prices in late 2017 when many people bought BTC at high prices and could not sell them due to lack of liquidity in their local market. They had no choice but to keep holding onto them until they sold off for much higher than what they paid for it initially.
What is a Bitcoin Exchange?
A Bitcoin exchange is a digital marketplace where traders can buy and sell Bitcoins. Exchanges allow you to buy bitcoin from other people, buy bitcoin with fiat currency and even buy bitcoin using your credit cards.
Once you buy bitcoin on an exchange, it is stored in a wallet in the exchange. It is recommended to withdraw the coins from the exchange and store them in a cold wallet for safety (in case the exchange is hacked)
A recommended exchange to start with is Binance or Kraken, one of the world’s biggest and leading bitcoin and crypto exchanges.
What is the Bitcoin Testnet?
The Bitcoin Testnet is a blockchain used to test new features before added to the main bitcoin network. Additionally, it’s a network to test mock transactions with unreal bitcoins.
Developers and other interested parties need to have an environment to test new changes before being released onto the live bitcoin network. It also provides a valuable tool for testing stuff without risking real money.
You cannot exchange Testnet coins with actual bitcoins. However, many of them have value in themselves. They allow people to try out different experimental configurations on their computers before committing these settings on the production system, which may cause irreversible damages if something goes wrong (and real money going to waste)
What is a Bitcoin Faucet?
Bitcoin faucets are websites that dispense bitcoins (usually a few hundred Satoshis each) for simple tasks like solving captchas and watching short videos. These were early attempts at spreading bitcoin’s knowledge and to provide a method of earning bitcoin, which was harder than today at the time.
When developing over the bitcoin TestNet, you can find Faucets to help you dummy fund your test wallet.
What is the Bitcoin Mempool?
What is the Bitcoin Mempool?
Bitcoin transactions are not instant and require at least 10 minutes to confirm. The Bitcoin Memory Pool, or Bitcoin Mempool, is the place where these pending transactions reside before being processed by miners. It has grown to more than 120GB, which means that it could take hours for your transaction to be confirmed if you set the transaction fees too low. The minimal transaction feel is 1 satoshi/byte, but varies as miners pick the transactions they prefer to process next by the fees attached to it.
What is a Bitcoin Full Node?
A Bitcoin Full Node allows its operator to access, validate, and relay transactions on the bitcoin network without trusting any third-party services or other nodes. A full node is connected to other full nodes in the network, broadcasting blocks and transactions. Before transactions are added to the Bitcoin Mempool to be grouped into blocks (by miners or full node as well), they help to validate incoming (TX) transactions. A new transaction will reach a full node, which will validate its structure and correctness according to the source code. Upon validation, it will forward it to the mempool where, where it will later be composed into a block and added to the blockchain.
What is a Bitcoin Mining Node?
A bitcoin mining node is a node connected to the block which can only create blocks, but not validate transactions. These nodes have reduced capabilities, and their sole purpose is to find hashes, create blocks and gain rewards.
What is the Average Bitcoin Transaction Size?
The average transaction size is approximately 250 Bytes but varies by the transaction type, size, and the number of input transactions constructing it. Read more about different transaction sizes in the blockchain.
What is On Chain Analysis?
On-Chain Analysis is the art and science of analyzing blocks on the blockchain, understanding transaction sizes, trends, and more. It can be used as metrics to understand trends such as where highs and lows for the bitcoin price, supply and demand, and the bitcoin network’s overall behavior.
On-chain analysis can provide indicators for trading and insights that are not visible elsewhere. One of the top on-chain analysts is Willy Woo, who provides valuable charts and models for predicting current and future trends.
What are SegWit Transactions?
SegWit Transactions are one of the most important scaling solution for Bitcoin. It essentially moves the digital signature data from a group of blocks to another, freeing up space and speeding up processing.
The problem with traditional bitcoin transactions is that they take up too much room in each block because all of their information is stored within it. This makes it harder for miners to include any other transaction into these blocks, which means users have to wait longer before getting confirmed transactions and paying less in fees as a result.
Because segwit gets rid of this issue by moving signature data outside the actual block, more than one transaction can now fit inside each individual block – meaning there’s more space for everyone!