Basic concepts — Bitcoin
Welcome cryptonauts, this is a translation of my first Spanish article I published on Medium. It’s a simple introduction to Bitcoin, not an in-depth technical kind of intro, but deep enough so you can understand the basic functionality of blockchains.
Key points are:
- What is Bitcoin?
- Decentralization explained.
- Important things to understand.
- Scams.
- How to avoid scams?
- How to become rich?
- Plan B.
- Wallets
- Hardware wallets.
- Software wallets.
- Cefi wallets.
What is Bitcoin?
Bitcoin is called both the cryptocurrency and the blockchain in which it is stored.
And so what is a blockchain?
A blockchain is basically a ledger, which in the case of Bitcoin, is public. In it are all the Bitcoin transactions since its creation.
The great benefit of blockchain technology is its high security due to the cryptological process that it entails.
All the information that you want to keep, in our case transactions, is grouped into blocks to which the old and new hash are added later.
The hash is basically a number that is added to each block that meets certain requirements, when it is encrypted. It is not important for us to know how the encryption process works, so let’s not complicate ourselves and continue.
As mentioned before, the hash of the old block is attached to the new block, causing any attempt to change past transactions to cause errors in the rest of the chain, prohibiting an “illegitimate” modification from taking place.
Decentralization explained
Another key element of Bitcoin is its decentralized operation, which, unlike a central entity, does not control which users can use the network, the amounts they send, and does not exercise any kind of discrimination that could occur in the traditional system.
In addition to allowing more equal access, decentralization implies that transaction confirmations are not concentrated in a small number of entities whose interests may interfere with the continuity of the blockchain. In this way, people and companies distributed throughout the world control and verify that the work of each node is due.
Important things to understand
So, in short, access is free and only requires a device with an Internet connection; by the nature of the system, anyone can have absolute control over their funds and security is one of the best in the world.
Even so, we must bear in mind that it is a complex system and does not “protect” new users. If you don’t know what you’re doing, you could lose everything.
Also whatever you do on the blockchain, it will be publicly accessible and visible to everyone. If you’ve ever heard about Bitcoin being used by criminals due to its anonymity, you couldn’t be more wrong. Every single transaction on the blockchains is fully traceable and there are even ways to set alarms for when a wallet makes a transaction.
Regardless of the security and operation of the blockchain, another obvious element to consider is the volatility of the currency. We will talk about this in detail in the next video.
Finally, be aware that the blockchain is unforgiving. Making mistakes when transferring funds will most likely end with you losing your Bitcoin.
Scams
Now we will make a mention of scams.
The typical, or more common one, is when a tweet from famous people goes viral saying that for whatever reason, they are going to give BTC, ETH or whatever, to their most loyal followers or to the first 100 people, to say a number, who send their coins.
If not, they promise to double, triple, etc. your funds and it will most likely look like the real thing. Since they copy legitimate web pages or create new ones with a lot of aesthetic work to simulate what would be done if it were real.
It is always for a limited time, or limited amount, or limited number of people and is always false. Don’t fall for these lies.
How to avoid scams?
The ways to avoid these scams are simple:
Always, and I mean always, you have to confirm that “gift” by consulting official social media accounts of the entities involved.
In 2020 there was a Twitter hack where many “celebrities” posted that they were going to give away cryptocurrencies; it was clearly not the case, but even thought the 18-year-old boy managed to hack one of the largest social networks in the world, he was arrested for trying to withdraw the stolen Bitcoin through a centralized exchange with KYC.
Those are the downsides for criminals on public blockchains like Bitcoin and Ethereum, there is no anonymity (at least not using their normal currencies, I am not going to go into detail about ways to avoid it because it is none of our business as we are not looking to do anything illegal with our funds).
Other recurring scams occur on pages that pretend to be known official portals of the crypto world. One of the best known pages is Medium itself, and consequently many scammers copy its format, create a page with a similar name and try to impersonate official entities.
An easy way to find out if what you’re are reading is real is to trying to navigate the site, not only to the parts they indicate, but the entire site. Also google the official page and once inside look for the article you were reading and compare the links to confirm that it is legitimate.
Finally, and this would be a last resort, pass your query to the social networks of both the entities and other people in the environment to know if it is real or not. The ideal is to wait for a confirmation from the official entity, but if hundreds of users already agree that it is a scam, be much more cautious or directly do not get involved in the least.
On the other hand, if a few users say it is real, don’t take it as the truth. Keep confirming with more users and always check with the official communication channels.
I don’t want to spend much more time talking about this but I think you understand what I’m going for, be cautious, think and doubt everything you see.
How to become rich?
First we need a Delorean that has a flux capacitor capable of generating 1.21 gigawatts!
The End.
No?
Well, seriously, the reality is that you have to roll up your sleeves and do a lot of research on the cryptocurrencies in which you are going to invest. In this introductory article we talk about Bitcoin only, but surely you have also heard that there are thousands of different currencies and dozens of blockchains as well. Among them is Ethereum, one of the most prominent blockchains in the space and in my opinion the most successful in developing a financial ecosystem to date.
Be careful, the possibility of getting rich quick exists, but it involves such a great risk that it is not worth it; it ends up being more like a game of roulette than investing or saving money. And even if you have deep pockets, you just need one bad bet to lose it all.
One recommendation that you are going to hear all the time is to DCA — Dollar Cost Averaging.
What does this mean?
Buying small amounts continuously. Don’t try to predict the market, neither on the way up or down; also don’t be tempted to buy a currency that is going up enormously because if you are seeing impressive numbers… you are already late.
Invest in currencies/coins/tokens that you have already researched, with solid fundamentals behind it. You do not usually associate fundamentals with cryptocurrencies because you think about volatility and asume that they are not developed to achieve a specific goal.
That might have been the case until a few years ago, but we see the opposite by looking at the financial and cultural ecosystems that formed on Ethereum.
New ventures appear left and right, developing increasingly efficient solutions for day-to-day problems and inconveniences or simply to offer services that traditional banks already provide but applied on the blockchain. Aave, Compound, Uniswap, Synthetix, Unibright, etc.
The projects are there, it is up to us to find them.
Wallets
Well, going back to the basics a bit, let’s talk about wallets, aka where we keep our cryptocurrencies.
They can be separated into two large groups, but I also took the liberty of adding a third one for clarification.
- Hardware wallets
- Software wallets
- CeFi / Hybrid wallets
Hardware wallets
Firstly, there are hardware wallets or physical wallets, aka cold wallets. They are by far the safest way to keep your cryptocurrencies currently.
They are small devices that are specifically built to store cryptocurrencies behind a layer of encryption (search public and private keys for more info!).
They are called cold wallets because they can only be interacted with when they are connected to a compatible device, the rest of the time they are off.
Clarification, they do not need to be connected to deposit cryptos. But we are not going to be able extract funds without having it physically in our hands.
Software wallets
Secondly, there are software wallets or hot wallets, these are wallets programmed for computers or cell phones, that is, applications or plug-ins for browsers.
They are not considered as secure as the physical wallets we previously described, as most of them are constantly connected to the internet. Cases in which someone could steal your wallet funds can range from hacking to personal carelessness.
The biggest risk in my opinion, would be to not aware of accepting infinite release of funds for a random DeFi application.
But we’ll talk about this when we get into Ethereum… believe me, if Bitcoin seems like a world of new things to you, Ethereum is a galaxy.
Beyond this, why would you prefer a software wallet over a physical one?
Most importantly they are free, also they allow you to transfer your coins more quickly than hardware ones, allowing those who do not necessarily want to save or HODL a particular crypto, to buy and sell their BTC more quickly if they like it.
CeFi / Hybrid wallets
And finally, we reach CeFi.
Why was adding this category relevant to me?
Because we need to make a big clarification about it.
The wallets we named before are going to give us a security phrase that is unique and irreplaceable. Usually they’re are either 12 or 24 random words that will allow access to ANY person who has them.
Yes, if someone in Thailand has your secret words he can empty your wallet in 2 seconds. And the opposite can also happen, if you forget these words you can lose access to your wallet forever.
It’s CRITICAL that you NEVER store these words on digital media. The best way to keep them is to have them written down on paper or memorize them (although it is very risky to just depend on memory). You could even write them in a metal sheet.
What does this have to do with centralized companies?
That all of them are in control of your secret phrase.
For some people it’s a good thing, for others it is death itself. It will be up to you to analyze how much you would trust a company that they are not going to disappear with all your crypto.
At a security level, most large crypto companies use a combination of hot and cold wallets. The idea is to have the bulk of funds secured in physical wallets and the daily volume in software wallets to have a faster response to customer requests.
Even so, many exchanges, for example, are not so cautious in terms of security, so I recommend you only leave the crypto you want to trade in them and nothing else.
Keep the bulk of your funds in a wallet that you consider safe. Either because it is from CeFi but it is insured, or because you have your own security phrase.
Thank you for reading!
If you have any comments or thoughts please let me know, I enjoy learning and discussing in a constructive manner!
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