Bitcoin explained, in simple terms

Last update:  June 8, 2023

Basics

  1. What is Bitcoin?
  2. Why is Bitcoin in the news so much now?
  3. What's the point of Bitcoin?
  4. What can I do with Bitcoin?
  5. How do I buy Bitcoin?
  6. How do I spend my Bitcoin?
  7. How do I turn my Bitcoin back into normal money?

Problems

  1. Bitcoin risks: 40 separate risks and counting
  2. Legal issues
  3. Other Bitcoin problems
  1. General problems
    1. Risks and Legal issues listed above
    2. Tax hassles
    3. Transaction fees
    4. No automatic record of transactions
    5. Bitcoin uses horrific amounts of energy
    6. A massive amount of electronic waste
    7. Ransomware attacks on hospitals shut down emergency rooms
    8. Ransomware attacks on infrastructure
    9. Sextortion leads to suicides
    10. Enables sex trafficking, illegal drug sales, terrorism, and ransom demands
    11. Enables war?
    12. Made lots of white supremacists fabulously rich
    13. Encourages attacks on hardware manufacturers
    14. Much of the Bitcoin community is a cult
  1. Problems at exchanges
    1. Difficulty withdrawing or spending your coin
    2. Horrible websites
    3. Advertised interest rate not actually available
    4. Horrible customer service
    5. They want your bank login

Addresses, Wallets, and Passwords

  1. More about Bitcoin addresses
  2. Wallets, and where Bitcoin actually exists
  3. Why passwords can't be cracked

Other

  1. Other cryptocurrencies, abbreviations, and symbols
  2. Bitcoin jargon

What is Bitcoin?

Bitcoin is a new kind of money that exists only on the Internet.  You can't hold it in your hand like paper money or coins. 

Traditional money (such as U.S. dollars or British pounds) is issued by its respective governments.  Bitcoin isn't issued by anyone, it just exists.  An anonymous programmer wrote the software in 2008, and volunteer "miners" use their computers to run the network, and automatically receive some Bitcoins for doing so.  Anyone can download the Bitcoin program and run it on his/her computer, becoming a node (a point on a network).  The nodes all talk to each other to coordinate transactions.  There is no Bitcoin company, and no centralized authority that oversees the network.

So the world used to have just government money, and now it has government money plus Bitcoin.  Actually, we have government money and cryptocurrency ("crypto", for short), since Bitcoin isn't the only kind of electronic money around, it was merely the first, and still the most popular.  Other popular cryptos include Ethereum and Dogecoin, but there are thousands of other examples, although the overwhelming majority of them are unpopular and see little use.  In this article, most things I say about Bitcoin are true of cryptos in general.

Money issued by a government (and not backed by something like gold) is called fiat, and I'll refer to fiat in this article.


Why is Bitcoin in the news so much now?

  1. The price went up in 2021, by a lot.  Some people trade Bitcoin like stock, either day-trading it, or holding it long-term for appreciation.  In five months the price went up nearly 6x and a lot of people got rich.
  2. The price crashed in 2022, and people lost a ton of money.  In 2022, most Bitcoin investors were underwater (in the red) for their investments.
  3. Big companies started to buy it for appreciation, such as Tesla and institutional investors.  However, when Bitcoin crashed in 2022, corporate interest quickly cooled off.

What's the point of Bitcoin?

In my mind, there is no point.  Bitcoin seems to be a solution in search of a problem.  You can use it like money (because it is money) but normal money is way easier to use, and is typically a lot less risky.  Let's first take a look at the problems that Bitcoin supposedly solves.


Supposed advantages of Bitcoin

Bitcoin is often hyped as providing these solutions:

  1. Alternative to fiat (government-issued) money for making purchases.  TRUTH: Bitcoin is a lousy substitute for fiat for common transactions.  Unlike credit cards and PayPal, there's no buyer protection for payments made with Bitcoin, which is one of the reasons that scam sellers love it.  Also, you'll pay a transaction fee to send Bitcoin, currently $6 (June 2023), but it's been as high as $63. (YCharts)  At retail, payment processors can pool all the customers' payments together rather than send each transaction through the Bitcoin network, so the Bitcoin user won't get hit with a large fee, but there might still be a lower fee.  However, there's never a fee for paying for anything with cash, and rarely a fee for paying with a credit card, and when there is, it's usually not as high as Bitcoin's fee.
  2. As a "store of value", a way to store your assets long-term.  TRUTH: Good stores of value don't suddenly lose 75-80% of their value, as Bitcoin has done multiple times.  Price plummets with Bitcoin are fairly common:
    1. 80% from 2017-18
    2. 50% in March 2020
    3. 52% between April-July 2021
    4. 58% between 11/21 and 5/22
    5. 75% between 11/21 and 11/22

      The U.S. dollar has certainly never suffered a catastrophic plunge like that.  The stock market isn't considered a store of value, but even the stock market hasn't crashed as dramatically as Bitcoin, ever, either.  And as bad as Bitcoin crashes are, other cryptos have crashed even harder.  For example, Terra Luna lost 99% of its value in a single day and then became essentially worthless. (CNBC)  If you hold Bitcoin or other crypto, it might not lose value, or it might even appreciate—or you could lose your shirt.

  3. A way to make transactions anonymously.  TRUTH: Bitcoin isn't truly anonymous.  First of all, every transaction is visible to the whole world in the public ledger (called the blockchain).  The blockchain lists Bitcoin addresses and not the names of the buyers/sellers, but crypto sleuths (including those in the government) have had success in tracking down who the Bitcoin addresses belong to, and prosecuting accordingly when the Bitcoins have been used for illegal purposes (which is the normal reason for wanting to be anonymous).  Also, if you sign up for an account at a legitimate exchange, they'll require you to provide your name, address, social security number, and photo ID, which they'll verify.  Many Bitcoin ATMs require ID for any purchase/sale, and they certainly do if your purchase/sale is large enough.  Any method you could use to buy/sell anonymously typically means that you're inviting more risk, or a higher price, or both.
  4. A way to send money quickly.  TRUTH: Not always.  When I tried to send crypto from two different popular exchanges, the sites informed me that it would take four days to process.  Another site said they usually process within 48 hours, but that it could take up to seven days.  At a BTM, a typical wait to pick up your cash is less than 30 minutes, but a BTM owner told me he's seen it take a solid month.  By contrast, I can get cash instantly at an ATM, or for larger amounts, walk into my bank and withdraw it.  I could also send a bank wire a lot faster than some Bitcoin exchanges will process my transfer, although that will incur a wire fee.
  5. A way to send money without paying wire fees.  TRUTH: You have to pay a transaction fee to send Bitcoin.  (See #1, above.)  If you send through an exchange, the exchange may have their own fee on top of the transaction fee.  BlockFi charged a whopping $43 for a single Bitcoin send (before they went out of business, taking customers' money down with them).
  6. A way to avoid oppressive fiat money.  The biggest Bitcoin promoters are libertarian extremists who insist that government-issued money is evil and oppressive (somehow), and that Bitcoin will usher in a new era of economic freedom where all the children of the world will join hands and sing in peace and harmony (somehow).  I wish I were exaggerating.  Here's an excerpt of an article from Bitcoin Magazine from a typical deranged Bitcoin proponent, who denounces those who don't share his delusion of a Bitcoin utopia as idiots or evil, or both:
Very few people understand the enormous impact Consumer Bitcoin is going to have... and certainly, the list of selfish and ignorant bad actors listed above are either incapable of imagining it, and if not, are actively against it under orders to prop up the unethical, unsustainable, and evil fiat status quo.

Thankfully not all people are driven by fear of the new, or take their marching orders from violent psychopaths. This is manifestly clear in the case of El Salvador, the surprise market leader that is forging ahead fastest and most effectively to switch from the money of mass murder to the money of peace, “Bitcoin”.

Democracy created fiat. It is that fiat philosophy (created by a pedophile, John Maynard Keynes) that was a key factor in the ruin of the economies of the African continent. By adopting bitcoin, fiat will cease to have power over 1,404,827,471 people, setting them on a path to prosperity and proper order. Bitcoin has the power to defang the unnatural blood-sucking viper that injects poison into the economies of Africa and drains blood from the people.

What is “democracy”? Democracy is a coercive political system...Because millions of people have been brainwashed in government schools...they have been encouraged to misuse the word “democracy” as a synonym for everything good or anything that is beneficial....Sorry to shatter your mesmeric delusions, democracy lovers....Bitcoin is going to defund the State by absorbing and extinguishing all the fiat currency in the world, so that eventually the deluded slaves of democracy can vote all day and all night without the votes cast having any effect whatsoever. The libertarian society, protected and powered by Bitcoin, will not allow the violent, deluded, and sick devotees of democracy to wage war, steal money, or interfere with voluntary contracts and exchange.

Uh-huh.  And we notice that he accused a mainstream economist of being a pedophile because, of course.  You get the idea that he's about to tell you that Hillary Clinton is running a child sex ring in the basement of a pizza shop.


Actual advantages of Bitcoin

Though most of the promise of Bitcoin is just hype, there are actually a few advantages that Bitcoin (and other cryptos) could have over fiat money.

  1. Deposit to or withdraw money from online casinos.  Online gambling is illegal in most U.S. states, but enforcement is nearly non-existent so some casinos operate anyway.   In the states where online gambling is illegal, it's also illegal for banks to move gambling money, so they won't, so players have a hard time depositing or withdrawing money.  Bitcoin solves that problem, because it bypasses the banks.
  2. Accept payments from customers for small transaction fees.  Merchants have to pay around 3% to banks to process credit card transactions, but they can accept crypto payments for much less.  For example, BitPay charges a flat 1%.  The downside (for merchants) is that almost no customers want to pay with crypto.
  3. Savings accounts.  Crypto savings accounts pay around 6-12%, blowing banks out of the water.  However, they were available to new U.S. customers only briefly (part of 2021-22), with the feds telling companies in Feb. 2022 that they couldn't legally offer interest on crypto.  (U.S. customers were already earning interest were allowed to continue earning on their balances, but couldn't make further deposits.)  The bigger problem is that the accounts weren't/aren't FDIC-insured, the significance of which became clear when various crypto banks went bankrupt in 2022 (including Celsius, BlockFi, and CoinLoan), taking several billion dollars of customers' investments down the tubes with them.  Another one (Gemini) didn't go bankrupt but froze accounts so customers couldn't withdraw their money.  Many of the exchanges which offer savings accounts brag that they have their own private insurance, but what they usually don't tell you is that the insurance doesn't cover you as soon as the company loans out your coins to someone else and they're no longer held by your exchange.  Interest-bearing accounts are still available in other countries, but they're still not insured, and dealing with the crypto websites opens up a whole bunch of other problems.  Also, note that many companies (like Crypto and Nexo) essentially lie about the interest rates on their websites; once you create an account, the interest rates actually offered are much lower than advertised.  Crypto.com offered 4.5% on Bitcoin, or 6.5% of you buy 50,000 of their in-house CRO coins and stake them for 3 months, so I dutifully did so, but even after that, the app still offered only the 4.5% on Bitcoin, not 6.5, and unlike banks, they don't have a customer service phone number you can call, and email-based support ranges from glacial to incompetent.  And at Nexo, USD withdrawal time is supposedly five business days, but I've now been waiting nearly two weeks for my withdrawal.


What can I do with Bitcoin?

All the things you can do with normal money you can do with Bitcoin, just with lots more hassle and risk.

  1. You can buy stuff with it.  But while everyone accepts normal money, only a tiny handful of merchants accept Bitcoin, there's a transaction fee (see above), making it impractical for all except the largest purchases, and there's no buyer protection like when you use a credit card or PayPal.
  2. You can get paid with it.  That is, someone who owes you money can pay you in Bitcoin.  Of course, you first have to find someone willing to pay you in Bitcoin instead of regular money.  Good luck with that.  And since you can't easily spend the Bitcoin, you'll want to sell it to convert it to normal money.  That's fraught with hassle and risk, as we'll see below.  Note that one advantage to you of your getting paid with Bitcoin instead of credit card, PayPal, or through eBay is that your buyer won't be able to dispute the transaction and get his/her money back over your objections.  But of course that's another reason scammer-sellers love Bitcoin.
  3. You can send or receive large amounts without a bank.  This can often be as fast as instant, but not always.  The cost is also often cheaper than the wire fee at a bank, but not always.  However, the Bitcoin transaction fee is often about as much as the wire fee at a bank.  Though for domestic payments, if you're willing to wait a few days for your payment to arrive at the recipient (or to get paid yourself by someone else), the Bill Pay service that your bank offers is free.
  4. You can trade it like stocks, trying to buy low and sell high.  But Bitcoin is volatile.  You could make a killing or you might lose it all.
  5. You can open a Savings Account and get interest, if you're outside the U.S.  But it's extremely risky, see above.
  6. You can use it to deposit money into unlicensed online casinos (and to receive your winnings).  See above.


How do I buy Bitcoin?

There are many ways to buy Bitcoin:


On an exchange

An exchange is a company that lets you exchange your money for something else, like another kind of money (such as Bitcoin), or stocks.  A company's exchange is operated as either a website, or a mobile app, or both.


Crypto exchanges have been hacked numerous times, with the hackers stealing the customers' bitcoins.  Unlike accounts at real banks, Bitcoin isn't FDIC insured.  You're at risk of hackers stealing your coins, or the exchange going out of business, or the founders of the exchange taking the money and running (aka, an "exit scam").

An account at an exchange is called a hosted wallet.  The exchange handles the addresses for your Bitcoins behind the scenes, and you never see the true passwords (keys) to your coins, just the password to your account at the exchange.  You're trusting the exchange to handle your coins and to let you withdraw your value at some future date.  Bitcoin purists note this with their famous battle cry, "Not your keys, not your coins!", meaning that by using an exchange, your assets are vulnerable to all the things mentioned above (exchange getting hacked, going out of business, or the owners themselves stealing your coins).  That's true, but buying and selling Bitcoin without an account on an instant exchange is either a big hassle, or expensive, or opens you up to other kinds of risks even larger than you'd have at an exchange, or some combination of the above.  And you certainly can't earn interest on your coins without an online account, which is almost the only thing that Bitcoin is truly useful for.  So, using an exchange or not using an exchange, is like being damned if you do, or damned if you don't.

Exchanges come in two flavors:  Instant Exchanges and Peer-to-Peer (P2P) Exchanges.

Instant exchanges


An instant exchange (my term) is easy because the exchange finds sellers for you.  All you have to do is click or tap "Buy".  The fee is typically less than 1%, and depends on which exchange you use and how much you're buying.  To buy:

  1. Sign up for an account at an exchange like Cash app, Bitstamp, Coinbase, Binance, Bittrex.
  2. Transfer normal money from your bank account to your exchange account.  (You can often use a credit card, but that might entail an extra ~3% fee.)
  3. Click or tap to purchase Bitcoin with your normal money.

Peer-to-peer exchanges

Sites like Paxful are peer-to-peer exchanges, meaning that they're a forum for hooking up buyers and sellers (like eBay or craigslist).  The main pluses are that for buying, there's usually no fee, and you can often get a better price than on an instant exchange.  The downside is that it's a hassle.  The seller you inquire to might not reply right away, or ever.  The seller will probably require you to walk into a branch of his/her bank and make a cash deposit, or send a bank wire.  (Few sellers accept easy methods like PayPal or credit cards, because scammers would buy with those methods and then easily reverse the payment after receiving the Bitcoin.)  While the peer-to-peer exchanges offer escrow protection, it's still easy to get scammed.


At a Bitcoin-ATM

At ATM that lets you buy (or sell) Bitcoin is called a BTM.  All major cities have them, as well as some smaller ones.  Most charge pretty hefty fees.  The lowest fee I've seen for buying is 4%.  The one at the convenience store down the street from me charges 11%.


To get Bitcoin from a BTM, you'll need a Bitcoin "wallet" to receive and hold the Bitcoin.  The easiest wallet is a mobile app like Coinomi.  We'll cover wallets in more detail below.


Buy from someone you know

There's a good chance you know someone who has Bitcoin.  Maybe s/he will sell you some.  To receive it, you'll need a wallet, like the Coinomi mobile app.



How do I spend my Bitcoin?

Before I tell you how, let me first advise to think twice before you buy anything with Bitcoin.
  1. There is absolutely no buyer protection.  If you don't get your merchandise, or it's not as advertised, and the merchant won't help you, then you're out of luck.  Your credit card, eBay, and PayPal all offer buyer protection.  Bitcoin doesn't.
  2. Every purchase you make is a taxable event.  You have to keep track of every single purchase you make with Bitcoin, and report every single purchase on your federal income tax return.  It's not as simple as just listing the purchases, either, you have to match up each purchase with a specific Bitcoin buy.  It's complicated.
  3. It's either slow or expensive, or both.  If the merchant uses a payment processor (a company that takes your Bitcoin and gives the merchant cash), then the transaction is instant (or nearly so) but you'll likely pay an extra fee for that service.  If you send Bitcoin to the merchant directly, then there might be a delay of some hours before the merchant gets it, and you'll pay a transaction fee to the Bitcoin network, which is about $22 as I write this, making Bitcoin impractical for small purchases.
So here's how to spend your Bitcoin.  First, find a merchant who's willing to accept Bitcoin as payment.  Good luck with that.  When you're ready to check out (either in a physical store or online), the merchant will give you a Bitcoin address to send your payment to.  It's similar to having a PayPal or Venmo address, or bank account number, for receiving payments.  The address is long and looks something like this: 19EkFu78tcs61AZ45YTsyhWtXpP9h3HKkU.  That would be a pain to type (and easy to misspell), so addresses are usually displayed as a QR code that you can scan with your phone.

How do I turn my Bitcoin back into normal money?

All the places where you can buy Bitcoin (see above), let you sell your Bitcoin for normal money.
  1. Instant Exchange
  2. Peer-to-Peer Exchange
  3. BTM
  4. Sell to someone you know

Instant Exchange

This is the easiest way to sell your Bitcoin, and the safest, unless your exchange gets hacked.  With a few clicks or taps you can sell your Bitcoin for normal money, then transfer that money to your bank account.


Peer to Peer (P2P) Exchange

Besides being a hassle, selling Bitcoin exposes you to potential scams.  Every single person I've met who's traded an appreciable amount of Bitcoin on the P2P exchanges has been scammed at least once, losing their Bitcoin in the process, including me.  The most common scam is simple:  After the buyer pays you (by depositing cash into your bank account, or wiring you money, or sending by PayPal, etc.), you send the Bitcoins to the buyer, and then the buyer reverses the payment.  At that point the buyer has your Bitcoins and his money, and you have neither.  Every single payment method can be reversed, in at least some circumstances.  Even cash deposits.  Even bank wires.  I sold $36,200 in Bitcoin by bank wire because all the websites said that was the safest way to receive payment, because bank wires are final, stone-cold irreversible.  Well, as I found out, they're not:  My buyer easily got Chase to reverse the wire.  I'm out my Bitcoins and the cash.  A lawyer advised that I could sue Chase, but legal fees would cost $40,000, more than the amount I'm trying to recover.  Oh, before seizing my money, Chase froze my account for two weeks (denying me access to all my money), then seized the wire payment, then unceremoniously closed my account.


BTM

BTM's typically charge at least a 4% fee, usually more.  The BTM will give you an address to send your Bitcoin to, in the form of a QR code.  Scan it with your phone, and send the Bitcoin (from your account at an exchange, or from a mobile app, whichever your Bitcoin is in).  The BTM will spit out a receipt with a claim code.  Take it and walk away.  Now you get to wait for the transaction to be confirmed on the network.  It usually happens in less than 30 minutes but it could take hours (or if you're super unlucky, weeks; one BTM owner said he saw it take up to a month once).  Once the transaction is confirmed on the network, you'll get a text message.  Head back to the BTM, enter the claim code, and it'll spit out your cash.