How to Buy Bitcoin for Beginners
Now, you’ve probably heard the word Bitcoin floating around. You might have seen the price has been skyrocketing recently. You might’ve seen that Tesla has bought $1.5 billion worth of Bitcoin and is gonna start accepting it as payment. And you might have heard of all these weird things called a Dogecoin which is apparently going to the moon.
This article is an introduction that I wish I would have had when I started investing in crypto about four years ago. And it’s the article that I want to be able to send to my friends whenever they ask me,
Hey are you investing in Bitcoin?
Why are you investing in Bitcoin?
How does it work?
Is it safe?
Are you gonna lose your money?
Isn’t it illegal?
All of this sort of stuff.
So this article, which is for informational purposes only and should absolutely not be construed as financial advice.
In the slightest, we’re going to split it up into four parts.
Firstly, I’ll talk about what Bitcoin is and how cryptocurrencies in general work and why they work, and why they’re legit.
Secondly, we’ll talk about why Bitcoin and crypto are so controversial and I’ll share my hot takes about that.
Thirdly, we’ll talk about, why I personally do invest in Bitcoin and crypto and I will share my portfolio allocation and the reasons behind that.
And fourthly, we’ll talk about how you can get started investing in crypto.
If that’s the sort of thing you want to do with lots and lots of caveats and cautionary tales along the way.
1. Building up Understand
All right, so let’s take things back to basics to try and build up our understanding of Bitcoin from the ground up. Now, Bitcoin is a cryptocurrency. There are hundreds of other cryptocurrencies out there but Bitcoin is like the original, the OG. And it’s by far the biggest cryptocurrency around, which makes the question, what is a cryptocurrency?
So here’s my definition of a cryptocurrency based on four central concepts.
A cryptocurrency is a virtual currency based on a ledger that is decentralized and secured by cryptography.
All right, so firstly, Bitcoin is a virtual currency. Now, what is a currency?
A currency is just a medium of exchange. It’s what replaces the old school bartering system we used to have when it would be like, I will give you this bushel of wheat in return for the shoe that you have kindly made me because you are a leatherworker. Obviously, that system of bartering is quite inefficient because you have to store a lot of stuff that other people want and that’s just a bit of a pain.
And so we invented currency in the form of coins usually, as a system that everyone recognized to be able to exchange stuff without having the physical goods. So I could sell my bushel of wheat for two copper coins and then I could save up my copper coins and I could buy your shoes for 10 copper coins, for example. Back in the day currency itself was tied to metals like gold and silver and copper, which had different values.
And so the actual metal of the coins was worth something because everyone agreed that these metals were somewhat precious but in modern times, most of our currency takes the form of paper notes and paper notes aren’t inherently worth anything because the paper is just worth paper but the currency is worth something because everyone agrees that it’s worth something.
If I take $100 dollars almost anywhere in the world most people, I mean most places in the world will recognize that $100 is worth $100 and I’d be able to buy $100 worth of stuff from it. If hypothetically the whole world were to tomorrow decide that the US dollar is a meaningless currency and they’re not gonna accept it for anything at all, then the US dollar would be worthless. So really when it comes to currency it doesn’t mean anything real. Currency is kind of just an abstract way that we’ve all agreed to value things in a certain way.
So coming back to Bitcoin, Bitcoin is a virtual currency. It is a digital form of currency, i.e. a digital form of paying for goods and services and exchanging money over the internet. Way back in 2009 when Bitcoin was first invented, most people didn’t believe that it would be a viable form of currency, but over the last decade-plus, as Bitcoin has become more and more popular, people are starting to say that maybe Bitcoin could be the currency of the future. Maybe in the future, maybe a few years, a few decades from now, we’ll be paying for goods and services using Bitcoin over the internet, rather than by using these old-school, old-fashioned centralized banking and government institutions to exchange US dollars and our actual local currencies. Okay, so that was the currency part of it.
We can think of Bitcoin or crypto as like “Internet Money” or like “Virtual Money” or “Virtual Currency”.
Let’s now talk about the ledger system that holds it all together. And the thing to understand here is that Bitcoin is effectively one giant huge spreadsheet. This spreadsheet is called a ledger and in the spreadsheet we’ve got a record of every single Bitcoin transaction that has ever happened since January 2009, when Bitcoin was, was first invented. And the way that I think of it in my head, it’s like, let’s say you’re going on holiday with a group of friends and you don’t wanna kind of keep on splitting the bill and handing over cash because that’s a total nightmare. Therefore, someone makes a spreadsheet to keep track of who owes what. And so line one in the spreadsheet might be John owes Sheen 12 pounds, line two might be Jake owes Molly, 18 pounds. And the idea is that as our holiday goes on, we would keep on adding stuff to our spreadsheet or a ledger. And at the end of the holiday, we would all settle up and then actual money would exchange hands. Now, assuming you trust your friends, to be honest, this spreadsheet actually works reasonably well. You can basically treat this whole spreadsheet as virtual money.
I am giving my friend virtual 10 pounds in exchange for them paying for dinner. Another friend is giving me virtual 20 pounds in exchange for me paying for the boat ride. Now that’s fine for a group of a few people on holiday but imagine hypothetically, if the whole world were to run on a similar spreadsheet, where instead of money ever exchanging hands like physically it would just be a line item in the spreadsheet.
Now imagine a world in which everyone trusted the spreadsheet and everyone was being honest and good and nice and friendly and only adding legitimate things to the spreadsheet that everyone agreed on. That’s basically what Bitcoin is.
It’s this giant spreadsheet that keeps track of absolutely every single transaction that’s ever happened regarding Bitcoin since the start of Bitcoin.
And so that means that this spreadsheet has a record of everyone in the world who has ever bought and sold Bitcoin and it tells you how much Bitcoin they’ve bought and sold, so you can work out how much Bitcoin each person has in their account.
Now let’s say I have two Bitcoins in my account which is quite a lot of money these days. And I was to give one Bitcoin a friend we could add to this spreadsheet.
John gives one Bitcoin to Jake. And because it’s all in one spreadsheet the spreadsheet knows that my Bitcoin account has now one Bitcoin and Jake’s Bitcoin account now has one Bitcoin in it as well.
Like every bank financial institution, the government in the world is some sort of centralized authority that handles money. And so the US dollar is tied to the federal reserve and the US government, the UK pound is tied to the bank of England, and then it’s all somewhat related to like the international monetary fund. And then like the government has something to do with it.
But essentially it’s a small group of actors like governments and banks that manage the financial system for basically every country in the world. And so the third part of our definition of a cryptocurrency is that it needs to be decentralized and the way that Bitcoin and all these other cryptocurrencies work is that there is no central person in charge of them.
There is no one person or one company saying, Hey, I have got the master spreadsheet. Instead, what happens is that every single person in the world can have a copy of that master spreadsheet if they want. And so with Bitcoin, for example, there are millions of people around the world on their computers who each have a copy of the master spreadsheet. And each of those computers is running software that’s constantly checking to make sure that the master spreadsheet is legit. And it’s the same as every other copy of the master spreadsheet on the network. And that means that if you wanna hack a Bitcoin it’s quite hard to do because there are millions of people all around the world who are helping to maintain it. And it means that if you want to unduly influence stuff like if you’re a bank or a government or some other evil person, it’s quite hard to do because again, it’s decentralized. It means that it’s being maintained and managed by millions of people all around the world, from their computers.
And now we get to the final part of our definition which is that this whole system is built and secured using cryptography. So cryptography is a branch of maths and computer science that’s associated whether with like code making and code breaking and cryptography is how all of our communications are encrypted. So for example, when you send a WhatsApp message there is no way that WhatsApp or Facebook can read the message because it’s encrypted by cryptography on either end. And so only the sender and the recipient can see what the message is. No one in the middle can see what the messages is, it’s become encrypted, it’s just like a bunch of numbers that no one can interpret. And the really clever thing about Bitcoin and these other cryptocurrencies is that they use cryptography to solve the problem of trust and to solve the problem of centralization.
The problem of trust is that you know, when I’m on holiday with my friends, we all trust each other and we know that no one’s gonna screw anyone over but in real life, that doesn’t necessarily happen. So your system needs to be secure enough so as not to rely on trusting individuals. And secondly, the problem of centralization, i.e. it can’t just be Google owning a Google sheet that everyone gets a copy of because Google controls it. It can’t just be Amazon, it can’t be the US government, it can’t be the bank of England. It needs to be truly decentralized in a way that everyone maintains and manages the system.
All right, now it’s time for a little basic introduction to the world of cryptography. This is a little bit complicated. So here are a few concepts and how I’ve kind of explained it to myself in my head. Essentially, cryptography is based around the use of one-way functions called hash functions. And the idea behind these is that you can put any message or anything through a hash function and it will spit out a totally random combination of letters and numbers on the other end in such a way that you can then reverse the function.
And so if we were to take my name and put it through a hash function called SHA-256 which is the one that Bitcoin uses but explaining it is a bit too hard. We’ll come out with this random string of letters and numbers. And now, if you were to just look at that random string of letters and numbers there is no way you can reverse the chain to go back to what the original message was.
Now, Bitcoin uses these hash functions to solve both those problems. It solves the problem of trust by using digital signatures based around, secret keys and public keys in this thing called “Public Key Cryptography”.
And essentially it means that you as an individual can have a secret key, a password that no one else knows, but then you have a public key that is sort of related to your password which other people do know, but that’s fine because they can never find out your true password.
And as long as you use your true password to sign your messages, it’s 100%, basically, 100% guaranteed that those messages are legit. So that kind of solves the trust problem. And we solved the decentralization problem by using this concept called “Proof of Work” where all of the different people on the network, on the Bitcoin network who are maintaining the system, are called “Bitcoin Miners” and what these guys try and do is they essentially try and solve a “Hash Puzzle”, which just requires lots and lots and lots of computing power effectively involves guessing multiple numbers, multiple, multiple times.
And this is a sort of lottery between everyone on the network, so that if you are the lucky person, who’s plucked the random number out of thin air that solves the “Hash Puzzle” then your spreadsheet kind of gets saved and then that saved state is permanent, and then you get rewarded with some Bitcoin for giving up your computing power to help kind of maintain the whole thing.
And I’m using a lot of jargon and this is actually very hard to break down in an easy way. I am pretty sure computer science students will be loving it. There are two sources I’d recommend and I would recommend these if you are actually interested in learning how cryptography works.
Firstly, it’s a video from one of my favorite YouTube channels, 3Blue1Brown called “But How Does Bitcoin Work?”, where he explains the basics of hash functions and cryptography and like SHA-256 and this sort of stuff.
And secondly, is actually an online course Intelligent Cryptocurrency which you can find by clicking here.
And it’s got tons of different bits in it that really helps you understand crypto from the ground up. And I’ve been working through this course for the last few weeks, and it’s really helped improve my own understanding of crypto. And it really nails it down from first principles to explain how Bitcoin works and the way they do it is the sort of creating a Bitcoin from the ground up and kind of explain all of the maths behind it in a way that’s interactive and engaging and fun. So if this stuff seems interesting to you, if you want to understand how public key cryptography works secret keys, private keys, decentralization, hash functions, Merkel nodes, this sort of cool stuff. You should definitely check out that course for sure.
2. Why is Bitcoin and crypto so controversial?
So there are broadly four reasons as to why Bitcoin is controversial.
The threat of illegal activity.
Firstly, a lot of people say that Bitcoin is a speculative bubble. The price of Bitcoin is not based. People say on any intrinsic value behind Bitcoin. It is in fact based on people like you and me thinking, Oh my God, Bitcoin’s a big deal. Therefore we buy it and therefore supply and demand mean that the price goes up. People have been saying this since 2011 when the price of Bitcoin was absolutely nothing compared to the $50,000 that it is now. And yes there is an extent to which Bitcoin is a speculative bubble. And in fact, when I invest in Bitcoin I don’t really think of it as investing, I do in fact, think of it as gambling which I’m gonna talk a little bit more about later.
Secondly, Bitcoin is controversial because of the energy consumption and alleged environmental impact of the technology. So because it is kind of decentralized and run by zillions of computers, zillions of nodes, all around the world people would say that those nodes use lots and lots of energy use lots of computing power, therefore lots of electricity in order to solve the hash puzzles that the whole Bitcoin system is based around.
Now, the anti-Bitcoin people would say that this use of energy is not very good because it’s bad for the environment and it’s causing carbon to go into the atmosphere, et cetera, et cetera just to maintain a system.
Whereas the pro-Bitcoin people would say, yeah, that’s true but like we need to use energy to maintain any system and the actual banking industry uses far more energy than Bitcoin does or will in the near future. And they would say that these kinds of Bitcoin mining farms are in countries like Iceland and Greenland, where it’s very cold and where there’s very like lots of cold air. And therefore the cooling of it becomes more efficient. And they would say that China does a lot of Bitcoin mining and energy is cheap in China. And then the anti-Bitcoin people would say, yeah, but China still produces a load of environmentally bad stuff because of their excessive use of energy in maintaining the Bitcoin network.
Thirdly, Bitcoin is controversial because people are sometimes worried about security issues. Now, theoretically, the whole system is sort of decentralized and trustless and like, you know, maintained by these millions of nodes all around the world. In practice, there are these things called “Crypto Exchanges”, now these are big companies sort of like the London stock exchange and the New York stock exchange. They’re an exchange that connects buyers to sellers. And because a lot of people who have accounts on these exchanges also use the exchange to store their Bitcoin. Like the exchange also stores Bitcoin for you.
Like I have all my Bitcoin and Coinbase. If Coinbase were to get hacked for whatever reason then I might lose my Bitcoin. And in the past kind of decade, there’ve been quite a few high-profile hacking instances where the exchange has been targeted and users have lost their crypto. In practice, this is not something that I am personally particularly worried about. If you’re worried about it, you can do lots and lots of other things to secure your Bitcoin like using a hardware wallet. There are loads of YouTube videos explaining that. But security issues are reason number three, why Bitcoin is controversial.
And reason number four is the fact that Bitcoin is sometimes used as a form of payment for illegal activities. Like, let’s say you wanna buy drugs or you wanna buy bad things on the dark web or whatever that means. You can pay in Bitcoin and you can receive Bitcoin and theoretically, your Bitcoin username is like a random string of letters and numbers that is not directly tied to you as an individual. And therefore Bitcoin is a way that unscrupulous people across the internet can facilitate payments without needing to verify their identity with anyone. In fairness, people can also do illegal things with US dollars and every other form of currency in the world.
I don’t buy that argument personally.I mean the internet itself can be a good or bad thing depending on the context in which it’s used. I personally think Bitcoin could be the future and it is broadly a good thing, but of course it could be a bad thing depending on how it’s used. And so that brings us onto section three, having said all of that about the potential issues with Bitcoin.
3. Why do I personally invest in it?
And again, let’s break this down into four parts. Number one is FOMO, number two, gambling, number three, fun, and number four, diversification. So firstly, I’ve got to be honest. The primary reason I invest in a crypto is that I have a fear of missing out. Like I first heard about Bitcoin in 2011 as everyone else did.
And then I’m thinking damn, if only had bought Bitcoin in 2011 I’d be a multi-millionaire by now. And I’d never have to work a day in my life. And then for me, like every few years I’d hear about Bitcoin and be like, Oh, it’s, you know, Bitcoin’s now $100, but you know if only I had invested two years ago, Oh, but I can’t possibly get it now because it’s $100 and that’s way too expensive. If I’d gotten at $100, Bitcoin is now worth $50,000 therefore I’d make a lot of money. But like, you know, it’s the sense of fear of missing out which is why I personally do invest in crypto.
Secondly, crypto feels like a socially acceptable form of gambling. I don’t really consider it an investment anyway, I consider it gambling. And I’m not a fan of gambling normally, but it’s like, it’s kind of fun to gamble on Bitcoin. And in fact, in 2017, the last time Bitcoin had like a real heyday, I’d put in about 60,000 pounds of my own money into Bitcoin and I was plus 40K at one point.
Like my portfolio was worth 100 grand and I’d only put in 60 grand.
So I’d made 40,000 in the space of a few weeks. And that was like a very addictive feeling because it was like within the space of a few weeks, I’ve made more money than I would have made in a whole year.
Then I subsequently lost lots of money in the December, 2017 crash, and I ended up with like negative 35,000 or something like that. And so that’s a bit of a cautionary tale but ultimately I do consider it a form of gambling that I’m happy to engage in with some amount of my money.
Thirdly, it’s just kind of fun. It’s fun to be a part of the future, it’s fun to keep up to the news like with the news about Bitcoin, it’s fun to look at the portfolio occasionally and be like, Oh, are we up? Are we down? How are things going? And it’s fun to feel as if yeah, to feel like part of this like revolution. And I genuinely do think that Bitcoin could be the future of money and I want to be a part of that and that just feels kind of fun.
And fourthly, if I do think of it as an investment, it’s like I’ve got some percentage of my portfolio in crypto and that theoretically helps me diversify my portfolio which is otherwise mostly in stocks and shares.
And the way I think of it is that this is not generally true, but like assuming the crypto is not correlated with the broader US stock market. It means that if I invest in crypto if I gamble my money on crypto, cryptocurrencies, it means that I hedge kind of the risk of the stock market going down and losing money in that kind of way.
Well, these days I have about 20% of my overall investment portfolio in crypto in a combination of Bitcoin and Ethereum. Mostly Ethereum because I actually bought loads of Ethereum like four years ago and just held onto it.
So I think my allocation is about 80% Ethereum, 20% Bitcoin. 20% of my overall portfolio in crypto is quite a high number. Someone like Graham Stephan, who is far more pro at personal finance than I am, and also has far more money than I do has like one to 2% of his portfolio in crypto as he talks about on his YouTube channel.
I have 20% of mine in crypto and that’s quite a high allocation. Like the main thing with crypto is that you only want to put in money that you can 100% afford to lose because it’s quite a high risk speculative investment.I don’t think of it as an investment.
I think of it as gambling. So it’s like I’m gambling with 20% of my overall investment portfolio. That for me is a number that I’m happy with. Like, I am happy with, like if tomorrow I lost that 20%. I wouldn’t care in the slightest. I like to think it wouldn’t affect my mental wellbeing at all. And I know this because when I lost 35,000 pounds in 2017, which at the time was like half my net worth it didn’t affect me at all.
So I’ve kind of been through that losing large amounts of money and realizing, okay, this is not too bad Therefore I’ve sort of put my arbitrary risk profile that I’m happy with to be 20% of my portfolios in crypto. The other 80% of my portfolio is in stocks and shares. And that’s sort of fairly standard, but 20% crypto, 80% stocks and stocks and shares. This is probably a bit too high. If I were talking to a friend, again, not financial advice and you’re not my friend. So I’m not giving you financial advice purely for entertainment and informational purposes only.
But if I were talking to a friend and they were like, Hey I wanna put some money in crypto, I’d probably say that 20% is probably a bit high. Like you probably don’t want to run the risk of losing 20% of your money overnight.
If Bitcoin goes to zero, you might want it to start with maybe 2% or 3% or 5%. You know, something that you’re a little bit more comfortable with than a 20%. So if you do want to get started, firstly, you wanna understand the underlying technology. So the course will help you understand the underlying technology and helps you understand why this works and why I personally think it’s legit.
Secondly, there are two things you need you to need a wallet to store your cryptocurrency and you need an exchange where you can buy and sell cryptocurrencies. Now, most big exchanges will also let you store currency on the platform. So I use Coinbase for everything. but I use Coinbase for everything.
And so I have my Bitcoin and Ethereum stored in Coinbase itself. And I also use Coinbase as the exchange to buy and sell. Coinbase is one of the biggest ones in the world. There are a few others, you can always Google-like best crypto exchange USA or best crypto exchange Pakistan or best crypto exchange UK. I personally use Coinbase it’s available in the UK.
It’s very nice and easy, no affiliation with them no affiliate links or anything like that. But Coinbase, if you’re watching this reach out
In practice, you do wanna secure your account. So obviously on my Coinbase account, I have two-factor authentication enabled. And if you really care about security, you can invest in something like physical wallets which is like a hardware wallet that stores your Bitcoin offline, again, beyond the scope of this article, you can learn that in the course.
But that is like a much more secure way of storing your Bitcoin rather than having it stored on the internet in an exchange like Coinbase. So that was my beginner’s introduction to crypto.
This has been a far longer article than I thought it would be. If you’re serious about investing I recommend you learn the concepts well and gain some experience.
Lastly, if you skipped my recommendation of enrolling in the cryptocurrency course then you can enroll here
*This article involves affiliate links, so if you use that to buy the course, it may help me.