Introduction
However, even with its limitless potential in various applications, we have to remember that it was created to serve as a payment method, essentially replacing fiat currencies. Its creator(s) envisioned an asset that can compete toe to toe with the American Dollar, giving its users freedom and benefits not possible with the Dollar or any other traditional currency. Over the years, Bitcoin has been used within broader applications, including as a speculative asset for trading, an investment hedge against other traditional assets, and a data storage platform for less secure blockchain networks. In this guide, we’ll go through some of the more common ways that Bitcoin is utilized as a network and as a digital asset. However, in order to understand some of its uses, you must first understand Bitcoin, including how to store it and how to acquire it. We have dedicated the first few sections to explaining Bitcoin and everything you need to know before diving in and starting to use it.
Bitcoin explained
To understand Bitcoin, you need to know its history and, most importantly, how it was created, why, and by whom. Then you have to follow its growth trajectory from its birth to the present. Bitcoin has had a relatively short but exciting past, and the more of it that you know, the better you will understand the significance of its underlying blockchain technology.
Bitcoin history
Bitcoin blockchain was launched in 2009 with block 0 (also called the Genesis block or the network’s first block) being created on January 3rd. Its pseudonymous creator Satoshi Nakamoto had earlier, in August 2008, posted the Bitcoin whitepaper to an online mailing listing consisting of cypherpunks. The title of this whitepaper was “Bitcoin: A Peer-to-Peer Electronic Cash System.” It’s worth noting that Nakamoto borrowed a bulk of Bitcoin’s underlying technology and concepts from previous attempts at digital currencies. However, unlike its failed predecessors, Bitcoin was the first to successfully combine and employ these concepts. Bitcoin, as a blockchain, comprises data chunks called ‘blocks’ linked together one after the other and secured through cryptographic functions to ensure that the data is permanently recorded. These chunks of data are then duplicated and stored in several computers (referred to as nodes) that help secure the network. With the Bitcoin network, data blocks are created through the mining process, whereby a network of computers compete to solve arbitrary puzzles. The winner of each puzzle gets to create the next block and is rewarded with freshly minted coins. Initially, the value of Bitcoin was determined by the dynamics of supply and demand in the market, and by late 2009, one coin was only worth a few cents. In May 2010, a notable transaction happened where one individual spent 10,000 BTC coins to indirectly purchase two pizzas worth $25. It is the first known commercial transaction when Bitcoin was used as a payment for a product. From these humble beginnings, Bitcoin has grown both in popularity and value to become a trillion-dollar asset with more and more merchants accepting it as payment for goods and services. We will highlight some companies and merchants that accept Bitcoin later in this guide.
Bitcoin features
Here are some of the notable characteristics of Bitcoin that make it a unique asset different from traditional forms of payments, such as using fiat or traditional money.
Decentralization – unlike conventional currencies that a central government controls, Bitcoin is not controlled by a single entity. Instead, all the parties that find utility in the blockchain network, including the users, miners, and developers, jointly own the network. Pseudonymity – Bitcoin is designed to work without identity verification, a security feature mandatory in traditional finance channels such as banks and money transfer services. With Bitcoin, value transfer is achieved by using public keys, popularly referred to as wallet addresses. Senders only require the recipient’s wallet address to transfer Bitcoins. Immutability – the Bitcoin blockchain is designed to maintain a permanent record of transactions by cryptographically securing and linking each block to the one before and after it. This design makes sure that a single block is not tampered with without altering the data construct of its preceding blocks. Additionally, the entire Bitcoin blockchain exists in multiple copies, which each computer on the network maintaining a copy. Therefore, if a malicious party tries to tamper with any of these computers, the majority will disregard its copy. Self custody – in traditional finance, banks and other financial institutions serve their customers by taking custody of clients’ financial assets. However, Bitcoin users can store their assets away from any financial institutions, thereby taking control of their assets. Global payments – Bitcoin is designed to facilitate fast and cheap cross-border payments. Usually, transfers can take anywhere from a few days to a few weeks using traditional international payment methods such as Western Union or MoneyGram. However, transfers on the Bitcoin network can take only minutes and cost a fraction of sending money through traditional channels.
As the Bitcoin network matures, the community keeps adding new features which increase its utility and, consequently, its value.
How to store Bitcoin
There is a big misconception in the crypto industry that Bitcoin wallets help you store your coins. The truth is that wallets only store your private keys, which give you access to your Bitcoins that only exist on the blockchain. Choosing which wallet to use is just as important as deciding how to use your Bitcoin. Crypto wallets offer different features and depending on how you intend to use your Bitcoin, you may prefer one wallet over the other.
Types of crypto wallets
There are two main types of crypto wallets – hot and cold cryptocurrency wallets. Hot wallets comprise any Bitcoin wallets that can be accessed from remote locations through the internet. They include mobile, web, and desktop wallets. On the other hand, cold wallets are cut off from the internet, limiting remote access by any internet-connected device. Since remote access to cold wallets is impossible, they are considered safer to use than their hot wallet counterparts. Cold Bitcoin wallets are available in a variety of forms, including hardware, steel, and paper wallets which will be looked at below.
Web wallet
Web wallets are the least secure kind of Bitcoin wallet as they can only be accessed using an internet connection. It is common for people to refer to these wallets as exchange wallets which means cryptocurrency exchange wallets. However, other wallets in the form of browser extensions aren’t maintained by trading platforms, but they are also considered web wallets. It’s more convenient to use web wallets if you wish to trade your Bitcoin or lend it out through an exchange platform. Most crypto exchanges offer services whereby you can profit by lending, staking, or just storing your coins on the platform.
Mobile wallet
Mobile wallets are applications that help store Bitcoin private keys on mobile devices such as cell phones and tablets. They are the least secure forms of storage, but they also offer more convenience to Bitcoin users seeking wallet versatility and utility. Some ways to use mobile wallets include spending Bitcoin online or offline, betting, lending through API connections to crypto exchanges, trading, or holding the crypto within the wallet.
Desktop wallet
Desktop wallets are pieces of software that can be downloaded and installed on a computer, enabling users to store private keys on their physical hard drive. Unlike their mobile counterparts, desktop wallets are much more versatile and capable. Some desktop wallets are designed to download the entire Bitcoin blockchain to the computer on which they are installed, enabling the user to maintain their version of the network data. By maintaining a full copy of the Bitcoin blockchain, these wallets effectively become full nodes, contributing to the network’s security. Aside from contributing to the network’s security, desktop wallets are just as capable as mobile wallets in terms of utility. Users can buy, sell, store, trade, lend, stake, and even participate in Defi applications through their desktop wallets.
Hardware wallet
Hardware wallets are unique devices that help store private keys offline, ensuring that they are not accessible remotely, making them one of the most secure means to store crypto assets. More recent hardware wallets come with display screens that offer users a medium of interaction with the device. These devices were initially used as storage devices, but they have grown in utility, making them more versatile. Recent models offer several functionalities, including buying, selling, trading, staking, and participating in Defi marketplaces. Some hardware wallets have integrated with desktop wallets to introduce more features such as betting.
Steel and paper wallets
Paper and steel wallets pretty much represent the same concept implemented slightly differently. Paper wallets are the most basic, cheapest, but most secure form of storing Bitcoins. A paper wallet is just a piece of paper on which private and public keys are printed. The biggest downside to this form of storage is that paper is not durable, and that is where steel wallets come in. Steel material offers the same offline storage capabilities just like paper; only it can last forever if preserved in rust-free environments.
Securing your wallet
The most critical mandate any wallet owner has is to ensure the safety and security of the assets held within the wallet. We’ve already mentioned that using a hot wallet is the least secure way to store your digital currency. However, there are ways to enhance the security of these types of wallets. Some of these include:
Using second-factor authentication – 2FA is a security feature requiring extra verification when logging into the wallet other than merely using the usual username/password combo. Typical 2FA methods include using authentication apps such as Authy, requesting one-time pass (OTP) codes from your service provider, or even using a hardware device for authentication. Using anti-virus software – desktops and mobile devices are vulnerable to virus software, and a great way to keep your systems safe is to use anti-virus software that continually scans for malware. Using human intelligence – hackers come up with new ways to steal crypto, and the most effective counter of most of these sneaky methods is to remain vigilant. Ensure that you confirm website addresses before visiting them, ensure the wallet addresses you send crypto to are accurate, and avoid sharing private keys with anyone. Additionally, physical wallets and devices should be kept secure at all times.
How to get Bitcoin
Before you can use Bitcoin, you need to acquire it first, and there are few ways to do that. You could opt to buy, trade, mine, or accept Bitcoin as payment for goods, services, and gifts. For simplicity, we will highlight how you can buy Bitcoin as this is the easiest and fastest way to get your hands on some digital assets. Here are some of the channels available to purchase Bitcoin:
Through cryptocurrency exchanges; Through crypto brokerage services such as Coinbase; Through PayPal (only US and UK customers) Through peer to peer crypto exchange platforms; Through Bitcoin ATMs; Through peer exchanges in conferences and meetups.
The most popular way to get your hands on some Bitcoin is to use one of the major cryptocurrency exchanges such as Coinbase, Kraken, KuCoin, Uphold, or Binance. The U.S.-based crypto exchange Coinbase is one of the best platforms to purchase and trade digital assets. Its interface is intuitive, fast to use, and highly secure. It is worth noting that PayPal has only recently launched its crypto service allowing its US and UK users to buy, hold or sell Bitcoin, Ethereum, Litecoin, and Bitcoin Cash within their accounts. If the PayPal method is inaccessible to you, another alternative is to get Bitcoin through a brokerage service that allows you to buy crypto using a credit or debit card. Most cryptocurrency exchanges have this service, but you have to sign up before purchasing any cryptocurrencies. If you opt for this route, Peer-to-peer platforms such as LocalBitcoins and Paxful offer their users a wider choice of payment methods ranging from PayPal to international payment processors such as MoneyGram or Western Union. These services are advantageous as they make crypto purchases feel local while giving the users more control over the price of the assets they purchase. Anyone looking to purchase Bitcoin anonymously may prefer to join local crypto meetups and conferences where they can interact and buy the crypto from their colleagues. Or else, they can use Bitcoin ATMs.
Use cases for Bitcoin
Having learned the fundamentals of Bitcoin, including, how to acquire and store it, let’s move on to using it. There are several ways to utilize this nascent digital asset. Satoshi Nakamoto envisioned a world where Bitcoin could be used as a peer-to-peer electronic cash system to complement or even replace traditional money. Over the years since its launch, Bitcoin has seen massive growth, spawning a new financial services industry. Bitcoin has not only survived its success as a digital form of payment, but it has also thrived. Industry players and the crypto community members have discovered and invented new ways to apply Bitcoin outside its original purpose. Here are some of them:
1. Bitcoin as an investment
Perhaps the most common way to use Bitcoin now is to invest in it by buying, holding, trading, or lending it for interest and you can do all these through most of the major crypto exchanges. Since its launch in 2009, Bitcoin’s value has grown multiple times from cents to the current price of over $55,000 per coin (as of October 2021). Another common way to invest in Bitcoin is to trade it on a crypto exchange to try and gain a profit from price fluctuations. Bitcoin frequently experiences price swings of more than 10-20% in a single day. Active traders can easily make decent returns if they are good at speculating. Another way to use Bitcoin as an investment is to benefit from price differences in various Bitcoin markets globally in what is commonly referred to as arbitrage trading. Price differences do exist in different exchanges or jurisdictions. An arbitrage trader can buy and sell Bitcoin while making a profit from the price discrepancies. Some services allow investors to deposit their cryptocurrencies, including Bitcoin, and earn interest in return. Uphold is a trading platform is a multi-asset trading platform with crypto as its highest supported asset, allowing investors to trade over seventy cryptocurrencies, including Bitcoin.
2. Bitcoin as a digital payment method
Bitcoin being used as a digital payment method was the original purpose of Bitcoin, as described in Nakamoto’s whitepaper. Essentially, you can use Bitcoin to pay for goods and services across the world. However, unlike traditional money, Bitcoin is not as widely accepted yet, although the list of merchants and places where you can pay using digital currency grows by the day. Here are a few of those companies, institutions and online merchants that accept Bitcoin as payment:
Online stores – are companies with e-commerce platforms that have Bitcoin as one of their accepted payment methods. They include Overstock, Home Depot, Shopify, Newegg, Microsoft, and eGifter, among several others. Online services – these companies provide a service to their customers and allow Bitcoin as a payment method. A few of these service providers are Namecheap, AT&T, ProtonMail, NordVPN, Surfshark, Hostinger, WordPress, Bloomberg, Reddit, Travala and Twitch, just to mention a few notable ones. Travel and hotel services – some airlines and tour or travel agencies accept Bitcoin for their services. They include Expedia, Virgin Galactic, CheapAir, Star Jets International, Garbarino Viajes, Norwegian Air, and Travala. Learning Institutions – you can even use Bitcoin to pay for higher education among some of the best colleges and universities worldwide. Some notable places that accept Bitcoin as payment for school fees are King’s College (New York), Curtin University (Australia), Financia Business School (France), University of Cumbria (UK), FPT University (Vietnam), and the University of Nicosia in Cyprus. Non-profit organizations – there are several not-for-profit organizations and charities around the world that accept Bitcoin. Here are some of them: The Water Project, The Giving Block, Liberty In North Korea (LiNK), Wikimedia Foundation, Wikileaks, the Internet Archive, Tor Project, United Way, and the Red Cross Foundation.
To find a more thorough list of all places, particularly online stores that accept Bitcoin, you can use data aggregators that collect all of this information and present it in a more usable manner. Popular Bitcoin store aggregators include:
Spendabit; Coinmap; CoinGate Merchant Directory; Bitcoin.com map; OpenBazaar; useBitcoins.
Also, it is worth mentioning that some notable companies that accept Bitcoin payments include Overstock, Microsoft, Whole Foods, Expedia, AT&T, Bloomberg, WordPress, Newegg, Shopify, and many more. However, those BTC store aggregators we’ve listed above can truly help you save time when finding a store to spend your Bitcoin.
How to pay with Bitcoin
The procedure for making Bitcoin payments may differ from merchant to merchant depending on which third-party service they use to accept the payments. Nonetheless, there are some basic structures when it comes to making any payment. We have already outlined the formative stages to start spending your Bitcoin (BTC), starting with understanding Bitcoin, choosing your wallet, and getting some coins to spend. Now that you already have these Bitcoins in a privately held wallet (not an exchange), you are ready to start spending your BTC.
Step 1 – Search
Search for the goods or services you are interested in and find a merchant that accepts Bitcoin. You can use data aggregators such as CoinGate, Spendabit or Coinmap mentioned above. These services will allow you to search for any product or merchant. For example, if you use Spendabit (shown below), you can use the search box to specify a product you are interested in. The service will return a list of all merchants that carry the product or similar offerings. All the results returned are links to external stores that accept Bitcoin for payment. Click on any link to proceed to the store and make your order.
Step 2 – Payment
In our example above, we have opted to use the Overstock marketplace to shop for running shoes. Once you have identified the products you want, proceed to the checkout stage, where you will specify the payment method you prefer. Online stores and merchants that allow Bitcoin payments, such as Overstock, will have a BTC payment button such as the one shown above. Select the ‘Bitcoin BTC’ option and provide your account login details to proceed. In the next stage, you will be provided with a Bitcoin address to which you will send your BTC equivalent to your order amount according to the most current BTC/USD exchange rate. The order will be processed once the BTC transaction has been confirmed on the Bitcoin network. Depending on the network traffic and the amount of miner fees you have included with your transaction, it may take a few minutes to a few hours. The process to pay using Bitcoin may differ slightly from merchant to merchant but the common elements of the steps remain similar. These steps are:
Final thoughts
Bitcoin may be an innovative solution to online payments, but it still lags behind conventional payment methods such as cash and card in some aspects. For instance, fewer companies, merchants, and online stores accept the digital currency compared to its fiat counterpart. Additionally, there are extra steps involved in making payments with BTC as opposed to using regular cash. Despite Bitcoin lacking in a few crucial aspects such as having fewer places to spend it compared to cash, its benefits including cheap global transfers and users’ control over their money have proved strong enough to increase its acceptance across the world. Not to forget that it has shown a stellar performance in terms of value appreciation since its launch in 2009 making it a worthy consideration to any investor’s portfolio. [coinbase]
