Financial Liberation - An Introduction to Bitcoin

Interacting With Bitcoin

Introduction to Bitcoin & Stablecoin

Interacting With Bitcoin

The Layers of Bitcoin
Safely Securing Your bitcoin
Diving Deeper
**Conclusion**

Bitcoin has taken the monetary system by storm, captivating the attention of developing countries, tech-savvy individuals and investors alike. However, with its rapid growth, many wonder how this digital asset can compete with traditional payment methods like Visa and Mastercard. Additionally, individuals are curious about how they can personally engage with Bitcoin.

In this section, we'll delve into the different layers of transacting, whether in fiat or Bitcoin. We'll also explore some best practices for keeping your bitcoin safe, including the importance of choosing the right wallet.

The Layers of Bitcoin

Bitcoin's blockchain is composed of blocks, as its name suggests. These blocks have a theoretical maximum size of 4 megabytes. That said, the average block size at the time of writing comes in at around 1.5mb. Because of this limit, there is a restriction on how many transactions Bitcoin can process per second, which is between seven to ten transactions per second (tps).

Therefore, you may wonder: How can Bitcoin’s blockchain possibly compete with networks such as Visa or Mastercard that transact at 1,700 tps?

The answer is simple. It is not competing with them.

Comparing Bitcoin’s blockchain to Visa or Mastercard is like comparing an international container ship to a checkout at a local hardware store. The container ship is intended for infrequent bulk transactions, whereas a checkout is built around high-frequency, small transactions. Although both move goods, comparing them is like comparing apples to oranges.

With this in mind, Bitcoin offers trustless, permissionless transactions with final settlement, while Visa and Mastercard provide convenience and ease of use. However, that is not to say Bitcoin’s blockchain doesn't offer these things, too. It just doesn't try to achieve them on the base chain or base layer as it's commonly known.

Let's explore what this means...

When inspecting any monetary system, there are often different methods, or layers, of transacting, with each method offering various benefits to the user. The layers of transacting in our current monetary system include:

Layer One: These transactions typically involve large amounts of money but have a low processing capacity, meaning that only a limited number of transactions can be processed per second. Examples of layer one transactions in the traditional monetary system include bank wire transfers and Fed Wire interbank transfers. These transactions are used for high-value transactions, but they are often slow and expensive, with wire transfer fees ranging from $10 to $50 and processing times that can take several days. While layer one transactions are secure and dependable, they may not be the best choice for consumers who need to make small transactions quickly and cost-effectively.

Layer Two: This layer typically includes smaller value high-volume transactions, enabling many transactions to be processed per second. It provides faster and cheaper transactions, with fees usually around 1-3% of the transaction value. Common examples of layer two transactions in the traditional monetary system are credit and debit card payments, online payment services, and gift card transactions.

Where does the Bitcoin blockchain fit into layer one and layer two transactions?

Bitcoin blockchain is a great alternative to layer one transactions. While it may not be able to match the speed of a layer two Visa payment, it is capable of processing high-value transactions at a fraction of the speed and cost of traditional layer one methods. Moreover, Bitcoin operates in a permissionless and trustless manner, meaning that transactions can be conducted without intermediaries.

However, despite its advantages as a layer one solution, Bitcoin can also compete with layer two transaction methods. There are technologies built on top of the Bitcoin network, such as Lightning, which enable users to transact near-instantaneously and for fractions of a cent. These technologies can be thought of as layer two solutions for the Bitcoin network. With this in mind, just like our traditional monetary system has layer one and two transactions, so does Bitcoin.

If you're looking for a reasonably quick (but not instant), cost-effective and secure way of sending a large amount of money, then Bitcoin layer one is your best bet. Whereas, if you're looking to transact near-instantaneously and for fractions of a cent, you will want to direct your attention to some of the technologies built on Bitcoin, which include innovations such as Lightning.

Bitcoin Lightning Network is a layer two scaling solution built on top of the Bitcoin layer one. It allows for near-instant transactions with minimal fees, making microtransactions and small purchases possible. Since El Salvador has adopted bitcoin as a legal tender, many people have been using the Lightning Network to transact Bitcoin instead of the standard layer one due to its benefits. With the Lightning Network, users can pay a fraction of a cent for almost instantaneous transactions, making it a perfect fit for merchants who want to accept Bitcoin payments without the higher fees and slower transaction times of traditional on-chain Bitcoin transactions. This has made it easier and more accessible for El Salvadorians to use bitcoin for everyday transactions, increasing the potential of Bitcoin adoption as a global currency.

Let's now turn our focus on what to do once you've acquired some bitcoin or decided to make a purchase.

Safely Securing Your bitcoin

What makes Bitcoin revolutionary is that, for the first time in history, we can take self-custody of a digital asset. This feat cannot be overstated! Just like how we can store cash under our pillow, we can do the same with bitcoin, but digitally. However, this new level of control over our money comes with new responsibilities. To keep our bitcoin safe, we must learn how to secure it properly. This means taking steps to protect against loss, theft, and hacking attempts.

Where To Store Your bitcoin

The first step in securing your bitcoin is to choose the right wallet. Without going into too much depth, there are primarily two types of wallets available: custodial and non-custodial.

Custodial Wallets These are wallets where, although you can access your wallet and move funds around, a third-party stores and secures your bitcoin.

One common example of a custodial wallet is an exchange account. When you purchase bitcoin through an exchange and leave your bitcoin on the exchange, you are using a custodial wallet. The exchange has custody over your bitcoin and is responsible for storing and securing your funds.

There are also countless other custodial wallet solutions available for mobile devices that give you easy access to your bitcoin. These wallets are typically user-friendly and offer a simple way to manage your bitcoin, but they still hold the keys to your bitcoin.

Non-custodial wallets (a.k.a. self-custody) Non-custodial wallets are a type of Bitcoin wallet where you are the sole custodian of your funds, meaning you have complete control over your private keys. Private keys are like a password to your wallet and are used to sign and authorise transactions. Without them, you cannot access or transfer your bitcoin.

Non-custodial wallets offer a higher level of security and privacy over custodial wallets since you are the only one responsible for the safety of your funds. Examples of non-custodial wallets include hardware wallets like Coldcard and Trezor, which are physical devices that store your private keys offline and provide an extra layer of security. Other popular non-custodial wallets are software wallets like Sparrow, Electrum, and Blockstream Green, which can be downloaded and installed on your computer or mobile device.

Although we cannot recommend a specific wallet, we highly advise taking control of your bitcoin through self-custody or collaborative custody, which involves selecting a wallet that suits your needs and preferences. It is essential to conduct thorough research before deciding on a wallet to ensure that it aligns with your security and usability requirements.

While custodial wallets may appear convenient, they come with significant risks. By giving custody of your private keys to a third party, you effectively give them control over your funds. If the custodian becomes insolvent, hacked, or shuts down, you could lose access to your bitcoin. And this has happened on countless occasions, with high-profile examples including the Mt. Gox and QuadrigaCX hacks resulting in the loss of customer funds, or FTX, Voyager, BlockFi, and Celsius experiencing catastrophic insolvencies, leading to the loss of their customer funds. Especially for savings, practising self-custody and taking responsibility for safeguarding your bitcoin is crucial.

Safety Tips

Once you have decided on a wallet, the fun and games aren't over just yet. Now it's time to minimise the risk of loss. To protect your bitcoin, consider these steps after choosing your wallet:

First and foremost, back up your wallet when taking self-custody. Hardware wallets come with a recovery seed phrase, a set of words that can be used to recover your private keys in case your device is lost or damaged. Create a physical copy, such as a metal seed plate, of this seed phrase and store it in a safe place. It's important to keep this recovery seed phrase secure. NEVER share it with anyone.
When safeguarding a substantial amount of bitcoin that exceeds the threshold you wouldn't want to lose, it's important to explore estate planning options for the unforeseen event of your passing. This ensures that your family and loved ones can access and manage your bitcoin effectively.
Be vigilant against phishing attempts and other scams. Scammers often try to trick you into giving them access to your bitcoin by posing as a trusted company or individual. No reputable company will ever ask you for your private keys, so never share your private keys with anyone, and always verify the authenticity of any website or individual before sending bitcoin.

While self-custody is our recommended approach, we understand that it may not be suitable for everyone. Here are some general guidelines to help minimise risk:

Use exchanges to purchase bitcoin, mobile wallets for everyday transactions, and hardware wallets to store your long-term bitcoin savings.
Treat exchanges or mobile wallets like your physical wallet, keeping only the amount of bitcoin you would carry in your everyday wallet.
Consider your hardware wallet as your savings account. It's meant for infrequent access and prioritises safety and security for the long term.

And if you are using an exchange:

Create a strong, unique password. Avoid using common phrases or easy-to-guess passwords. Consider using a password manager.
Enable two-factor authentication (2FA) whenever possible. This adds an extra layer of security by requiring a code from your phone or hardware device in addition to your password.

If you're still unsure, we highly recommend checking out Ben from BTCsessions on YouTube.

Remember, with great power comes great responsibility, and taking the time to secure your bitcoin properly is essential to protecting your financial future.

Before closing out this module, I'd like to leave you with one last thought...

Diving Deeper

If you are interested in further exploring the world of Bitcoin, many options are available. Such as:

Nodes: Running a node is an excellent entry point for those curious about Bitcoin beyond basic transactions. It allows you to not only contribute to the Bitcoin network by verifying the blockchain and influencing new updates or changes but minimises trust and offers enhanced privacy by giving you the ability to verify your own transactions and balances. By running a node, you become a part of the decentralised network and help ensure its security and integrity.
Mining: Mining is another way to contribute to the Bitcoin network and potentially earn bitcoin. While it requires a little more resources than running a node and is not as profitable as it used to be, mining is a rewarding activity for those interested in the technical aspects of the network.
Development: If you have experience in software development and are interested in contributing to the development of Bitcoin, a great starting point is Bitcoin's GitHub repository.

Regardless of your interests, there are many resources available to help you learn more about Bitcoin and get involved.

Conclusion

Although we often hear that Bitcoin can never rival Visa or Mastercard, hopefully, this section has proven this notion to be untrue. Rather than competing directly with these companies, Bitcoin's base layer is designed to process high-value transactions much more efficiently than traditional methods. This makes it a fantastic alternative to traditional layer one solutions. Moreover, technologies like The Lightning Network, built on top of the Bitcoin layer one, enable nearly instantaneous transactions for just a fraction of a cent. Thus, Bitcoin can still compete with Visa and Mastercard, offering solutions for both businesses and individuals alike.

Bitcoin's biggest advantage is that it allows us to have self-custody of a digital asset, which was never possible before. If you feel overwhelmed after going through this section, don't worry. Taking control of your own bitcoin is a powerful step towards financial freedom, but it also comes with new responsibilities. However, with a little bit of research and due diligence, these new responsibilities will quickly become second nature to you, and you'll feel comfortable taking on the task of safely securing your bitcoin.