Bitcoin 101 Start Here

What is Bitcoin?

Bitcoin is a digital currency that lets you send and receive money without banks or middlemen. It’s like digital cash you can use online, but it’s decentralized—nobody owns or controls it. Imagine a global notebook where everyone agrees on who owns what, updated by thousands of computers worldwide. That’s Bitcoin!

Key Facts

• Created in 2009 by an anonymous person (or group) named Satoshi Nakamoto.

• There will only ever be 21 million bitcoins, making it scarce like gold.

• Transactions are recorded on a public ledger called the blockchain.

Why Use Bitcoin?

• Freedom: You control your money, not a bank.

• Privacy: Transactions don’t require personal info.

• Global: Send Bitcoin anywhere, anytime, with low fees.

Analogy: Think of Bitcoin as email for money. Just like you can send an email to anyone with an address, you can send Bitcoin to anyone with a Bitcoin address, no permission needed!

How Bitcoin Works

Bitcoin operates on a peer-to-peer network, like a giant, shared Google Doc that everyone can read but only update with strict rules. Let’s break down the key pieces.

The Blockchain

The blockchain is Bitcoin’s ledger, a record of every transaction ever made. It’s like a stack of transparent pages in a notebook, where each page (a “block”) lists transactions. New pages are added roughly every 10 minutes.

How It Works

• Each block is linked to the previous one, forming a chain (hence, blockchain).

• Computers called nodes store and share the blockchain.

• Miners add new blocks by solving math puzzles, ensuring security.

Why It’s Secure

• Changing one block requires rewriting all blocks after it, which is nearly impossible due to the energy and coordination needed.

• Thousands of nodes worldwide keep copies, so no single point of failure exists.

Analogy: Imagine a public bulletin board where everyone posts their transactions. Once a transaction is pinned up, it’s locked in place, and everyone checks to make sure it’s legit.

Nodes vs. Miners

Bitcoin’s network relies on two key players: nodes and miners.

Nodes

• Role: Keep a copy of the blockchain and check transactions for accuracy.

• Types:

  • Full Nodes: Store the entire blockchain (hundreds of GBs) and validate everything.

  • Lightweight (SPV) Nodes: Store only block headers, relying on full nodes (used in mobile wallets).

• Why Run One?: Ensures you verify your own transactions, boosting privacy and trustlessness.

• Example: Running a node on your computer is like being your own bank teller, checking your transactions independently.

Miners

• Role: Create new blocks by solving complex math puzzles (Proof of Work).

• Rewards: Earn new bitcoins (block reward, 3.125 BTC as of April 2025) plus transaction fees.

• Hardware: Use specialized machines (ASICs) that consume significant electricity.

• Example: Miners are like librarians who add new pages to the blockchain notebook, getting paid for their effort.

Analogy: Nodes are like librarians who keep the library’s records accurate, while miners are writers adding new chapters to the book, rewarded for their hard work.

UTXOs: Your Digital Piggy Banks

Bitcoin doesn’t use account balances like a bank. Instead, it uses Unspent Transaction Outputs (UTXOs)—think of them as individual piggy banks holding specific amounts of Bitcoin.

How UTXOs Work

• When you receive Bitcoin, it’s stored in a UTXO (e.g., one worth 0.5 BTC).

• To spend, you “smash” a UTXO, use what you need, and create new UTXOs for the change.

• Example: To pay 0.3 BTC from a 0.5 BTC UTXO, you spend the 0.5 BTC, send 0.3 BTC to the recipient, and get 0.2 BTC back as a new UTXO (minus a small fee).

Why It Matters

• The UTXO set is a list of all unspent piggy banks, checked by nodes to prevent double-spending.

• Managing UTXOs smartly saves fees and keeps your wallet tidy.

Analogy: UTXOs are like gift cards with fixed amounts. To buy something, you use one or more gift cards, and any leftover value becomes a new gift card.

Getting Started with Bitcoin

Ready to jump in? Here’s how to start using Bitcoin safely.

Setting Up a Wallet

A Bitcoin wallet is software or hardware that holds your private keys—codes that let you spend your Bitcoin. It’s like a keychain for your digital piggy banks.

Types of Wallets

• Software Wallets (e.g., Sparrow, Electrum):

  • Run on your phone or computer.

  • Free and easy to set up.

  • Example: Sparrow Wallet connects to your own node or an Electrum server for better privacy.

• Hardware Wallets (e.g., Ledger, Trezor):

  • Physical devices that store keys offline.

  • Ideal for long-term savings due to high security.

  • Cost: $50–$200.

• Paper Wallets:

  • A printed seed phrase (see below).

  • Ultra-secure if stored safely but not user-friendly for frequent use.

How to Set Up

1. Download a trusted wallet (e.g., Sparrow from sparrowwallet.com).

2. Create a new wallet and write down the seed phrase (more on this next).

3. Set a strong password or passphrase for extra security.

4. Receive Bitcoin by sharing your wallet’s public address (starts with “bc1” for modern wallets).

Tip: Start with a software wallet for learning, then consider a hardware wallet for "HODLing" (holding Bitcoin long-term) or trading.

Analogy: A wallet is like a safe where you keep your Bitcoin keys. A software wallet is a safe in your desk drawer; a hardware wallet is a bank vault.

Understanding Seed Phrases and Passphrases

Your wallet’s seed phrase is a 12- or 24-word backup code, like a master key to your Bitcoin. A passphrase is an optional extra password for added security.

Seed Phrase

• Generated using BIP 39, a standard with 2048 words (e.g., “apple banana cherry”).

• Restores your wallet if you lose your device.

• Security Tip: Write it on paper and store it in a safe or split it across multiple locations. Never store it online!

Passphrase

• Adds a second layer of protection.

• Example: Seed phrase “apple banana cherry” with passphrase “mysecret” creates one wallet; same seed with “anotherpass” creates a different wallet.

• Warning: Lose your passphrase, and your Bitcoin is gone forever—no recovery!

Analogy: The seed phrase is the key to your house, and the passphrase is a deadbolt. Both are needed to get in, and losing either locks you out.

Hierarchical Deterministic (HD) Wallets

HD wallets create all your Bitcoin addresses from one master key, making backups and privacy easy.

How It Works

• A single seed phrase generates a master key, which spawns a tree of child keys (your addresses).

• Each transaction can use a new address for privacy, all tied to the master key.

• Standardized by BIP 32, so your seed works across wallets like Sparrow or Electrum.

Benefits

• One backup for all addresses.

• New addresses for each transaction hide your total balance.

• Example: Sparrow generates addresses like “bc1xyz” for each payment.

Analogy: An HD wallet is like a family tree. The seed phrase is the ancestor, and each branch is a new address, all connected but separate.

Securing Your Bitcoin

Bitcoin gives you full control, but that means full responsibility. Here’s how to keep it safe.

Master Fingerprint and Derivation Paths

These are technical tools that keep your wallet organized and efficient.

Master Fingerprint

• A unique ID for your wallet, like a label on your safe.

• Helps identify your wallet when restoring or managing multiple wallets.

Derivation Paths

• A “recipe” for creating addresses from your master key.

• Example: m/84'/0'/0'/0/* creates Native SegWit addresses (start with “bc1”).

  • m: Master key.

  • 84': Native SegWit (cheapest and fastest).

  • 0': Bitcoin network.

  • 0': First account.

  • 0/*: Receiving addresses (0, 1, 2, etc.).

• Using m/84' ensures low fees and modern compatibility.

Analogy: The master fingerprint is your wallet’s name tag, and the derivation path is a map to your piggy banks, with “m/84'” leading to the most efficient ones.

SegWit vs. Native SegWit Addresses

Bitcoin addresses affect transaction fees and speed. Here’s the difference:

• Legacy Addresses (start with “1”):

  • Oldest type, highest fees.

  • Like mailing a heavy package.

• SegWit Addresses (start with “3”):

  • “Segregated Witness” saves space, lowering fees.

  • Like a standard envelope.

• Native SegWit Addresses (start with “bc1”):

  • Most efficient, lowest fees, fastest confirmation.

  • Like an email—modern and lightweight.

Why Choose Native SegWit?

• Saves up to 40% on fees (e.g., $1 instead of $1.70 for a $100 transaction in 2025).

• Supported by most wallets and exchanges.

• Derivation path m/84'/0'/0'/0/* ensures you’re using these.

Analogy: Choosing an address type is like picking a shipping method. Native SegWit is express delivery—fast and cheap.

UTXO Management

Smart UTXO management saves fees, boosts privacy, and keeps your wallet tidy.

Key Strategies

• Minimize Inputs: Use fewer UTXOs per transaction to reduce fees (e.g., one 0.5 BTC UTXO vs. five 0.1 BTC UTXOs).

• Consolidate: Combine small UTXOs into one when fees are low (e.g., during weekends or market dips).

• Avoid Dust: Don’t create tiny UTXOs (less than 0.00001 BTC) that cost more to spend than they’re worth.

• Privacy: Mix UTXOs carefully to avoid linking your transactions (e.g., don’t combine UTXOs from different sources).

Tools

• Wallets like Sparrow have coin control to pick specific UTXOs.

• Use CoinJoin (mixing services) for extra privacy.

Analogy: UTXO management is like organizing your coin jar. Combine small coins when it’s cheap, and don’t let pennies clutter it up.

Advanced Bitcoin Setups

Ready to level up? These setups give you more control and security.

Running Your Own Node

A Bitcoin node is a computer running Bitcoin Core software, storing the blockchain and verifying transactions.

Why Run a Node?

• Privacy: Verify transactions yourself, not through a third party.

• Trustlessness: Ensure the network follows Bitcoin’s rules.

• Support the Network: Help keep Bitcoin decentralized.

How to Set Up

1. Download Bitcoin Core (bitcoincore.org).

2. Allocate 500+ GB of storage (as of 2025).

3. Sync the blockchain (takes days initially).

4. Connect your wallet (e.g., Sparrow) to your node via its RPC interface.

Hardware Options

• Old laptop or desktop (8 GB RAM, 1 TB drive).

• Dedicated device like a Start9 server or Raspberry Pi.

Analogy: Running a node is like being your own referee in a game, ensuring everyone plays by the rules.

Using an Electrum Server

An Electrum server (e.g., Electrs, Fulcrum) sits between your wallet and node, speeding up queries and boosting privacy.

Why Use One?

• Faster: Indexes the blockchain for quick wallet syncs (seconds vs. minutes).

• Privacy: Doesn’t store your wallet data, unlike Bitcoin Core.

• Remote Access: Connect from anywhere securely (e.g., via Tor).

• Multi-Wallet: Handles multiple users or wallets efficiently.

Setup

1. Install Electrs or Fulcrum on your node (requires 16 GB RAM, 500 GB SSD).

2. Configure Sparrow to connect to it (e.g., “electrs://your-node-ip:50001”).

3. Optionally enable Tor for remote access.

Analogy: An Electrum server is like a librarian who quickly finds books (transactions) for you, without keeping a record of what you read.

Multi-Signature Wallets

Multi-signature (multisig) wallets require multiple keys to spend Bitcoin, like a safe with multiple locks.

How It Works

• Example: A 2-of-3 multisig needs 2 out of 3 keys to unlock (e.g., you, a backup, a trusted friend).

• Set up using Sparrow or hardware wallets (e.g., Trezor + Ledger + Coldcard).

Benefits

• Security: Even if one key is stolen, your Bitcoin is safe.

• Redundancy: Lose one key? You can still access funds with the others.

• Shared Control: Ideal for businesses or family savings.

Setup Example

1. Create a 2-of-3 multisig wallet in Sparrow.

2. Store one key on a hardware wallet, one on a paper backup, and one with a trusted party.

3. Use derivation path m/48'/0'/0'/2/* (standard for multisig Native SegWit).

Analogy: A multisig wallet is like a bank vault needing two keys to open—one you carry, one in a safe deposit box.

Practical Tips and Tools

Configuring Start9 for Easy Access

A Start9 server simplifies running a node and services like Electrum. Here’s how to make it accessible:

Edit Hosts File

• Maps your Start9’s IP (e.g., 192.168.1.175) to a name (e.g., start9.local).

• Windows: Edit C:\Windows\System32\drivers\etc\hosts as admin:
  192.168.1.175 start9.local

• macOS/Linux: Edit /etc/hosts with sudo nano:
  192.168.1.175 start9.local

• Flush DNS cache:

  • Windows: ipconfig /flushdns

  • macOS: sudo dscacheutil -flushcache

  • Linux: sudo systemd-resolve --flush-caches

Access

Open http://start9.local in a browser or SSH to manage your node.

Analogy: Editing the hosts file is like adding a nickname to your phone’s contacts, making it easy to call your Start9 server.

Privacy Best Practices

Protect your financial privacy with these tips:

• Use New Addresses: Generate a new “bc1” address for each transaction.

• Avoid Address Reuse: Reusing addresses links your transactions, like posting your home address publicly.

• Run a Node: Verify transactions privately.

• Use CoinJoin: Mix your UTXOs with others to obscure transaction trails (e.g., via Wasabi Wallet).

• Tor: Route connections through Tor for anonymity (supported by Start9, Electrum).

Analogy: Bitcoin privacy is like playing hide-and-seek. Use new hiding spots (addresses) and cover your tracks (CoinJoin) to stay hidden.

Glossary of Terms

• Blockchain: Bitcoin’s public ledger of all transactions.

• Node: A computer storing and verifying the blockchain.

• Miner: A computer adding new blocks, earning rewards.

• UTXO: Unspent Transaction Output, a chunk of unspent Bitcoin.

• Wallet: Software or hardware holding your Bitcoin keys.

• Seed Phrase: 12- or 24-word backup code for your wallet.

• Passphrase: Optional password for extra wallet security.

• HD Wallet: Wallet generating all addresses from one master key.

• Master Fingerprint: Unique ID for your wallet.

• Derivation Path: Instructions for creating addresses (e.g., m/84'/0'/0'/0/*).

• SegWit: Address type reducing fees (starts with “3”).

• Native SegWit: Most efficient address type (starts with “bc1”).

• Electrum Server: Software speeding up wallet queries.

• Multi-Signature: Wallet requiring multiple keys to spend.

• Start9: Device for running a node and services.

Next Steps

• Download Sparrow Wallet and create your first wallet.

• Buy a small amount of Bitcoin (e.g., $10) from an exchange like Coinbase.

• Try sending it to your wallet’s “bc1” address.

• Explore running a node with a Start9 or Raspberry Pi.

Bitcoin is your money, your rules. Start small, stay curious, and take control!