How to Use Bitcoin
Once you’ve got some Bitcoin, what on earth do you do with it?
Software and hardware developers are making it easier and easier to hold, send, and pay with Bitcoin.
Let’s look at a few typical profiles of Bitcoin users and see how they interact with Bitcoin on a daily basis:
Hodlers
Do you know what a hodler is? Have you ever heard of the verb ‘to hodl’? Almost certainly not. There’s a story here…
Back in 2013 when Bitcoin was in its infancy, a member of a Bitcoin forum created a thread with the title I AM HODLING. It was a typo. He’d been drinking. He meant to type I AM HOLDING. It was at a time of lots of volatility in the Bitcoin price and he wanted to signal to the other forum members that he wasn’t going to panic sell.
This spelling mistake quickly achieved legendary status and is now a firmly established Bitcoin term. Hodlers are basically those Bitcoin holders who buy Bitcoin and generally don’t sell – ever. They have a very long-term time horizon and see so much price appreciation potential that they think it’s foolish to sell.
So how does a hodler use Bitcoin? They use it by doing nothing! They buy and hodl. That’s it. Invariably they have their Bitcoin secured nice and snug in a hardware wallet.
Using Bitcoin to Buy a Drink
Let’s go to the other extreme now. You’re not a hodler. You’re a regular dude out one evening looking for a nice cocktail. Somehow you’ve ended up in the obscure British town of Bedford and stumble across a bar by the name of the Auction Room.
You order a Manhattan and casually enquire:
“Evening, my good man – do you by any chance accept Bitcoin?”
“Why, of course,” comes the reply, “Lightning?”
“Well, yes, Lightning. Thank you.”
You get out your mobile phone, open an app, and after a click or two and a scan, you’re done. All paid.
Lightning Network
At this point, we need to explain what the Lightning Network is. Don’t worry, it doesn’t involve being hit by a thunder bolt every time you pay with Bitcoin.
Lightning is the name given to a technology that overcomes the fact that Bitcoin blocks are only finalised every 10 minutes. It wouldn’t be very user-friendly to pay for your cocktail and expect the barman to wait 10 minutes to receive the funds.
Bitcoin itself is often referred to as Layer 1. It’s the base layer. It’s the foundation technology.
Lightning is a Layer 2 technology. It’s built on top of the Bitcoin blockchain. It was designed to facilitate pretty much instant, very low fee, smaller transactions – like buying a cocktail at the Auction Room in Bedford on a Friday night or picking up a little trinket at Mr Charrington’s.
Lightning works differently to Bitcoin and explaining how it works is a conversation for another day… The key point is: it’s built into a growing number of smartphone wallet apps that you can use to pay for things at any bar, café, restaurant, shop, etc., where they accept Bitcoin payments.
A list of popular Bitcoin wallet apps that allow you to pay with Bitcoin over the Lightning network are listed on our Where to Keep Bitcoin page.
Generally, to use a Lightning wallet, you first need to transfer some Bitcoin from your normal Bitcoin wallet to the address of your Lightning wallet. Or, it may be that that your Lightning wallet is your normal Bitcoin wallet, in which case you’re all set.
The Lightning wallet then handles all of the Layer 1 and Layer 2 interactions automatically. You don’t have to be a tech geek – you just use the app to pay.
How to Send Bitcoin
The third use case we’re going to consider is where you simply want to send Bitcoin to someone.
For example, you might live in Australia and want to send Bitcoin to your friend Yoshi in Japan. How do you do it?
Every Bitcoin wallet can generate a ‘Receive’ address. You open the wallet software, go to the Receive section, and there you will find a Receive address. It will look something like this:
bc1qwx6styw7xfkvy8l642lydsw1re56gtggwf32n5
There will also most likely be a QR code next to the address that contains the same data. There are times when a QR code is easier than sending a long string of letters and numbers.
So, your friend Yoshi copies the Receive address from his Bitcoin wallet software and texts or emails it to you.
You then open your wallet software, go to the Send section, and paste Yoshi’s Receive address into the appropriate field. You type in how much Bitcoin you want to send him and then choose the fee you wish to pay to make the transaction happen.
Bitcoin transaction fees are not fixed. They vary over time. You choose how urgent the transaction is – generally Low, Medium or High priority – and the software shows you how much each priority level will cost you. Once you’ve selected the fee, you hit the ‘Create Transaction’ button (or similar name).
The next step is where you approve or sign the transaction. This can only be done by using your private Bitcoin key:
- If you have a hardware wallet, you would normally connect it to your computer and type in the pin or passcode. The wallet would then be recognised by your wallet software, and you would be asked to sign the transaction which you would do by pressing buttons on your wallet. Finally, you would ‘broadcast’ or complete the signed transaction by clicking a button in your software.
- If you have a software wallet on your phone or tablet, you can complete the approve transaction step on the phone itself. It will simply be the last step of the process. Very easy.
To be fair, the process above using a hardware wallet is a bit fiddly. Software and hardware interface designers are working hard to make it as straightforward as possible. A list of the main hardware wallets can be found on our Where to Keep Bitcoin page.
Yoshi will then receive the Bitcoin after a certain amount of time. If you sent it as high priority, the transaction would probably get into the next block and he would get the funds after about 10 minutes. If you sent it as a lower priority, it would take longer.
Summary
- You don’t actually have to ‘use’ Bitcoin – it’s OK simply to own it. Just as you might own stocks and shares, gold, a house, and so on. If you buy and hold Bitcoin, without necessarily using it very much, you are a Hodler. Welcome.
- Using Bitcoin smartphone software wallets that support Lightning technology, you can pay in Bitcoin wherever Bitcoin is accepted.
- You can send Bitcoin to anyone you want, whenever you want, anywhere in the world, at low cost. All you need is their Bitcoin receive address. And vice versa: you can receive Bitcoin by sending someone your receive address.
Useful Resources
> Joe Nakamoto takes you on a wacky, entertaining shopping spree around the beautiful town of Lugano in Switzerland where he buys things using a Bitcoin lightning wallet on his phone:
> Here Natalie explains why the Lightning Network is an important part of Bitcoin and how it works:
> For a more in-depth, technical look at Lightning, have a look at the Wikipedia page: en.wikipedia.org/wiki/Lightning_Network
Where to Next?
If you’ve been reading the sections in order, the next page we recommend is How to Mine Bitcoin.