What is Bitcoin?
From the official site bitcoin.org:
Bitcoin is a peer-to-peer digital currency. Peer-to-peer (P2P) means that there is no central authority to issue new money or keep track of transactions. Instead, these tasks are managed collectively by the nodes of the network. Advantages:
- Bitcoins can be sent easily through the Internet, without having to trust middlemen.
- Transactions are designed to be computationally prohibitive to reverse.
- Be safe from instability caused by fractional reserve banking and central banks. The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) throughout the network, not monopolized by banks.
Bitcoin is an open source project currently in beta development stage.
I’ve been lurking the topic of Bitcoin for a while and can tell you that there is a lot to Bitcoin and a lot to take in before comprehending how the system works. My write-up here is my best attempt to explain Bitcoin in my own words. You could choose to blindly trust the Bitcoin system though you don’t have to since it is open-source and transparent. Since Bitcoin is a new currency that plays by new rules, Bitcoin gets scrutinized far more than today’s paper and coin currency. Here’s a friendly video that brings Bitcoin down to a much more approachable level:
Not sure why you shouldn’t trust the Fed? There’s a video for that too. (This one is 30 minutes long and presents a strong change of view.)
What does that mean?
Bitcoin is a peer-to-peer digital currency.
Bitcoin is currency. This means it can be used in exchange for goods and services.
Bitcoin is digital. This means the products, bitcoins, are virtual and have no physical representation.
Bitcoin is peer-to-peer. This means the system is decentralized. Nobody has control over the system, issues new money, or tracks transactions. For a more technical explanation of Bitcoin, you can read the original paper by Satoshi Nakamoto (.pdf).
What do I do with it?
It’s a form of money, so you do the same thing you would do with other money. You buy things with it or you accept it from others who would like to buy things. You can also convert it from Bitcoins to USD (or other currencies) or buy Bitcoins for USD. Between direct deposit, credit cards, and online bill pay, today’s currency isn’t a whole lot different from a virtual currency. You can see the current conversion rates at various exchanges, of which Mt. Gox is probably the largest.
You can use Bitcoins already to purchase hosting, web services, VoIP service, games, virtual goods, and tangible goods. Find a list of links to websites that are accepting payments in the form of Bitcoin from the Bitcoin wiki Trade page or the Bitcoin Directory.
For some purchases, you may be interested in using an escrow service to ensure money is securely exchanged.
How do I get started?
Bitcoins are comparable to the regular currency you use every day. A bitcoin has a certain value and you can use it to buy something. For example, 1 Bitcoin might allow you to buy one MP3 that you want. You get this bitcoin by receiving it from someone or converting your current cash into Bitcoins through an exchange. You store and access those Bitcoins through your wallet. The wallet contains Bitcoin addresses. Wallet.dat resides in the Bitcoin directory underneath the user’s application data folder on Windows computers. You can also choose to use an “eWallet” through a service called mybitcoin.com. In related reading, knowing how to secure your wallet is always a good idea.
To use the Bitcoin system and establish your wallet, you get started by downloading the official Bitcoin client from Bitcoin.org. The client is available for Windows, Linux, and Mac OS X (10.5 or higher).
The Bitcoin client connects to other Bitcoin peers and keeps track of your Bitcoin balance. A neat feature of Bitcoin is that it promotes anonymity. Your wallet receives money sent to your address but you can generate new and additional Bitcoin addresses at any time and keep them organized in your Address Book. This way, you can generate an address to send and receive Bitcoins that is unique to each vendor or source.
You can receive a few Bitcoin “pennies” to play around with from the Bitcoin Faucet. We Use Coins is a great resource to view when first getting started with Bitcoin.
What is Bitcoin mining?
Instead of money being introduced to the US dollar by the Federal Reserve, Bitcoin has a fixed amount of Bitcoins (21 million) that will gradually be introduced to the Bitcoin market over the next few years. These coins are introduced after mathematical problems are solved. This is done in much the same way as grid computing. It’s even started quite a hobby with Bitcoin mining. The Bitcoin client has a “Generate Bitcoins” option which will use your spare CPU cycles to work on solving these problems and create Bitcoins for you in exchange.
The Bitcoin miners have developed special software that can handle the mining more efficiently and can pool many computers together to work on completing the calculations faster. GPUs, the processors on video cards, have been found to be even better at solving these types of hashes. Using the additional mining software, you can set your CPU or your GPU to start working on crunching these numbers individually, or in a pool. BitcoinMiner.com discusses different mining software and mining pools you can join. I have been using the GUI for the poclbm miner and contributing to the BitcoinPool and BitPenny pools to play around with it.
Being a hobby, people have researched to find some of the best hardware that calculates the fastest. Since the RoI of calculating Bitcoins depends on the amount of electricity consumed, having a more efficient card is more “profitable”. ATI video cards tend to outperform NVidia cards because they excel at the floating point calculations. There are detailed comparisons by model of video cards on how they perform at mining. Mining Bitcoins isn’t a get rich quick scheme and if you’re paying for your electricity, it will probably be more worth it to convert some money to Bitcoins. Unless you happen to have one of the efficient video cards already in your computer and want to take up Bitcoin mining as a hobby, you can probably consider Bitcoin mining a detail to Bitcoin that you don’t need to worry about.
Should I convert all my money to Bitcoins?
Probably not. Bitcoin as a currency is still in its infancy and as software, it’s still in beta. However, as more and more vendors are starting to accept Bitcoins as a valid form of payment, you might convert your money to Bitcoins as you need it. You can buy Bitcoins with Paypal through CoinPal.
How do I track the Bitcoin market?
Since Bitcoin is still young and more transparent than other money markets, you can learn a lot about finances by observing the Bitcoin market. You can use these websites to observe the market:
What’s next?
Bitcoin will be interesting to watch and see where it goes. It’s becoming more legitimate with every vendor that supports it and as it gets more established. You can learn more through the official Bitcoin FAQ and the Bitcoin wiki. You can also get involved in the community with the Bitcoin Forum or the Bitcoin Reddit community.
A shout-out to anybody that has read Cryptonomicon by Neal Stephenson.