Bitcoin: Getting Started
What is Bitcoin?
Bitcoin is a decentralized digital cryptocurrency. Please review these videos:
For anyone looking for a more advanced overview, here is the Khan Academy Bitcoin Course Playlist:
Address (Public Address): These are the parts of the Blockchain which denote where the bitcoins are. Anyone can generate an address and begin receiving bitcoins. The address can be made public in order to receive bitcoins.
Bitcoin, BTC: The Cryptographic bits of data that can be exchanged as a payment system. Bitcoins are divisible a theoretical infinite number of times. There are several names for these divisions including BitCents (BTC x 10-2), mBTC (BTC x 10-3), uBTC (BTC x 10-6) and Satoshi (BTC x 10-9).
Block Chain: This is the P2P transaction ledger for Bitcoin. All transactions are stored on the ledger and on every computer connected to the bitcoin network. Older transactions are compressed for efficiency, however it still can take some time to update when a computer has been off for a while.
Confirmation: It is possible that bitcoins could be sent fraudulently (through double spends, etc). However, the system is constantly being audited by miners. If a transaction is successful, then it will start acquiring confirmations. It is considered to be guaranteed correct if it has acquired 6 confirmations. You may decide how many confirmations you wish to wait for. Increasing your fee will prioritize the transaction to the miners and will make transactions get confirmed faster. If you do not care how long the transaction takes, you can send the transaction fee free. A significant fee to make the transaction occur quickly is still very small.
Difficulty: Bitcions are mathematically released and the difficulty it is to get bitcions is constantly adjusted in order to regulate the release of coins. If coins are being released too fast (more people start mining as BTC price rises) then the difficulty will increase making mining less profitable.
Double Spend: A user will try to send bitcoins to 2 addresses simultaneously. The software thinks it has enough coin for both transactions when in reality it does not. Thus, the user is attempting to multiply his purchasing power. This is why miners are auditing the system in order to prevent such fraud.
Hash Rate: The rate at which a miner’s (or the bitcoin network) calculates problems for auditing and verifying the blockchain. At the time of writing this, the bitcion network’s hash rate is 4,000,000 Gh/s which means that it performs 4 million billion calculations a second.
Key (Private Key): This is what allows you to send the bitcoins in an address. If you lose your private key, you can look at bitcoins in a wallet but you will not be able to send them. Public Addresses can be generated from Private Keys, but Private Keys cannot be figured out from Public Addresses.
Mining/Miners: Miners use mining equipment to audit the bitcoin system. They are rewarded with bitcoins as they are being released into the network on a regular, planned basis. Once all bitcoins are released, mining will still continue but will survive on the transaction fees.
Mixing: There may be a time where you wish to send coins in a way that is anonymous. A mixing service will allow you to send coins into a pool where your coins get sent somewhere unrelated to the recipient of the coins. The recipient will then get coins from someone else who sent them to the pool. Current fees are around 1%
P2P: Peer-to-peer system where there is no central location where the data is stored. It is on everyone’s computer and is shared between users. This means there is no central system you have to go through and shutting down one node will change nothing about the system as a whole.
Signature: If one wishes to make known that an address belongs to them, they can transmit a digital signature to the network. This will cause you to lose anonymity.
Taint: If coins are sent from one address to another, the system “remembers” where the coins have been. This is called taint. Tainted coins can be mixed and sent to a new address if desired. Taint can potentially lead to linking addresses, but because of mixing it makes it impossible to trace.
Wallet: This is the collection of addresses that you own is said to be stored in a wallet. If you use the standard software, the file that stores your addresses is wallet.dat.
Can Bitcion be Hacked?
The Bitcoin Math itself cannot be hacked unless you took the power of the sun and converted it into computing power for a couple million years. This is theoretically possible, but practically impossible.
The weakness in bitcoin is not the math. There are a few ways in which bitcoin has vulnerabilities.
The 51% attack:
If there was a situation in which someone can get enough computing power in order to overcome the entire bitcoin system (own 51% of it) then their miners could approve the transactions they want to the detriment of actual valid transactions. The longer bitcoin goes on and the more popular it gets, the more impossible it is for this to happen. Currently, it would take a few super computers to overcome the system and is quickly becoming nearly impossible.
The main thing you want to be concerned about is YOUR security. The weakness in bitcoin is not the math of bitcoin, but you not having good protection of your private keys. If you store your private keys in a wallet.dat file on your computer, then I will not try to hack bitcoin. I will hack your computer and copy that file. Thus, precautions must be taken.
How Can I Get an Address/Wallet?
Computer Client (Think Checking Account)
There are several ways to get an address/wallet. If you are just going to dip into the bitcoin network and want an easy way to send small amounts of coin, then the best method is to use one of the many programs available for bitcoin wallets.
The Bitcoin-Qt is the backbone of the network and the main base client if you want to start.
Armory Client is a feature-rich client that I currently use. It allows paper back-ups and many other things.
Encrypting a Wallet:
If you want to add one step up to your protection, both of those clients allow you to encrypt your wallet by using a passphrase. Make sure the passphrase is complicated. An easy passphrase just creates a vulnerability. You can get a good enough encryption in order to make it pretty secure to store some coins.
Backing Up a Wallet:
You can copy a wallet.dat file onto a thumb drive, cd, or even write your private key on a piece of paper. In case of a hard drive failure, you do not want to lose your coins.
Cold Wallets (Think Savings Account):
In order to take away the vulnerabilities to your computer, then you can print out an only paper wallet. You can use the public address to send coins into the wallet and only import the private key at some point in the future when you wish to spend those coins. Some especially paranoid (or they just have a loooot of bitcoins) people will buy a computer that has never touched the internet in order to generate the address and then destroy the computer.
For a full description as to how to generate a good paper wallet, read this link:
If you want to generate some paper wallets, you can go here (be sure to move your mouse around as it helps make the address generation more random):
There are many other cold storage options (and you can come up with your own) but here are some examples that are out there.
Many more are probably in use that people do not wish to share.
How Do I Get Bitcoins?
There are many exchanges available. If you wish to look at the list:
The most popular one is Mt. Gox
CoinBase has been used and is trusted by a few FDR users.
However, the easiest ways to get bitcoins are to either use BitInstant (https://www.bitinstant.com/) or LocalBitcoins.com (https://localbitcoins.com/). BitInstant allows you to send a moneygram and the bitcoins appear in your wallet by the time you get home. Local bitcoins allows you to meet up with people (at a public place to prevent theft) and trade BTC for money. Make sure to wait for confirmations before leaving a local bitcoin exchange (and make sure you give a transaction fee to the network so that this happens in a reasonable amount of time.) If you have any worries at all in a local exchange, do not buy and just check the next person on the list.
Besides exchanging money, there are other options.
These sites pay you to look at ads or watch videos. I run them sometimes in the background when I’m going to be on the internet all day anyway. You will not make a lot of money on this (a couple cents an hour maybe?) However, if you are just looking for a small amount to tip people with or just a free way to dip in, then faucet sites may be for you.
I have used bitvisitor.com in the past.
Create an address and put it in your signature in forums or on your website. When you produce content people enjoy, they may send you a tip.
Accept payment for goods or services in bitcoin. Especially if you think prices will go up (or bitcoin just has fewer fees) you can provide discounts for customers who pay in bitcoin.
I would HIGHLY recommend against this until you have spent a lot of time on bitcointalk.org and know what you are doing with mining. Mining can lose you money if you get the wrong equipment. However, some people (especially where power is free or very cheap) are able to make money mining for bitcoins.
Of course there are probably many other ways to earn BTC, but these are the basics.
Can I Accept Bitcoins Without Having to Hold the Bitcions?
Bitpay (https://bitpay.com/) and other bitcoin payment providers allow people to accept bitcoins and get a check for the value of bitcoins at the end of the day. This allows people to accept bitcoins as payment, but not worry about potential fluctuations in price in the bitcoin market.
How Can I Send Bitcoins?
If you have the coins on a cold wallet, import them into a client. Select “send bitcoins” or the equivalent. Make sure the transaction fee is set where you want it to be. Paste/Type the public address of where you would like them sent. Paste/Type the amount. DOUBLE CHECK THE AMOUNT AND ADDRESS!!! There are no chargebacks with bitcoin and someone may keep excess coins that are sent if they choose to. If you send to the wrong address, then it is most likely that that person will keep them (or they will never be seen again if you somehow really messed up). There are checks in the system to correct toward real addresses; however, double checking should always be performed. Send the coins.
What Can I Buy with Bitcoins?
A list has somewhat been compiled here:
However, there are probably many, many more who are not on that list and accept bitcoin.
An open-source map of bitcoin-friendly businesses has been started here:
Even if you do not end up getting bitcoin, but enjoy the idea it would be awesome if you supported bitcoin-friendly buinesses in your area with fiat dollars as well as with bitcoin if you wish.
Where Can I Learn More?
And many more...
At this point I will take a break and ask for feedback. I probably made mistakes, so I would be happy to hear corrections.
Do you have a question I didn’t answer? I will answer it below and if I think enough people will have the same question, I will edit this post so that others do not have that question at the end.
If you want more information on a topic, I may have some sources or can create another post about it.
Thanks for reading!