What are Bitcoins?
Bitcoins are a new type of money – a ‘digital currency’ that is being increasingly used all over the world. Unlike traditional money that is printed or minted in industrial facilities, bitcoins are created by lots of people around the world running computers, using open-source software that solves complex mathematical problems. Bitcoins are the first example of a category of money called cryptocurrency where the production, transactions and issuing of the money is carried out collectively by the network of people that use it. Bitcoins are created by the people, for the people.
Who Invented Bitcoins?
A reclusive software developer that goes by the pen-name of Satoshi Nakamoto is credited with inventing the bitcoin system. His idea was to engineer an electronic payment system that relies on mathematical proof and that was independent of a central authority. His vision was to produce a currency that could be transferable electronically – more or less instantly – and that had very low or no transaction fees. Because the bitcoin system is based on an ‘open-source’ protocol, anyone in the world is free to review the source code of the system and offer improvements and suggestions to Nakamoto’s original design. Indeed, when flaws are spotted, the community of bitcoin developers solves them, meaning that bitcoin is designed by the people to suit the needs of the people.
Who Mints the Bitcoins?
No one. The currency isn’t printed or minted like traditional currency, but instead exists in an entirely digital form. In much the same way that email replaced postal mail, Bitcoins use new technology that makes an everyday activity easier, quicker and cheaper. And because bitcoins don’t exist physically, there isn’t any chance of a shadowy central authority taking over and making its own rules with less accountability, as is the case with normal money that is often devalued when central banks simply print more money to pay for national debt.
To create bitcoins digitally, computer power is required to run a software program called a ‘bitcoin miner’. The community of people that produce the bitcoins are called ‘miners’ and anyone can join. The same network of people that produce bitcoins are also responsible for processing the transactions made with bitcoins, meaning the system has its own payment network built it.
Bitcoins come into existence when a computer running the bitcoin mining programme solves a solution to a very difficult mathematical problem whose difficulty is precisely known. The difficulty is automatically adjusted regularly so that the number of solutions found globally, by everyone, for a given unit of time is constant. Roughly every 4 years, the number of bitcoins that can be created by solving these equations reduces by 50% – resulting in a currency that is produced at a regular and predictable rate.
Is there an Unlimited Supply of Bitcoins?
No. One of the main flaws with fiat money (any money declared by a government be legal tender) is the ability of central banks to print more money whenever they want – devaluing money that is already in the system. There is a maximum limit of 21 million bitcoins built into the system, making the currency more akin to precious metals like gold that have a limited supply.
Why Use Bitcoin?
It’s fast -
When paying by cheque or wire transfer the bank will hold the money for several days until it knows that the money is really there. Bitcoin transactions, in contrast, can be instantaneous, or you can wait just 10 minutes to get the transaction confirmed by the network. Bitcoins are the fastest possible way yet invented to pay someone online.
It’s cheap -
Using the bitcoin network is free, unlike traditional payment providers and banks that charge fees for transactions or services. The bitcoin system has a voluntary fee that you can pay if you want to remunerate the people that operate the network and to speed up the transaction confirmations.
It’s open and decentralised -
Bitcoin is open source – nobody owns it and can take it away from you. Remember the Cyprus banking crisis in March 2013? Deposits larger than $100, 000 were taken away by the central bank to help pay for government debts. This can’t happen with bitcoins because there is no central authority. For people losing trust in the banking system, bitcoins offer a better alternative.
It’s secure and safe to use -
Transactions over the bitcoin network are secured using military grade cryptography and there is no way for someone else to make a fraudulent payment on your behalf. Compare this with online credit card transactions where you enter your secret information into web forms. This is a highly unsafe way to do business and it is no wonder that credit card numbers keep being stolen and fraudulent payments keep being made. So long as you keep your bitcoin wallet safe, bitcoins give you a much greater control over money and eliminates fraud.
It’s private and anonymous -
Just like with cash transactions, bitcoins offer individuals a way to pay for goods and services while protecting your identity. There is no need to give out credit card numbers or personal information when paying with bitcoins. This eliminates identity theft. While the transactions over the bitcoin network are available for everyone to see, there is no way to know where the transactions came from and where they are sent.
You don’t have to worry about inflation -
Regular currencies are subject to inflation when central banks print more money to pay for national debt. This causes the value of the currency to decrease and the price of goods and services to increase. It’s a regular problem with normal currencies but not possible in the bitcoin system because there is a limited supply of bitcoins.
You don’t need to trust middlemen -
In a conventional system, you have to trust a lot of middlemen with your money and your sensitive information. You have to trust the bank and its employees, for example, and perhaps a third-party payment processor and their employees also. With all these middlemen, there are bound to be a few unscrupulous individuals who could potentially do you harm or are out to rip you off. Not to forget, all these middlemen charge exorbitant fees for their services . Why not cut out all the middlemen altogether and instead place your trust in a decentralized system? With bitcoin, there is no need to trust any middlemen – when you send a transaction, it is digitally signed and secure. A bitcoin miner will verify the transaction, and then the transaction is completed without the merchant even needing to know who you are.
With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless. - Satoshi Nakamoto
There are no chargebacks -
Bitcoins are like cash – once you spend them they are gone. Many online merchants will be very familiar with a type of credit card fraud whereby people make a purchase and then contact the credit card company to make a chargeback, effectively reversing the transaction. This can be incredibly costly for merchants, especially if the goods have been shipped, the service set-up or the cost of sales already deducted. With bitcoins, chargebacks are not possible and a person who has sent a bitcoin cannot try to retrieve them without the recipients consent.
The people own it -
All other electronic payment systems currently available are owned by large corporations and out to make huge profits. Take PayPal as an example: if the company decides to suddenly freeze your account and take all of your assets without consulting you, it is perfectly entitled to. Because you own the private key and corresponding public key that makes up your bitcoin address, there is no way for other people to take it away from you. The bitcoin system isn’t owned by a greedy corporation like PayPal, so you never need to deal with greedy corporate behaviour.
It works everywhere at any time -
The bitcoin network is open to anyone with an internet connection and it never sleeps. Don’t worry if other people are using different bitcoin wallets or other software, since everything is based on the same technology, it all works well together.
Payments are easy on mobile phones -
Bitcoin on mobiles allows you to scan-and-pay on mobile phones. All you need to do to receive Bitcoin payments is to display the QR code in your Bitcoin wallet app and let your friend scan your mobile, or touch the two phones together (using NFC radio technology). There is no need to swipe cards, enter PIN’s or sign anything.
There are three main ways to obtain bitcoins: either in person, online through bitcoin exchanges, or you can use a computer program called a bitcoin miner to ‘create’ bitcoins yourself. Be careful when sending money to bitcoin exchanges because you need to trust the operator not to steel your funds and that their website is safe and secure. Look for websites that are secured over SSL (i.e. have https in front of their domain name rather than just http). Websites that use extended validation SSL are the safest of all and will usually made the web browser turn green. Below is an example of a secure website that uses extended validation SSL (our website!) that shows you what to look for.
List of places to get bitcoins:
- Mt Gox – the oldest and most well known bitcoin exchange. After signing up for an account you will need to identify yourself but you will be then able to buy a large number of bitcoins.
- Bitcoinschile.cl – a bitcoin exchange where you can buy bitcoins with bank transfer (Chile only) or by Western Digital or Moneygram (US, some Europe, India, others).
- TradeBitcoin.com – find a local bitcoin trader in your area
- BitInnovate.com – a fixed priced Bitcoin exchange service in Australia. Buy Bitcoins using cash at the bank in Australia (AUD) and New Zealand (NZD) or sell Bitcoins for Australian dollars using Bank Transfer or PayPal.
- BTC-Dealer – buy bitcoins with credit card. Payment methods accepted include: OKPAY (USD), cashU (USD), Cash4WM (USD, RUB), Przelewy24 (PLN).
- Exante Bitcoin Fund – investment fund dedicated to bitcoins. The fund manages wallet security and the account can be opened in one day.
- Bitcoin Nordic – purchase bitcoins using bank transfers, cashU online payments or Danske Netbetaling – an instanst payment method for customers of Danske Bank.
- LocalBitcoins.com – In-person bitcoin trading. This website gives you the ability to find someone in your local area who trades bitcoins and to arrange and meet them in person.
- Bitcoin Wiki’s OTC – a marketplace for people to conduct over-the-counter trading in bitcoin.
- BitcoinTalk Forum’s OTC – Find a direct seller in the forum to buy and sell bitcoins with.
- CoinMama – buy bitcoins with Western Union money transfer.
- BlockChain.info SMS Phone Deposits – buy bitcoins using SMS phone deposits. Works with every mobile phone or landline and no registration or credit card required. Can only be used three times per month but there is no maximum purchase limit.
- Bitcoinary.com – online marketplace to find bitcoin traders. Built in escrow whereby the funds can be released by the bitcoin sellers only when they have received payment.
- Bit Stamp – a European Union based bitcoin marketplace
- BTC-e – A currency exchange with market for trading between bitcoins and other currencies, including the U.S. dollar, Russian ruble and other cryptocurrencies Litecoin and Namecoin. The site has Russian and English user interface translations.
- Justcoin – a bitcoin currency exchange from Norway. Supports EUR and NOK, as well as Litecoin and Ripple.
- BitBox – bitcoin exchange based in the USA. Allows trading between USD and BTC.
- VirWoX – a leading independent exchange trading virtual currencies. Currencies traded include Linden Dollars (the virtual currency used in Second Life), Avination’s C$, the Open Metaverse Currency (OMC) and bitcoins. Can convert to EUR, USD, GBP, CHF, and the other virtual currencies traded.
- Intersango – a bitcoin exchange with an escrow service.
- VirtEx- an exchange trading between bitcoins and CAD (Canadian Dollars).
- Camp BX – a platform to buy and sell bitcoins in real time using USD.
- FBTC Exchange – Dutch bitcoin exchange.
- FYB-SG – Singapore bitcoin exchange trading between BTC/SGD
- Rock Currency Exchange – a currency exchange trading between Second Life Lindens (SLL), EURO, USD and BTC.
- BitNZ – currency exchange allowing trading between bitcoins and New Zealand Dollars.
- Kapiton.se – bitcoin exchange trading between bitcoins and Swedish Kronor.
- Vircurex – exchange trading P2P digital curriencies, such as Bitcoin, Namecoin, Liteoicn, Devcoin, Geistgeld, Solidcoin, I0coin, Ixcoin, as we as Euro and US Dollars.
- Coinbase – a direct payment site offering a PayPal-style internet wallet. Ability to connect a US bank account to buy bitcoins (only available in the US).
How do bitcoin transactions work?
To send and receive bitcoins, you need a bitcoin wallet to transact with other users. A bitcoin wallet is a piece of software that you can download to your computer or mobile phone. There are also web wallets that host your bitcoins. Below is a list of bitcoin wallets:
Just like with regular wallets holding cash, it is a good idea to keep your bitcoin wallet safe and secure. Securing your wallet offline (also known as cold storage) is the safest way to store your bitcoins because it is not connected to a network where computer vulnerabilities could lurk. When storing your bitcoins on a computer connected to a network, it is best to backup your wallet and encrypt it.
The funny thing about bitcoins is that they don’t exist anywhere, even on a hard drive. There are actually no digital bitcoins held inside your bitcoin wallet, rather the wallet only records transactions between other bitcoin addresses and the balances increase and decrease in turn.
Every transaction that has ever occurred with bitcoins is stored in a ledger called the block chain. By looking at the block chain it is possible to work out the balance of every bitcoin address. However, you can use a new bitcoin address for every transaction if you have publicised your bitcoin address and are worried about others knowing your balance.
Bitcoin transactions aren’t particularly exciting to look at, containing only three pieces of information: the record of which bitcoin address was used to send the bitcoins, the amount of the transaction and the receiving bitcoin address.
To send bitcoins you need two things: a bitcoin address and a private key. Bitcoin addresses are generated randomly and are simply a sequence of letters and numbers jumbled together. Anyone can get a bitcoin address and you don’t need to fill out any paperwork or show any ID, as would be needed to set up a bank account. The private key is also a sequence of jumbled letters and numbers but unlike your bitcoin address, this is kept secret. Private keys are used to unlock bitcoin wallets and sign bitcoin transactions.
When bitcoins are sent from one wallet to another, bitcoin miners in the network verify the transaction and put it into the block chain ledger where it stays for eternity. Sometimes you must wait roughly 10 minutes for the transaction to be cleared by the network, while other merchants won’t make you wait, taking the chance that you won’t spend the same bitcoins somewhere else before the transaction confirms.
What is bitcoin mining?
Bitcoin isn’t like traditional money that is printed or minted, rather it is ‘discovered’ by computers around the world that ‘mine’ for coins by competing with each other to solve mathematical problems. Every time a computer running a bitcoin mining program successfully solves an equation, it is rewarded with a block of 25 bitcoins. When this happens, the block chain ledger is updated and everyone on the network hears about it.
It is the miners job to create new blocks of bitcoins, confirm bitcoin transactions and write them to the bitcoin ledger. Bitcoin miners keep the whole system synchronized and can be perceived like a bitcoin data center except that it has been designed to be fully decentralized with miners operating all over the world. Miners will still need to operate even when the last bitcoin is issued because processing the transactions and securing the network will still need to occur.
Bitcoin: A Peer-to-Peer Electronic Cash System (the original paper by Satoshi Nakamoto)