A note on understanding Bitcoin:
Bitcoin-skeptics have reasonable, common-sense questions. Unfortunately, Bitcoin offers mostly complex, awkward explanations. This shouldn’t be too surprising, really–it claims to be the first truly unique currency in hundreds of years. If that’s true, then it won’t be built out of easy, palatable answers. So if a question like “Well, who pays for the infrastructure?” takes over an hour to explain, don’t freak out. If it was a short answer, you’d probably know it already.
So let’s begin!
What is Bitcoin?
Bitcoin is a currency. Just like the Yen is Japan’s currency, many people are calling Bitcoin “the currency of the Internet”. Some may argue about whether Bitcoin fits the technical definition of money, but at least for the common usage of the word, it’s close enough for now. You can buy things with it and sell things for it, and it’s recognized as a common unit of value–at least to other Bitcoin users. Instead of dollars and cents, we are working with bitcoins and bitcents. At current prices (I’ll explain what that means in a bit), 1 bitcoin (commonly written “1 btc”) is worth over $250. Don’t let this fool you, though–you can buy, sell, and use fractions of a Bitcoin. The smallest denomination of a bitcoin is 0.00000001 btc (often called a Satoshi), and there are other names for other denominations. For example, 0.001 BTC = 1mBTC, and 0.01 BTC is often called a bitcent.
I personally have a little over 5 btc at the moment. There are products and services I could buy with my bitcoins, although for now there’s a lot less variety when compared to a traditional currency. Holding bitcoins is a bit like holding a foreign currency like Yen while in the US: Less often usable than the native currency, but not necessarily actually worth any less. For example, if I can find someone who will transact with Yen, it works just fine whether we’re in Japan or the US. Same with bitcoins: all I need is to find someone who also uses them (when you’re on the Internet, this gets much easier), and I can spend them–just like cash, but actually more easily, cheaply, and quickly. I could also take them to an exchange website (I use coinbase), and sell them for good ol’ USD.
In the same way that I can buy things with bitcoins, I can offer my own products or services in exchange for someone else’s bitcoins. In fact, when I first got into this whole Bitcoin thing, I dropped out of college and did contracting-style coding work for people who had bitcoins to spend. I made over $500 worth of bitcoins with about 20 hours of work–and that was without a degree, professional experience, or even a portfolio. I was then able to turn around and use an exchange to get $500 USD in my bank account, which paid for a month of rent. I could not have done that if it weren’t for Bitcoin–I’ll write more about this in a future post. For now, just know that bitcoins can be earned and used in ways very similar to conventional money–albeit with some key differences, which we’ll get into. There are many things that USD and other conventional currencies can buy that Bitcoin can’t buy yet; but there are also some things that Bitcoin can buy that traditional currencies will never be able to.
Bitcoins’ value is determined and measured most often by online “exchanges” (which I write more about in “how to get bitcoins”), where users can trade traditional currencies like USD or Yen for bitcoins. The current price of bitcoins is just over $263.11/btc. This price is determined completely by the supply and demand of bitcoins. Back when Bitcoin first began, they were essentially valueless, since no one knew about them. As more people got invovled, there were less bitcoins to go around per person, so they began to rise in value. As you can seen on this graph depicting bitcoin’s price over the last year, the price can be volatile at times–but it’s the common belief of Bitcoin proponents like myself that this value will continue to rise in the long term. Bitcoin is just now starting to peek its head into mainstream media like Washington Post and Fox News, and as more people become interested, the price of Bitcoin is likely to increase.
How is Bitcoin used?
Payment within Bitcoin is built around what’s called a “Bitcoin address”–mine looks like this:
All addresses start with 1 or 3, are about that long, and are made up of random-looking sequences of numbers and letters (collections of these addresses are sometimes called “wallets”). With that address, any reader now has all the information they need to know to send me some of their own bitcoins. I’m not worried about putting my address on a public blog (or anywhere, really), because it doesn’t actually allow anyone to control my account. With my address, you can send me bitcoins, as well as look up the history of that address, but that’s it. If you do send me bitcoins, it will take up to, on average, 10 minutes for me to be able to spend them. Similarly, if you were to get a bitcoin address and leave it with an insightful comment, I could (and probably would!) send you at least a few mBTC.
The exact process for sending someone bitcoins might be different for different clients, but it’s always something along these lines: Copy the address, paste it into your bitcoin client, type in an amount to send, and click “send”. Somewhere along this process you might have to put in a password. That’s it! This ease of sending payments to anyone (and remember, all you need is their Bitcoin address) is one of the great strengths of Bitcoin. I have the android Bitcoin app, which makes it even easier–I can scan QR codes that represent bitcoin addresses, allowing me to basically skip the step of directly managing the bitcoin address myself. I also have addresses for some of my friends stored as contacts for quick access (this is great for managing friendly bets and loans, by the way).
There are other tools that use bitcoins, in which the interface is different. For example, the bitcointip bot on Reddit allows reddit users to tip one another (even if the recipient has never heard of Bitcoin!) by making a reddit comment like “+/u/bitcointip 0.1 btc”. I’ve used this many times–sometimes to tip a comment or post I enjoy, and other times to actually purchase some service or information, like I did at the end of this post. This bitcointip bot is one example of the extremely flexible and open use of the Bitcoin protocol, which is another one of Bitcoin’s strengths.
That’s a basic primer for how people actually use bitcoins. If you want more of a tutorial that actually gives more specifics, check out this site. Keep in mind that if you plan to hold large amounts of bitcoin, there are some security tips you should know. Bitcoin is somewhat different from the money we’re used to using, and therefore the risks are somewhat different. I plan to go into detail with good, secure practices in a future post. If you want to get some bitcoins before that happens, check out this site to get an idea of the kind of security precautions I’m talking about.
How do I get my own bitcoins?
Perhaps the most rewarding way to acquire bitcoins is to offer a product or service for bitcoins. For example, visit /r/jobs4bitcoins. There, users post hiring and for-hire posts. This is how I found all my contracting business I mentioned earlier. There are other sites that facilitate the same thing, some of which are specialized: If you have medical expertise, for example, check out coinmd.
If you can’t or don’t want to directly earn bitcoins, they can be bought on any Bitcoin trading website (as I said earlier, I use coinbase for this). The total waiting time associated with setting up an account and jumping through the hoops necessary to actually make your first purchase can be a few days or weeks, depending on the exchange you use, and the process may require weird hassles like sending in a picture of your driver’s license. The exchanges themselves aren’t really to blame for this hassle; it’s mostly caused by regulations that the exchanges must follow. Because of this, exchanges in different countries require different things, and some are easier to use than others. But even with all this hassle, this is the method most new users end up going with, once they decide they want some bitcoins.
Another way to get bitcoins is to buy them locally, in person. If you know someone who has some, great! If not, websites like localbitcoins are a good way to find someone. This option has two major advantages: your bitcoins aren’t initially connected to your identity (certain deliberate steps can maintain this lack of connection), and the transaction can be done instantly, instead of days or weeks after signing up for an exchange. Unfortunately, Bitcoin’s penetration is pretty low at the moment, so it could be pretty hard to actually find someone who’s willing to sell Bitcoin in person. And if you do find a local seller, they may ask for a somewhat elevated price to pay for the hassle of organizing the trade.
It’s also technically possible to “mine” bitcoins (in fact, this is where all bitcoins originally came from), but it’s not actually worth it in the overwhelming majority of situations, and almost certainly not a great option for new users. I’ll go into more detail about what mining is (and why you probably don’t care too much) in a later post. But for now, my advice is just to not worry about it, unless you’re interested on an academic level.
Can I use Bitcoin to get rich quick?
Quick? Maybe, but the shorter of a term we’re talking, the closer it is to gambling.
Bitcoin prices have been on a very interesting ride in the past year, as this graph shows. While most of us believe that its general, long-term trend will continue to be upward, anyone who claims to be absolutely sure about the more immediate future should probably be ignored. Imagine that you buy 5 btc today for $1,300, but tomorrow the price falls, and suddenly your bitcoins are only worth $1000. The next day it falls even lower, and now your bitcoins are worth only $800. While I don’t think the price could possibly fall that much that quickly anytime soon, I’d be a fool to say I was sure about that. However, as iffy as I am about the short term, I do have a lot of faith in the long term–I think (along with most Bitcoin proponents) that they’ll eventually be worth thousands of times what they’re worth now. So, can Bitcoin make you rich tomorrow? I wouldn’t count on it. But can Bitcoin make you rich eventually? In my humble opinion, it’s all but guaranteed to. In tomorrow’s post, I’ll start to explain where that conviction comes from.
This should be enough to start forming a fuzzy idea of what Bitcoin is. My next post will focus on the advantages of Bitcoin: How is it different from PayPal? What does decentralized mean? What is a cryptocurrency? How is Bitcoin anonymous? What can I do with Bitcoins that I can’t do with conventional money? In the post after that one, I’ll describe what it is about Bitcoin that actually makes all of those advantages possible.
I’d love to write these every day, and I have a deep enough understanding of Bitcoin to continue doing so for quite a while. Even tiny tips would go a long way toward keeping the bills at bay, and that’s all I’d need to keep doing this! 1AMXQxWLUrBhbdrTiNF6nLxyJvSKXDv3xy
If there’s any basic information that should be in this post and isn’t, let me know in the comments! If you include your bitcoin address, and I use your suggestion, I’ll be happy to send you a tip of at least 0.01 btc for the suggestion (assuming there aren’t like… hundreds of you, of course). Thanks for reading!