What is Bitcoin?

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:

1AMXQxWLUrBhbdrTiNF6nLxyJvSKXDv3xy

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.

In conclusion…

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!

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7 thoughts on “What is Bitcoin?

  1. Phil

    Very nice overview of how it works! I’ve been sitting on the fence for a while on whether on not to buy some bitcoins but it seems like speculation or not it is handy to have at least some btc for the future. It would be nice to know more about the most secure way to keep our bitcoins if we plan to just buy them now and sit on them for a while rather than spending.

    Oh and my now newly created blockchain.info wallet šŸ˜‰ (is this a recommened one?)

    1F9rQYq7yioxh5it5ctCKF7HLX3Ybqg2fN

    Reply
    1. bitcoinanswers Post author

      Thanks for the feedback! I plan to go into secure handling practices in a future post, probably in the next few days. It’s a big enough topic in its own right–I didn’t want to just tag it on the end of this one.

      And yes, blockchain.info is a good one! It has a good reputation in the community (and reputation is very important with bitcoin companies and tools) Generally, you want to avoid web wallets for large amounts of bitcoins, but they’re great for small amounts.

      I just sent you half a bitcent–have fun getting into bitcoin!

      Reply
    2. Bardi Harborow

      Blockchain.info is probably the most secure web wallet ever, but as @bitcoinanswers said, you souldn’t store large amounts in there. Although, that really applies to computer clients as well. The best solution is to use a cold wallet (look it up) to store large amounts.

      Reply
  2. Ian

    Nice post! Good introductory piece for a novice. Since you have penned this, it seems that the prices have gone up nearly 100USD/BTC. Do you think this most recent bubble is due to pop? I am interested in getting started, but I currently have no wares to trade and I am unsure about the immediate future of BTC to buy at 350USD price-tag if it is due to drop soon. Also, as far as going through a bank, like wells fargo, do you know if you must be a member of the bank in order to transfer funds into your BTC wallet? I have my account with Blockchain and I do not live close to my credit union, so any transaction in person with them is out of the question. Also, what are your thoughts on Cloudhashing?

    I also thought it would be interesting to imbed a website with a “tip jar” much like reddit’s tipping system. There are probably several other sites that do this already, but what are your thoughts on this as a way to make a little? I do not have a website… yet, but I think it would be a neat idea, if not now, in the future when BTC is a little more established. I also think it would be a great and easy way to throw some money at content, whether useful, funny, thought provoking, or simply enjoyable without really breaking the bank (at fractions below 0.0001 and no fees, it is hard to say you can’t afford it). With reddit Karma and Facebook Likes garnering so much laud, it seems like it would be a fascinating experiment to attach actual value.

    I would be getting BTC primarily as an experiment that will hopefully pay dividends in the future. So, as much as I would like to embrace the BTC economy, at the moment I feel much more comfortable sitting on a little coin while hoping for the best.

    I am also here to take some of your money…
    1BLpK7h1aroj1YwdrYGpHCPP66spG7crxb

    Reply
    1. bitcoinanswers Post author

      I would first say that as long as you’re still looking at the somewhat long process of actually setting up a bank, you don’t actually have to worry about volatility that much. I think we’re well-past any crashes and corrections much longer than a few days. If you’re seriously considering buying bitcoins, I’d get READY to buy them as fast as possible, so you’re poised to take advantage whenever you feel the time is right.

      My opinion about the market at the moment is that we’ll slingshot back and forth between 300 and 350, which will eventually quiet down to a period of stability, followed by another steady rise. But who knows whether that sequence will take a day or two, or a few weeks. The other thing is that China is going crazy, and lending the market a lot of (potentially temporary) upward force. When that bubble pops–which is a question of when, not if–it will have an affect, but it won’t be devastating. This is all my own humble opinion; don’t sue me, bla bla bla.

      I haven’t heard much about the Wells Fargo method. My intuition is telling me that it’s almost one of the more antiquated ways to get Bitcoins, but I don’t know. It’s important to remember that the chosen method doesn’t matter TOO much unless you’re actually going to try to day-trade (which is a terrible idea for a new bitcoin user). For now I’d just do what is convenient, easy, and has good reputation (checking the bitcoin subreddit regularly does wonders for keeping track of reputations of companies). Specifically, I’d recommend starting a coinbase account and doing whatever the first step is, because it’s all free and pretty painless until you actually want to buy or sell bitcoins.

      The problem with mining in general is that the market is so saturated that the network difficulty (which scales against the combined power of all miners) actually makes computing a hash in ANY way barely worth the electricity it cost to perform. That’s assuming ideal mining equipment that you’d pay top dollar for, too. Any computer can mine, but few can mine *efficiently*.

      I didn’t read your second paragraph until just now–you are a man after my own heart! You’re bringing up some very important thoughts and motivations behind a project I’m working on, called SocialNet. Here’s a link to one (of a few) posts I’ve written about it: http://www.reddit.com/r/Bitcoin/comments/1k48uy/the_next_social_networktipping_usercontrolled/ It’s hard to tell for sure, but this project could become a reality within weeks–we feel we’re very close.

      Just sent you a few bitcents. If you’d email me at syriven@gmail.com, I’d love to ask you some questions! (Also, I know an Ian in real life… are you that Ian?)

      Reply
  3. Bardi Harborow

    Nice article, although it misses some things:

    What is a “client”?
    What is “”mining”?
    and so on…

    It assumes a bit of prior knowledge and isn’t really suitable for a “Explain Like I’m 5” article. Still, your lightning typing skills are impressive as always. Looks like I should set up a competitor to your blog =)

    Reply

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