Bitcoin was invented as a peer-to-peer system for online payments that does not require a trusted central authority. Since its inception in 2008, Bitcoin has grown into a technology, a currency, an investment vehicle, and a community of users. In this guide we hope to explain what Bitcoin is and how it works as well as describe how you can use it to improve your life.
Since anything digital can be copied over and over again, the hard part about implementing a digital payment system is making sure that nobody spends the same money more than once. Traditionally, this is done by having a trusted central authority (like PayPal) that verifies all of the transactions. The core innovation that makes Bitcoin special is that it uses consensus in a massive peer-to-peer network to verify transactions. This results in a system where payments are non-reversible, accounts cannot be frozen, and transaction fees are much lower.
Where do bitcoins come from?
We go more in-depth about this on the page about mining, but here’s a very simple explanation: Some users put their computers to work verifying transactions in the peer-to-peer network mentioned above. These users are rewarded with new bitcoins proportional to the amount of computing power they donate to the network.
Who controls Bitcoin?
As we mentioned above, there is no central person or central authority in charge of Bitcoin. Various programmers donate their time developing the open source Bitcoin software and can make changes subject to the approval of lead developer Gavin Andresen. The individual miners then choose whether to install the new version of the software or stick to the old one, essentially “voting” with their processing power. It is in the miners’ best interest to only accept changes that are good for the Bitcoin currency in the long run. These checks and balances make it difficult for anyone to manipulate Bitcoin.
How To Set Up a Wallet
A “wallet” is basically the Bitcoin equivalent of a bank account. It allows you to receive bitcoins, store them, and then send them to others. There are two main types of wallets. A software wallet is one that you install on your own computer or mobile device. You are in complete control over the security of your coins, but they can sometimes be tricky to install and maintain. A web wallet or hosted wallet is one that is hosted by a third party. They are often much easier to use, but you have to trust the provider to maintain high levels of security to protect your coins. There are four main wallets that we recommend for beginners.
Coinbase is a web wallet with a simple design and a number of very useful features that make it excellent for beginners. You can send and receive bitcoins via email and buy and sell bitcoins directly from Coinbase. A full-featured Android app enables access to all account functions on the go. Coinbase’s founders have a proven startup track record and have raised money from very prominent venture capitalists. This gives Coinbase a level of legitimacy unparalleled in the Bitcoin space. They are also one of the only large Bitcoin companies to never suffer a major hack.
Bitcoin Wallet for Android and Blackberry
For those looking for mobility and security, we recommend the simply-titled Bitcoin Wallet mobile app. There is a version for both Android and BlackBerry OS. It is a software wallet, so you retain complete control over your bitcoins. It also works well with QR codes and NFC, making transferring coins to someone else’s phone easier than writing a check. Be sure to backup your wallet (with the included “Backup Wallet” feature) or you risk losing all your coins the next time you get too close to a pool.
Blockchain.info
One of the quickest and easiest ways to get a Bitcoin wallet is to simply go to Blockchain.info and fill out their brief requirements. Blockchain.info is another web wallet like Coinbase and provides a simple setup and mobile access to your account via their Android app. They also provide a number of other useful services to the Bitcoin community.
Other Wallets
We also recommend a few other wallets, but not for the beginning Bitcoin user. If you are up for more of a challenge, Armory is a good choice for those requiring the highest possible security, and the original Bitcoin-Qt client is also trusted and worth learning how to use.
How To Buy Bitcoins
Coinbase
If you don’t mind waiting a couple of days, the easiest and cheapest way to get your hands on some bitcoins is to sign up with Coinbase and link your bank account. Coinbase charges a low 1% fee and you receive your bitcoins as soon as the transfer from your bank account clears. Coinbase doubles as a web wallet with a mobile Android app. This allows you to easily purchase and sell bitcoins from your office, on the go, or from the comfort of your own home.
LocalBitcoins.com
Another great way to get bitcoins today is LocalBitcoins.com. It operates like a craigslist for bitcoins allowing buyers and sellers in the same geographical areas to find each other and trade bitcoins for cash. While this can be very simple and quick, we recommend taking the same precautions you should take whenever meeting a stranger from the internet. LocalBitcoins.com has a rating system that should help you find a trustworthy buyer or seller, but maybe don’t meet them in a dark alley or under a bridge.
Online Bitcoin Exchanges
Bitcoin exchanges enable you to store both dollars and bitcoins in your account and then buy and sell bitcoins instantly at the market rate. This enables you to trade bitcoins the way you might trade a stock. The main downside of exchanges is that it can be difficult to fund your account with dollars in the first place or transfer your dollars out after selling coins.
Mt.Gox
Mt.Gox was the largest Bitcoin exchange and now all their old users are in a class action lawsuit against them. Coinbase is a much better option.
Other Exchanges
As Bitcoin is a currency without borders, there are many other exchanges that can be used internationally. We have had some success with Russia-based BTC-e despite their clunky interface. European Union-based Bitstamp is well regarded
Sending bitcoins
Sending bitcoins is as easy as copying and pasting someone else’s address, choosing an amount, and clicking send. This may seem backwards to people used to supplying credit card information to purchase things online, but this method allows the sender to be in complete control of the payment process. Transactions are also irreversible. Essentially, sending a bitcoin is a lot like sending an email. You put in someone else’s address and there’s no going back after you hit send.
Feel free to practice sending bitcoins by donating to our bitcoin guide. Our donation address is that green string of letters and numbers in the sidebar.
Don’t worry if it takes a few minutes for the recipient to see the payment that you have made. Depending on the network and on the wallet applications the two parties are using, it can take up to ten minutes for the first confirmation of the transaction. Some services require six confirmations (which can take about an hour) before they recognize the transaction.
Receiving bitcoins
To receive bitcoins, choose a receiving address from your wallet, provide it to the other party and wait for them to send payment. As mentioned above, it can take around ten minutes for the transaction to be confirmed by the Bitcoin network, and it is standard to consider transactions that have been confirmed six times to be fully confirmed.
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