Bitcoin is a form of digital currency, created
and held electronically. No one controls it.
Bitcoins aren't printed, like dollars or euros -
they're produced by people, and increasingly
businesses, running computers all around
the world, using software that solves
mathematical problems.
It's the first example of a growing category of money known as cryptocurrency.
What makes it different from normal
currencies?
Bitcoin can be used to buy things
electronically. In that sense, it's like
conventional dollars, euros, or yen, which are
also traded digitally.
However, bitcoin's most important
characteristic, and the thing that makes it
different to conventional money, is that it is
decentralized. No single institution controls
the bitcoin network. This puts some people
at ease, because it means that a large bank
can't control their money.
Who created it?
What is Bitcoin?
A software developer called Satoshi
Nakamoto proposed bitcoin, which was
an electronic payment system based on
mathematical proof. The idea was to produce
a currency independent of any central
authority, transferable electronically, more or
less instantly, with very low transaction fees.
No one. This currerncy isn't physically
printed in the shadows by a central bank,
unaccountable to the population, and making its own rules. Those banks can simply produce more money to cover the national debt, thus devaluing their currency.
Instead, bitcoin is created digitally, by a
community of people that anyone can join.
Bitcoins are 'mined', using computing power in a distributed network.
This network also processes transactions
made with the virtual currency, effectively
making bitcoin its own payment network.
So you can't churn out unlimited bitcoins?
That's right. The bitcoin protocol - the rules
that make bitcoin work - say that only 21
million bitcoins can ever be created by
miners. However, these coins can be divided into smaller parts (the smalest divisible amount is one hundred millionth of a bitcoin and is called a 'Satoshi', after the founder of bitcoin).
What is bitcoin based on?
Conventional currency has been based on
gold or silver. Theoretically, you knew that
if you handed over a dollar at the bank,
you could get some gold back (although
this didn't actually work in practice). But
bitcoin isn't based on gold; it's based on
mathematics.
Around the world, people are using software programs that follow a mathematical formula to produce bitcoins. The mathematical formula is freely available, so that anyone can
check it.
The software is also open source, meaning
that anyone can look at it to make sure that it does what it is supposed to.
What are its characteristics?
Bitcoin has several important features that set it apart from government-backed currencies.
1. It's decentralized
The bitcoin network isn't controlled by one
central authority. Every machine that mines
bitcoin and processes transactions makes
up a part of the network, and the machines
work together. That means that, in theory, one central authority can't tinker with monetary policy and cause a meltdown - or simply decide to take people's bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013.
And if some part of the network goes offline for some reason, the money keeps on flowing.
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What are its characteristics?
1. It's easy to set up
Conventional banks make you jump through
hoops simply to open a bank account.
Setting up merchant accounts for payment
is another Kafkaesque task, beset by
bureaucracy. However, you can set up a
bitcoin address in seconds, no questions
asked, and with no fees payable.
2. It's anonymous
Well, kind of. Users can hold multiple bitcoin
addresses, and they aren't linked to names,
addresses, or other personally identifying
information. However..
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How Can I Buy Bitcoins?
You can buy bitcoins from either
exchanges, or directly from other people via marketplaces.You can pay for them in a variety of ways, ranging from hard cash to credit and debit cards to wire transfers, or even with other cryptocurrencies, depending on who you are
buying them from and where you live.
Surprisingly, it's still not easy to buy bitcoinswith your credit card or PayPal, depending on your jurisdiction.
This is because such transactions can easily
be reversed with a phone call to the card
company (ie 'chargebacks'). Since it's hard to prove any goods changed hands in a transfer of bitcoins, exchanges avoid this payment method and so do most private sellers.
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How Can I Buy Bitcoins? (cont.)
However, the options have recently grown for
consumers in some countries.
In the US, Coinbase, and Circle offer
purchases with credit cards. Bittylicious,
CoinCorner and Coinbase offer this service in
the UK, accepting 3D Secure-enabled credit
and debit cards on the Visa and MasterCard
networks.
Underbanked consumers in the US can turn
to expresscoin, which recently launched to
serve this market, accepting money orders,
personal checks and wire transfers.
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First, get yourself a bitcoin wallet
Next, you will need a place to store your new
bitcoins. In the bitcoin world, they're called a
'wallet' but it might be best to think of them
as a kind of bank account.
Depending on the security levels you want,
different wallets will provide different levels
of security. Some act like everyday spending
accounts and are comparable to a traditional
leather wallet, while others tout military-grade
protections.
The main options are:
(1) a software wallet
stored on the hard drive of your computer,
(2) an online, web-based service .
(3) a 'vault'
service that keeps your bitcoins protected
offline or multisig wallet that uses a number of keys to protect the account.
Most have their vulnerabilities: if you store
bitcoins locally on your computer, make
sure you back up your wallet regularly in
case the drive becomes corrupted; and
online web wallets employ varying degrees
of security against hackers, from quite good
(multi-factor authentication) to quite poor (ID and password).
For more on storing bitcoins, see our guide
on the subiect. Exchanges and Online Wallets
This is the law in most countries and no
regulated exchange can get around it, as
any company interfacing with the current
financial system must meet 'know your
customer (KYC) and anti-money laundering
(AML) requirements.
The best exchange option also depends
where you're located.
For more information, you can check out this
list of major bitcoin exchanges/wallets around
the world, and the payment options they
allow.
See our guide: How to buy bitcoins in the UK
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Built differently. Exchanges and Online Wallets
At this time, the largest full trading exchanges
by volume are Bitfinex (Hong Kong), Bitstamp
(US), BTC-e (unknown), Kraken (US), Huobi
(China and Hong Kong), OKOCoin (China)
and BTCC (China).
Coinbase is a popular wallet and exchange
service that will also trade US dollars and
euros for bitcoins. The company has web and
mobile apps. Originally a US-only service,
Coinbase has recently opened up to a large
number of European countries.
Circle offers users worldwide the chance to
store, send, receive and exchange bitcoins.
Currently only US itizens are able to link
bank accounts to deposit funds, but credit
and debit cards are also an option. Apps for
iOS and Android are now available.
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