Bitcoin is a digital store of value and payment system invented by Satoshi Nakamoto, who published the invention in 2008 and released it as open-source software in 2009. The system is peer-to-peer; users can transact directly without needing an intermediary. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. The ledger uses its own unit of account, also called bitcoin. The system works without a central repository or single administrator, which has led the US Treasury to categorize it as a decentralized virtual currency. Bitcoin is often called the first crypto-currency, although prior systems existed. Bitcoin is more correctly described as the first decentralized digital currency. It is the largest of its kind in terms of total market value.
A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold or store bitcoins, due to the nature of the system, bitcoins are inseparable from the block chain transaction ledger. Perhaps a better way to describe a wallet is something that “stores the digital credentials for your bitcoin holdings” and allows you to access (and spend) them. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated. At its most basic, a wallet is a collection of these keys.
What is Bitcoin?
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.
Mining is the term used for running a series of calculations on a computer to verify the transactions that take place in the Bitcoin network. About every ten minutes, a new block of transaction data is created and the miners who created the block are awarded a few bitcoins. This serves the Bitcoin network both as a system to verify transactions and as a system for fairly distributing new bitcoins.
Although it used to be profitable to mine bitcoins with your standard personal computer, the cost of the electricity necessary to do so is now greater than the value of the bitcoins you could mine. Profitable mining now requires specialized hardware that can perform more computations with greater power efficiency.
If you’re interested in a more in-depth look at mining, we are currently preparing an article with more advanced information. Sign up for our mailing list or subscribe to our feeds (RSS2/Atom) to be informed the moment it’s published.
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.
There are several types of wallet. Software wallets connect to the network and allow spending bitcoins in addition to holding the credentials that prove ownership. Internet services called online wallets like Blockchain.info,Circle, Coinbase or CoinCorner offer similar functionality but may be easier to use; in essence, bitcoin credentials are stored with the online wallet provider rather than on the user’s hardware. Physical wallets also exist and are more secure, as they store the credentials necessary to spend bitcoins offline. Examples combine a novelty coin with these credentials printed on metal, wood, or plastic. Others are simply paper printouts. Another type of wallet called a hardware wallet keeps credentials offline while facilitating transactions.
Privacy is achieved by not identifying owners of bitcoin addresses while making other transaction data public. Bitcoin users are not identified by name, but transactions can be linked to individuals and companies. Additionally, bitcoin exchanges, where people buy and sell bitcoins for fiat money, may be required by law to collect personal information. To maintain financial privacy, a different bitcoin address for each transaction is recommended. Transactions that spend coins from multiple inputs can reveal that the inputs may have a common owner. Users concerned about privacy can use so-called mixing services that swap coins they own for coins with different transaction histories.It has been suggested that bitcoin payments should not be considered more private than credit card payments.
Wallets and similar software technically handle bitcoins as equivalent, establishing the basic level of fungibility. Researchers have pointed out that the history of every single bitcoin is registered and publicly available in the block chain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm bitcoin’s fungibility. Projects such as Zerocoin and Dark Wallet aim to address these privacy and fungibility issues.
Buying and selling
Bitcoins can be bought and sold both on- and offline. Participants in online exchanges offer bitcoin buy and sell bids. Using an online exchange to obtain bitcoins entails some risk, and, according to a study published in April 2013, 45% of exchanges fail and take client bitcoins with them. Exchanges have since implemented measures to provide proof of reserves in an effort to convey transparency to users. Offline, bitcoins may be purchased directly from an individual or at a bitcoin ATM.
The bitcoin exchange service Coinbase launched the first regulated bitcoin exchange in 25 US states on January 26, 2015. At the time of the announcement, CEO Brian Armstrong stated that Coinbase intends to expand to thirty countries by the end of 2015. A spokesperson for Benjamin M. Lawsky, the superintendent of New York state’s Department of Financial Services, stated that Coinbase is operating without a license in the state of New York. Lawsky is responsible for the development of the so-called ‘BitLicense’, which companies need to acquire in order to legally operate in New York.
Acceptance by merchants
In 2015, the number of merchants accepting bitcoin exceeded 100,000. As of December 2014 established firms that accept payments in bitcoin include Atomic Mall, Clearly Canadian, Dell, Dish Network,Dynamite Entertainment, Expedia, Microsoft, Newegg, PrivateFly, Overstock.com, the Sacramento Kings, TigerDirect, Time Inc., Virgin Galactic, and Zynga.Due to the fact that chargebacks are impossible, retailers usually offer in-store credit as the only option when returning items purchased with bitcoins. As of September 2014 PayPal allows North American merchants using its system the ability to receive payment in bitcoins.
Acceptance by nonprofits
Organizations accepting donations in bitcoin include: Greenpeace, The Mozilla Foundation, and The Wikimedia Foundation. Some U.S. political candidates, including New York City Democratic Congressional candidate Jeff Kurzon have said they would accept campaign donations in bitcoin. In late 2013 the University of Nicosia became the first university in the world to accept bitcoins.
In order to use bitcoins you will need to open a wallet similar to bank account.
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. Click here to sign up.
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.
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.
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.