Q. How does bitcoin work?
Bitcoin is a peer-to-peer network, a set of protocols (standards for
interoperability), client interfaces (called wallets) and a currency
that operates on top of all of those technologies. The bitcoin system
allows any person to send or receive a fraction of a bitcoin (the
currency unit) to another person, anywhere in the world. The bitcoin
system operates on the Internet without the need for banks or bank
accounts and allows people to send money like they send email.
To start using bitcoin, you need a bitcoin client, or “wallet”
application. The bitcoin client allows you to use the bitcoin network,
just like a web browser allows you to use the web. There are many different types
and makers of bitcoin wallets, for desktop and mobile operating
systems and also available as web applications. To receive bitcoin, you
need a bitcoin “address”, which is a bit like an email address or bank
account number. If someone knows your bitcoin address, they can send you
money, but cannot do anything more, not even identify who you are or
where you are. Therefore, you can freely share your bitcoin addresses
with anyone without fear or security risk. Once you have a “wallet,” it
can create any number of bitcoin addresses for you, even one per
transaction. Give those addresses to anyone you want to send you
bitcoin. Tip: bitcoin addresses are created by your wallet and do not
need to be registered with anyone, or linked to your identity or email
address. They can be used immediately to receive money from anyone and
become part of the network once they have some bitcoin sent to them.
Bitcoin addresses always start with the number “1” and they look like a
long string of number. One of my bitcoin addresses is
“1andreas3batLhQa2FawWjeyjCqyBzypd”. This is known as a vanity address,
because it has my name in the beginning, but it works just the same as
if it was a long string of random letters and numbers. I use it to
receive tips and donations from people all around the world.
Your wallet also allows you to send bitcoin to another bitcoin
address. If a friend of yours has a bitcoin address, you can ask them to
email it to you, or they can show it to you in the form of a barcode (QR
code) that your mobile bitcoin wallet can easily scan with its camera.
Once you have an address to send bitcoins, you can then use your wallet
to create a “transaction”, which is like writing a check. You tell your
wallet which address should receive the bitcoin (your friend’s address)
and how much bitcoin you want to send. You can send a whole bitcoin
(about $660 at this time), but that’s usually too much! Instead, you can
send a small fraction of a bitcoin, for example 0.001, which is 50
cents. When you send bitcoin, your wallet will also calculate a small
fee that is paid to the bitcoin network in order to process your
transaction, usually half a cent ($0.005 US dollars). Hit send, and your
friend will see their wallet receiving 50 cents, in a matter of seconds.
Within 10 minutes the transaction will “confirm” (like a check
“clearing” in your bank) and your friend can then spend it.
Bitcoin transactions are “push” transactions, meaning that you are
always in control of your wallet. No one can “deduct” bitcoin from your
wallet, you have to explicitly sign a transaction to send it out. This
makes bitcoin much safer than credit cards when shopping online, as your
transaction only authorizes a single payment and never reveals your
private identity.
Q. I don’t own any bitcoin. How do I get some?
Now that you have a wallet, how to get some bitcoin? Well, the
easiest way is to sell a product or service for bitcoin. You can start
accepting bitcoin, by adding a bitcoin address for payments on your
invoices, your shop window or lemonade stand! Most merchants use a
service like bitpay to facilitate
this, acting as a payment processor. Their service can create a new
bitcoin address for each transaction, keep accounts, handle refunds and
even convert bitcoin to USD or your local currency instantly, shielding
you from exchange rate fluctuations. They also offer plugins for many
popular online store applications, for easy integration. If you plan on
using bitcoin for many transactions it might be best to use such a
service. Services like Shopify, Square and Stripe also offer bitcoin as
a payment option for their online merchants, so that might be a good
option.
If you don’t want to trade products or services for bitcoin, you can
buy some instead. To buy bitcoin, you have to convert your local
currency into bitcoin, at the current exchange rate (see
bitcoinaverage.com for the current rate). For this purpose you can use a
broker or exchange that facilitates a market for buyers and sellers of
bitcoin: Coinbase (US), Bitstamp (Europe), BTCChina (China) and others.
If you use these services to buy bitcoin it is prudent to transfer your
bitcoin once purchase into your own wallet. That way you control the
bitcoin and do not have to trust them not to lose it.
Another way to buy bitcoin is using a local trader. You can find
local traders using localbitcoins.com and your city or
zip code. Localbitcoins can help you arrange a meeting with someone in a
public space (like a cafe) and will handle the escrow of bitcoins to
protect you from fraud. It is the fastest and easiest way to purchase
small amounts of bitcoin (eg. $100-$500 USD worth)
Q. Where do I keep my bitcoin?
Keeping your bitcoin keys out of the hands of hackers is not easy.
Your bitcoin wallet contains the keys that unlock the bitcoin you own.
The actual bitcoins are stored on the network in a public ledger of
accounts. Protecting your keys (your wallet) is therefore critical to
protecting your bitcoin. If your keys are stolen, then your bitcoin can
be easily stolen and you will have no way of getting it back. You should
also be extremely careful with any services that hold your bitcoin
wallet on your behalf. Custodial accounts of this sort can be hacked or
have the funds stolen by insiders.
I personally keep a small amount of bitcoin on the web-wallet service
blockchain.info (Disclosure: I am
the Chief Security Officer of Blockchain). This service uses software
that operates a wallet entirely in your web browser, doing all the key
management and transaction signing in your browser. That means the web
service never sees your keys or has access to your funds. Combined with
two-factor-authentication (2FA), this provides an excellent level of
protection for small amounts (< $1000). You can also have a mobile
wallet linked to your account to use your bitcoin on-the-go.
For larger amounts, it is best to combine to keep bitcoin offline in
“cold storage”. This can be achieved with an dekstop wallet on an old
laptop that is kept offline or using “paper wallets” which are bitcoin
keys printed on paper and stored in safe or safety deposit box.
Q. How do I spend bitcoin?
You can spend bitcoin at thousands of merchants that accept bitcoin
directly, as well as using intermediaries such as gift cards (Gyft.com) or travel agents (CheapAir.com) that allow you to use
bitcoins with merchants who are not yet accepting them directly. To find
companies that take bitcoin, you can use a number of online maps and
directories, such as coinmap.com, spendbitcoins.com, or
bitpay.com/directory. Several large merchants now accept bitcoin too:
Overstock.com, Tigerdirect.com, Square Market (squareup.com/market) and
others. Every week more and more merchants start accepting bitcoin. Next
time you are shopping in a store, ask “Do you take bitcoin, yet?”
Bitcoin is not just about shopping, though. Use bitcoin to support
your favorite charity or to send money to victims of disasters. Many
charities are beginning to accept bitcoin, including some of the
charities that pioneered bitcoin: Seansoutpost.com, Bitgive.com,
Fr33aid.com and others. Bitcoin can also be used to hire contractors and
service professionals from around the world, making payments easy,
secure, instant and much much less expensive than Paypal or Western
Union. Bitcoin crosses borders as easily as email or Skype and can allow
you to connect with the world in a way that was never possible before.
Licensed as CC-BY-SA, by Andreas M. Antonopoulos (Twitter:@aantonop,
http://antonopoulos.com/)