Saturday, April 20, 2013
Bitcoin - Getting Started
I'm sure you've been hearing all kinds of buzz lately about Bitcoin. And coincidentally, I recently put a bitcoin tipping QR code in the right hand menu on this blog.
The bitcoin to fiat currency charts (whether that be $ USD, $ CAD, £ GBP, or € EU or whatever other currency you use where you are from) had an interesting rise and crash this past month that brought all kinds of attention from news agencies all over the world.
With all this new attention on bitcoin I think that it's a good topic for this blog, as there are a lot of people just starting to look at it out of curiosity now wondering what it is, how it's used and whether it is something for them.
Bit coin is the first example of what is being called a cyrpto-currency. To keep this explanation simple, bitcoins are a digital virtual form of cash that is stored ina client program called a Wallet. Bitcoin uses a publicly available (as in every machine running a Bitcoin Wallet client has a copy) ledger in which all transactions are recorded. To prevent fraud or accidental double spending of the virtual coins, it uses very complex calculations to verify all transactions in the public ledger. The ledger itself is shared between Wallet clients over a peer to peer network similar to bit torrent, where all of the wallets share new pages of the ledger, called blocks, with each other. At the time of this writing, that ledger is currently about 8GB, and always growing. The official bitcoin client (bitcoin-qt) downloads the whole ledger starting from day 1 a block at a time and re-verifies it all. This can mean that setting up a new bitcoin wallet with a fresh install of this client can take hours, or days before it is synced up with the network and ready to use. There are, of course, ways to short-cut that process, but if one wants to be very careful and trusts no one else there could be a wait of several days to get set up in bitcoin.
To avoid the long delays you can set up an online wallet through a service like My Wallet by Blockchain, or WalletBit. Or if you have an account at Reddit Just send a message to /u/bitcointip and the tip bot on that site will set one up for you, and will even let you use your Karma points on that site to obtain a small amount of bitcoin currency to play around with. With online wallets they are available to use almost immediately, but you are trusting the site owners to protect your money for you.
So, you have some fiat currency (lets say it's $USD) and you want to convert that to bitcoins, how do you go about doing that? Well, for the average user you set up an account at an exchange like Mt.Gox
or one of the other exchanges listed here: https://en.bitcoin.it/wiki/Trade#Currency_exchanges or, if you are lucky you might find someone willing to do an exchange in person (I hear Craig's List is a place you might look for that)
Once you have some bitcoin money in your wallet sending money is cheaper, easier and more reliable than PayPal. Unlike PayPal though, you cannot complain to a company to get your money back if a transaction goes south. In that way, it's more like cash. once it leaves your hands, you can't get it back through a charge back, you would have to get the police involved if you were scammed. On the flip side of this is that for a seller you don't have to worry about scammers posing as buyers then asking PayPal for their money back claiming that they never got what they paid for.
Where it also acts more like cash (and I think one reason why the client is called a wallet) Like a real life physical wallet, if you lose your bitcoin wallet your money is gone, unless you can find it again.
You can and should backup your wallet, and don't wander around with all of your money in the wallet on your cellphone, only carry what you plan to spend that day. You can have as many wallets as you want.
With a wallet on a mobile phone, transferring money is as simple as scanning the other person's QR code (AKA "3D" barcode) and clicking send.
The nice advantage of bitcoin is that it has low (or even no) transaction fees and you can send an amount that is worth only a fraction of a cent. This enables micropayments in much smaller amounts than PayPal or anyother service has ever been able to do. This can be good for small fundraising efforts on the internet.