Earlier this year in April I wrote an article on what Bitcoins was all about. A lot has happened in the Bitcoin space since April. I’ve decided to write a revised Bitcoin article and how can one get started in the buy/selling and trading of Bitcoins.
What is a Bitcoin?
Strictly speaking, Bitcoin is a protocol. Just like HTTP, FTP, SMTP, Bitcoin is a protocol. Its just a coincidence that the very first application made on this protocol was money and it too was called Bitcoin.
Bitcoins today are referred to as money, cryptocurrency, altcoins, digital money, etc. Why do Bitcoins matter to us so much? This is a very important question!
I want you to spend some time, in getting educated in Bitcoins. This is perhaps one of the best videos that explains what Bitcoins are.
What problem does Bitcoin solve?
It does solve quite a few, but one of the predominant problem that bitcoin (and other cryptocurrencies) are trying to solve is how Chris Larsen (CEO Ripple Labs) put it in our podcast “…there was no internet for finance. …internet for value” what Bitcoin and other associated currencies allow us to do is to “not just exchange information but exchange value“
Listen to the podcast especially from the 3:00 mark to the 12:00 mark. Chris does a wonderful job of explaining the problem.
Bitcoin allows you to exchange value (just as you would exchange information on the internet), without the double-spend and do so in a decentralized manner, i.e. there isn’t one singular body or entity like (VISA, MasterCard, SWIFT, etc.) that is authorizing the transaction.
The original paper by Satoshi Nakamoto is titled: Bitcoin: A Peer-to-Peer Electronic Cash System (PDF – Original Paper).
So why is this decentralized nature of money so important? Well, in short, if people from all over the world are going to be entrusted in keeping your ledger (the book which actually reflects your monetary balance) then we want to be sure that the ledger cannot be cooked. The consensus approach is one that makes it work, i.e. keeps the ledger intact. If one entity or a few entities did try to cook the book (so to speak), the general consensus would not reflect those unauthorized entries and the consensus would win, and the illegal entries would be ignored.
When you have money in the system, it is important that the integrity of the bookkeepers is intact. This is what a decentralized ledger does.
Explain Bitcoins to me in layman’s terms…
So here is a summary for wanting to know everything about Bitcoins:
- Bitcoin is a digital currency
- It is abbreviated as BTC or XBT
- Just like the old days, when Gold and Silver had to be mined from the mountains and rivers, Bitcoin is also mined, albeit digitally. When you mine a certain complex problem, you get rewarded with Bitcoins.
- The mining is digital in nature. Don’t wonder too much about it, just think of it as your computer crunching number (that is mining).
- Only so many Bitcoins can be mined and released into the overall Bitcoin ecosystem per day.
- The more computing power that comes in to mine, the more harder it becomes for more Bitcoins to be produced (not an accurate statement, but think of it as a built-in resistance to being duped by large amounts of computing power) so that influence is minimized.
- It has been designed so that there is no single source or headquarters or association that controls it.
- That’s right, no one controls Bitcoin.
- No Government, Association, Body, Person, Group, etc. controls Bitcoins.
- Its software is open-source
- There are 10,000s of Bitcoin nodes running in the world.
- It is Peer-to-Peer in nature. Just like your Bit-torrents. There is no one controlling it.
- The money supply is limited, i.e. there will only be 21 Million Bitcoins mined. No more.
- Because the money supply is limited, no one can just print (or mine) more Bitcoins and introduce inflation.
- 10,000s of websites and businesses have started accepting Bitcoins.
- Bitcoin transactions are guaranteed and non-reversible, i.e. if you pay someone with Bitcoins you cannot reverse the transaction. That money is as good as gone to the other person. This is particularly important for businesses who want to sell products/services without the fear of looming chargebacks.
- There are only Five methods of obtaining Bitcoins:
- Buying (from a Bitcoin Exchange – Very comprehensive list)
- Buying from a Broker, companies like Coinbase, Circle, TruCoin, Cointap, LocalBitcoins, etc.
- Selling a Product/Service and someone pays you with Bitcoins. You can use payment gateway companies like Bitpay, BIPS, GoCoin, etc. to help you accept payments on your website.
- Gift – someone gifts you Bitcoins into your wallet.
- You would need a Bitcoin Wallet to get started with Bitcoins.
- Right now a little over 13.3 Million Bitcoins have been mined (remember, mining ceases when 21 Million Bitcoins have been mined)
- The current market value of these 13.3 Million Bitcoins is a little more than $14 Billion (as of 29th November 2013).
- No one knows for sure who invented Bitcoins. The author’s name is Satoshi Nakamoto. No one knows who he is. Most people believe this is a pseudonym and there are more people behind the creation of Bitcoin.
- If you want to mine Bitcoins, do note, your best bet is to use ASIC hardware, here is a great list of all the popular Bitcoin Mining Hardware. However, mining Bitcoins is now for the big-boys. You need specific ASIC hardware to mine Bitcoins.
So what exactly can one do with Bitcoins?
Well, think of Bitcoins as a universal currency. They are not like Japanese Yen which can only be used primarily in Japan or the Bangladeshi Taka which can be used in Bangladesh only.
It not even like the US Dollar (which is accepted and traded in many countries).
Anyone with an internet connection (be it on the tablet, computer or your smart mobile phone) can get a wallet.
Anyone can buy, sell and trade in Bitcoins. If you are on the Internet, you can buy, sell and trade bitcoins.
So lets discuss a couple of cases…
You are freelancer in Pakistan and you’ve just made a Logo for someone for US$ 300. Now the problem (as known to all Pakistanis) is that there is no PayPal in Pakistan. What do you do? Well, you can ask the person to pay you in Bitcoins.
- The transaction is almost instantaneous
- It cannot be reversed, i.e. once you get paid, there is no way the Buyer can cancel the transaction or reverse the charges.
- The fees is extremely low (usually it is 0.5% or much less).
- Its global. No discrimination here.
Imagine, you can send money anywhere instantly. No restrictions. No boundaries. One big marketplace.
If you have a brother in Chicago and you’re in Delhi, and he wants to send you $5, there is no economical way for him to do so. With Bitcoins, micro-transactions or small-value transactions are a breeze. He can send you $5 worth of bitcoins in a jiffy. Try that on your typical banking system. Heck he can even send you $1.
The currency literally allows you to send money anywhere, without limitations. Literally 1000s of startups are propping up all over the world, using or improving the Bitcoin technology to offer innovative way to pay for good and/or services, or just plain exchange value between two users.
Don’t be fooled by the long wallet address. Bitcoins can be sent to emails also (see blockchain wallet and other wallets that support emails).
Here are some videos that will really help you understand Bitcoin and how to jump onboard the Bitcoin ecosystem.
Circle Demo Video
What is a Bitcoin?
Buying & Using Bitcoins using Coinbase
Accept Bitcoins from your Customers with BitPay
Essence of How Bitcoin Works
What is the Blockchain? (the bitcoin decentralized ledger)
This page was last updated on September 30, 2014.