If you’ve tuned into financial news recently chances are good that you’ve heard something about currency wars or economic turmoil. On the other hand Bitcoin has begun to get a lot of coverage from groups like CNN and Forbes as it continues to outperform traditional curencies. But what exactly is Bitcoin and how do you use it? Well I’ve put together a brief overview of the digital currency. What follows is a bit of background on Bitcoin followed by a tutorial on setting up a Bitcoin wallet and getting your first Millibit.
An Overview Of Bitcoin
Bitcoin (abbreviated BTC) is a decentralized person to person digital currency that uses basic encryption to record and process transactions. Unlike traditional fiat currencies it is not reliant on a central entity like the US Dollar is on the Federal Reserve or the Euro is on the ECB. Rather, Bitcoin is reliant on a network of users running the Bitcoin client and on a group of miners. Miners use a combination of specialized software and hardware to process transactions and help keep the network running and secure. It is currently trading at about $47.50 (USD) to one Bitcoin and is expected to rise given its limited supply and increasing utility.
Bitcoin was developed by an anonymous individual referred to as Satoshi Nakamoto. Satoshi first published the Bitcoin white paper in late 2008 (Available at Bitcoin.org). On January 3rd, 2009 Bitcoin’s first block was mined, otherwise referred to as the genesis block. Shortly thereafter the first version of the Bitcoin client was released. The Bitcoin client is the software needed to use Bitcoin, which we’ll cover in the tutorial.
When Bitcoin was first released users could use their computer’s CPU to process transactions, otherwise referred to as mining. By doing a certain amount of cryptographic work, the user could mine a ‘block’. A block is a standard transaction unit and contains the transactions that have occurred on the network since the last block was solved. Once a miner has found a block they are rewarded with a number of Bitcoins. Originally this was 50 bitcoins but the reward halves approximately every 4 years and is currently at 25 Bitcoins per block.
Individual users can use Bitcoin by sending and receiving Bitcoins to and from other users. The transactions are recorded in the blockchain every time a block is solved (roughly every 10 minutes). The blockchain then acts as a record of all transactions that have occurred within the Bitcoin network.
There will only every be 21 million Bitcoins of which roughly 10,900,000 are in circulation today. This finite number of coins means that Bitcoin will be deflationary as opposed to the inflation experienced with traditional currencies. The Bitcoin mining difficulty adjusts every 2016 blocks or roughly 14 days. The block size will continue to halve every four years until no additional Bitcoins are generated and miners receive coins solely through small, voluntary transaction fees. Bitcoin uses the SHA 256 encryption algorithm to secure transactions.
There are a few types of Bitcoin wallets available for use. The traditional method is referred to as running a full node and consists of running a program on your computer that holds a record of all Bitcoin transactions that have ever occurred (the blockchain). However, downloading the blockchain has become a time consuming task and alternatives have become available. Several third party sites now offer online wallets or as they are sometimes referred to instawallets. There are also native applications that work similar to the Bitcoin client but don’t require a download of the full block chain though we won’t cover those here.
Setting Up An Instawallet
If you’re looking to get up and running with Bitcoin as fast as possible I suggest you start a wallet with Blockchain.info (If you want to run the Bitcoin client skip to that section). An instawallet, like the one you’d get from Blockchain.info, is arguably not as secure as running your own Bitcoin client on your own machine. However, it is the fastest method to get a new Bitcoin wallet and can be accessed from multiple locations easily.
First you’ll need to navigate to Blockchain.info and click on wallet in the upper navigation bar (or go to Blockchain.info/wallet directly). Once you’re there click on Start A New Wallet under new users. You’ll need to provide an alias for easier access as well as a password at least 10 characters in length. Make sure that you either choose a password you’ll easily remember or record it somewhere. You’ll also be given a mnemonic phrase from Blockchain.info to record. This phrase can be used in the event you forget your password so make sure to record it somewhere safe.
Once you’ve created your wallet you’ll be able to sign in at Blockchain.info/wallet/alias where alias is the alias you input when creating your wallet. Just enter your password and you’ll be taken to a screen with your wallet. From here the wallet is pretty self explanatory. Send Money allows you to send Bitcoins to merchant or another user by entering in their address and a number of coins. Receive Coins allows you to copy your address(es) to post or give to other users so they can send you coins.Wallet Home provides a summary of your current balances and My Transactions shows a history of your transactions.
Setting Up The Bitcoin Client
Running the Bitcoin client has a few key advantages over an instawallet. First of by running the Bitcoin client you’ve essentially become your own bank and are not reliant on any third party for access to your money. The Bitcoin client, when fully encrypted and secure, is much more secure than say trusting your coins to another site or individual. Also by running the Bitcoin client you help support the running of the network and strengthen both its speed and to some degree security.
The downside to running the Bitcoin client is that with the current size of the blockchain it can take as long as 24 hours to download (depending on the speed of your internet connection).
The first thing you’ll need to do is download the latest version of the Bitcoin client from Bitcoin.org. Versions of the Bitcoin client are available for Windows, Ubuntu, Linux, and Mac OS X. The example for this tutorial will be with Windows though it should be pretty similar for other operating systems. Once you’ve downloaded the client go ahead and open it up (the .exe file for windows). You’ll then go through a standard install process for windows with the Bitcoin program placed in your program files directory.
One you have the client up and running you’ll need to wait for it to download the entire blockchain which will take some time and some space on your hard drive. You’ll see (out of sync) appear on your client until the blockchain is fully updated. It is also recommended that you keep the client running in order to keep the blockchain fully up to date. Otherwise you may need to wait until the blockchain updates once you restart the client.
Things are fairly self-explanatory after you have the client up and running. Send Coins allows you to send Bitcoins to another user by entering in their address and the amount to send. Receive coins allows you to manage your addresses, copy them and allows other people to send you Bitcoins. Transactions is a ledger of all the coins you’ve sent and received to date. The address book allows you to manage a list of addresses and label them so you don’t have to reacquire an address every time you need to send someone Bitcoins.
Securing Your Bitcoin Wallet
The Bitcoin client includes basic encryption that allows you to secure your wallet with a passphrase. I highly recommend that you encrypt your wallet in order to further secure your coins. Make sure you have a method for recalling the password as you might not be able to recover your coins if you forget it.
With over 83,000 members Bitcointalk.org is by far the largest, most active, and most influential Bitcoin community. Originally hosted as part of the Bitcoin.org domain, BitcoinTalk is the oldest Bitcoin community and the most in depth. The Bitcoin subreddit is a great resource when it comes to the most recent news and announcements regarding Bitcoin. With just over 19,000 subscribers r/Bitcoin is one of the fastest growing subreddits and is extremely active for its size. There are a number of other forums and sites that support and promote Bitcoin but these two are the best starting point.
Post a comment with your feedback about this article or about Bitcoin along with your BTC address and I’ll go ahead and send you one Millibit (0.001 BTC – While supplies last). Also, there are a few different places online that act as Bitcoin faucets that hand out a few Millibits to new users on regular intervals.
UPDATE: I’m all outta free millibits. To buy Bitcoin try Coinbase or one of the exchanges such as Bistamp.net or MtGox.com.
Another way to get Bitcoins is to purchase them either through a service such as Coinbase or through an exchange. MtGox is currently the largest exchange and offers several methods for getting fiat currencies into the exchange.
The number of places that you can spend your Bitcoins is increasing as well. Check here for a list of a few Bitcoin merchants.
In a follow up post I’ll get more in depth with Bitcoin mining and how you can do it using your computer’s GPU (Graphics Processing Unit), though this may eventually become inefficient due to modern mining hardware. If you have questions regarding this post you can post in the comments section or contact me at cryptojunky at zoho dot com.