What is Bitcoin?
Bitcoin is an Internet based medium of exchange. Think of it as another type electronic currency. The Internet is required to use Bitcoin.
What makes it different from other currencies?
Bitcoin's primary feature is its integrity. The entire system is open to the scrutiny of the public and tremendous amounts of computing power are used to authenticate, verify, and protect the system. Every single Bitcoin transaction is recorded in a ledger, which is commonly called the block chain. This ledger is available to anyone on the Bitcoin network.
Another major difference between Bitcoin and others is that it is simple to use and requires no intermediary. You can receive and send bitcoins without supplying any personal information to set up an account. No bank, financial institution, or any other middle man is used. The system is supported and secured by all the users on the network using powerful encrypting technology.
What is the Bitcoin network.
It is a network comprised of computers that are running some form of Bitcoin software. Bitcoin software is open source and freely available. Anyone who runs a bitcoin application and has a connection to the Internet will automatically join the network and be able to participate in Bitcoin activity. Bitcoin software can be found at Bitcoin.org.
Do I have to be running the bitcoin program to receive payments?
No. A payment sent to your bitcoin address will be recorded in the ledger by other computers that are on the network at the time.
What is a Bitcoin address?
Bitcoin address is some what of a misnomer. It really is an account number. Think of it as a bank account. When someone sends bitcoins to your address they aren't really sending anything. What is happening is the ledger is being adjusted with the appropriate amounts being deducted from their account and added to your account.
How do I get a Bitcoin address?
The Bitcoin application will generate one for you. It will look like a random sequence of numbers such as 1z8ZXx2cuMzqBYSe72X4Dgy1UdDbjQNPLk. It is however, not random at all. It is a very special number that is generated in concert with another number which is referred to as the private key. This private key is mandatory to spend any Bitcoins sent to the associated Bitcoin address. Without the associated private key it is impossible to spend any bitcoins in the associated Bitcoin address. The Bitcoin application automatically keeps track of your Bitcoin address and its associated private key in a file called wallet.dat.
Can I have more than one address?
Yes, you may create as many Bitcoin addresses for yourself as you like. Think of them as multiple bank accounts. For increased privacy it is recommended that you use many addresses.
How do I use the Bitcoin address?
Just give it to people. Email it out, post it on your web site, or include it in an online post. Think of it like your phone number, but instead of calling you, people will use it to deposit Bitcoins in your account.
How do I send or receive bitcoins?
You receive bitcoins from anyone who sends them to your Bitcoin address. You don't need to do anything.
To send Bitcoins you use the Bitcoin application. It's as simple as entering the Bitcoin address you want to send coins to and the amount to send. That's it.
What if my wallet gets deleted?
All bitcoins sent to the addresses in that wallet are unusable and considered destroyed. Without the private keys it is impossible to spend the Bitcoins. The ledger will show the coins in your account(s) but you will be unable to spend them. There is simply no way to use the Bitcoins if you do not have the private keys. The private keys are to insure that no one but you can spend the bitcoins. If you don't have the private keys then you cannot spend the bitcoins either.
Therefore, it is of extreme importance that you create backups of your wallet.
What if someone sneaks onto my computer and copies my wallet or steals my flash drive with the backup of my wallet?
They will be able to spend your bitcoins.
It is imperative that you think of your Bitcoin wallet as holding cash. If someone steals your real world wallet and it has cash in it you will never see the cash again. The same is true for your Bitcoin wallet.
Is there any way to protect my wallet?
1) At the time of this writing the Bitcoin application does not encrypt your wallet but they will eventually release a version that does. This will help protect your Bitcoins. If an encrypted wallet is stolen it will be unusable by the thief.
2) When you make a backup make sure you encrypt the backup. Then if the backup is stolen it is useless to the thief.
3) Make sure you keep you system secure from viruses and other malware, such as trojans and key loggers. If such a villainous program gets onto your system it can defeat all other efforts to protect your wallet.
We also look forward to a version of the program that will allow the name of the wallet file and it's location to be changed. This will make it harder to find the wallet. As it stands now, your wallet's name and location is known to everyone.
How do I get Bitcoins?
There are several ways.
1) Provide goods and/or services in exchange for bitcoins. For example, write an E-book and charge bitcoins for it.
2) Buy them. Exchange real world money for some bitcoins. You can try to buy them from someone local using BTCnearMe.com, or register at an exchange such as Tradehill.com or mtgox.com.
3) Work on the Bitcoin network as a miner and earn bitcoins.
4) Visit the Bitcoin Faucet to get a tiny bit of a bitcoin for free.
How are new bitcoins created?
Newly created bitcoins are given to workers on the Bitcoin network as compensation for their work.
How do I do work on the Bitcoin network?
Workers on the Bitcoin network are misleadingly called miners. They should really be called transaction processors.
Miners gather up a bunch of unprocessed transactions and verify them and then secure them on the ledger. By design, securing transactions on the ledger requires vast amounts of computer processing power. This is to prevent villains from tampering with the ledger. For them to tamper with the ledger would require them to overcome the entire computing power of the Bitcoin network.
Miners are rewarded for their work with newly created bitcoins. This is the only way for new bitcoins to be created. A miner who secures a group of transactions to the ledger is rewarded with 50 bitcoins. This reward will decrease over time until there is no reward. This is designed to limit the total amount of Bitcoins to no more than 21,000,000 (21 million).
To work on the Bitcoin network as a miner you need to have your computer perform the transaction processing calculations. This requires special software to do. Unless you have a significant amount of computing power, you will earn very very few bitcoins.
Why will anyone want to work on the network later when the reward is gone?
Some will donate the work for the benefit of the community. Most will do it to gain the transaction fees. Every transaction can have a transaction fee attached to it by the sender. Transaction fees are optional for all except extremely small or extremely large transactions. Currently most transactions have no fee attached.
Why would anyone choose to pay a fee if its optional?
Because they want to have their transaction processed faster. Transactions that pay a fee go to the head of the line for transaction processing. The larger the fee you pay the more eager a miner is to process your transaction. You can choose to pay whatever transaction amount you want. It's hard to predict but it is estimated that in the future the typical fee will be about 1% or less.
How much is a bit coin worth.
Its value can fluctuate significantly. Visit BitcoinWatch.com to see the latest exchange rates.
The penny is the smallest denomination for the U.S. dollar. What is the smallest denomination for a Bitcoin?
A bit coin can be divided up into 100 million pieces. The smallest piece being 0.00000001 of a bitcoin.
We like to call this an ittiest-bit, but others call it a satoshi, after Satoshi Yakamoto, the creator of bitcoin. However there is strong suspicion that is not his real name.
In referencing fractional amounts of a bitcoin you may also use the r nomenclature. For example, 0.0001 would be r4 (4th position right of the decimal point), r1 is one-tenth a bit coin (0.1, 1st position right of the decimal point), r8 is the ittiest bit(0.00000001). If someone is asking for BTCr2, they want 1/100 a bitcoin (0.01). For values other than 1 use a multiplier. Example: 0.00003 would be BTCr5x3.
How do I get a refund?
Bitcoin provides no refund capability. Think of it like sending someone cash. Basically it's impossible to get a refund unless the receiving party chooses to send the bitcoins back to you.
Are there any negative aspects to bitcoins?
There are some, and depending on your situation they may be major or insignificant.
1) It is NOT anonymous. All transactions are irrefutably logged and available to everyone. If someone can associate a name, addresses, email, etc. with a bitcoin address, they can see every transaction done by that individual using that bitcoin address. For example, if you use bitcoin to buy some vitamins at a website and they send you the product. The site now knows that your name and address and the bitcoin address you used to make the purchase. By looking for the bitcoin address in the blockchain they can see all other transactions you did with that bitcoin address.
To attain some degree of privacy the bitcoin creators recommend using a different bitcoin address with every transaction. While this helps with privacy it complicates things by having to deal with dozens, hundreds, or even thousands of bitcoin addresses.
2) A tiny handful of people own a significant percentage of the entire money supply. When bitcoin was first started the creators reserved a large number of bitcoins for themselves. Also early on when the mining difficulty was extremely low numerous individuals were easily earning substantial amount of bitcoins. The mining pay out should have been at a tiny fraction of a bitcoin and then increased as the difficulty increased. This would have provided a chance for bitcoin to be dispersed into far more hands. As it is, a few people have started with giant hoards of bitcoins.
3) The complexity of the entire system wallets, multiple addresses, third party companies, etc. is easily handled by technical people but the typical person will have difficulty figuring it out and could easily get aggravated by the complexity, and financially harmed because they don't know how to protect their wallet or privacy.
4) It is slow to complete transactions. It takes roughly ten minutes or more to be sure the payment is valid.
Third party intermediaries can be used for immediate payments, but one of the main selling points of Bitcoin was that no middleman had to be trusted. If you want immediate payments you need to trust a middleman.
5) The lack of ability to do true micro payments (less than USD 1 cent). Due to the concern of network bog down with millions of micro payments, bitcoin enforces transaction fees that make micro payments unviable. The solution is back to using a middleman.
6) Deflation. The best medium of exchange(money) is one that has a stable supply, neither inflating nor deflating.
Holding onto a deflating currency is great, especially for those holding huge amounts, but what does constant deflation do to an economy at large? Has anyone studied any economy or currency that had *perpetual* deflation?
7) Since bitcoin is like cash, it's a thief's dream come true, because once you send the bitcoins, they're gone. The scammers and con artists will ceaselessly scam users from the convenience of their computers in far away lands, in their never ending quest to steal anything they can.
8) Software bugs. The entire Bitcoin system is based on computers and software. Unknown bugs, exploits, cyber attacks, or other issues have the potential to reek havoc on Bitcoin.
Case in point: "A bug caused a temporary block chain fork on 11 March, 2013. After investigating that bug, we determined that the bug can happen even if the entire network was still running old versions of Bitcoin-Qt/bitcoind. Therefore, the only option is to require everybody to either upgrade or workaround the bug." Source: http://bitcoin.org/may15.html