What’s going on with this Bitcoin thing?
When you start reading there’s this new digital currency circulating online and you see the price soaring, that’s when the scrambling sets in.
That’s when you race to Google and start searching for info.
That’s when you skim through some articles and get a little bit of the picture but realize your picture is still much too blurry.
That’s when you get serious and come to Amazon and look for a definitive resource so you can fully understand Bitcoin.
Enter this book. Bitcoin Made Easy is a quick, non-technical guide written to help anyone understand the basics of Bitcoin. With the knowledge foundation provided in this book, you can make the decision of whether you want to trade or invest in Bitcoin.
Bitcoin is actually very simple. Bitcoin is just a digital currency that can be sent directly over the Internet from one person to another person.
Think of Bitcoin as Internet cash. With Internet cash, you can strike a deal with someone on the Internet and pay them directly for a product or service.
Let’s compare two separate Ebay transactions, one as a common everyday occurrence and the other as a Bitcoin hypothetical, to illustrate the Internet cash concept:
Common scenario: Jerry is selling a case of contact lens solution on Ebay for a “Buy it Now” price of $35.99. Jackie decides to buy and pay using his credit card. Jackie’s credit card balance now increases $35.99 and he owes the credit card company that money.
Bitcoin hypothetical: Jerry has the same listing and accepts Bitcoin as payment. Jackie sends the market equivalent of $35.99 in Bitcoin to Jerry’s Bitcoin account from Jackie’s Bitcoin account. The transaction is over.
Note: It is crucial to remember that you can only buy things with Bitcoins when sellers accept Bitcoins for value.
Just to be sure you have the concept down, consider this:
Many buyers pay online using credit cards, not because they need to borrow the money to pay but because they need a way to digitally exchange value for goods or services.
Using Bitcoin eliminates the need to use credit cards or pay through Paypal for online transactions because it allows you to pay sellers directly with digital cash.
Simply put, Bitcoin is a form of cash you can pay people with online.
Bitcoins are Non-Physical
Bitcoins only exist as balances on Bitcoin accounts. There are no actual coins or even digital files you can point to and say, “This is a Bitcoin.”
Think about it this way: You know how your bank account shows a number amount right now that’s your bank account balance in your country’s currency (ie US dollars)? Bitcoin shows a balance too. Bitcoin’s balance is in Bitcoins but there’s no physical paper money to withdraw.
Instead, a Bitcoin account is like having cash in your own personal wallet that exists on the Internet. There’s a running tally on how much Bitcoin you have and that’s how you know it’s there. You can’t see or hold Bitcoins. You know you how many Bitcoins you have by looking at your balance.
First, you download a Bitcoin wallet to your computer or smart phone. There are several wallet choices available including ones based on the operating system you’re running (Mac, PC, etc.). You can download a wallet here.
Think of how you use your real life wallet. If you get a $20 bill for your birthday, you put it in your wallet. If you decide to buy a book, then you take $15 out of your wallet to spend.
A Bitcoin wallet is like the online version of your wallet. All of your Bitcoins will be inside your wallet and you will take Bitcoins out when you want to buy something. When you receive Bitcoins, you will put them in your wallet.
By downloading a Bitcoin wallet, you will automatically get your first Bitcoin address.
Think of your address kind of like the way you would an email address that you will use one time, for the specific purpose of sending or receiving something and then never use again.
Addresses are always free and it’s recommended you only use them once. An address will look like something like this:
When you’re sending or receiving Bitcoins, you will tell the other party this address.
It’s ok if other people know about it; it’s a public address.
When you tell someone your address, you’re saying, “Hey, this is my address. This is where the money is coming from (or this is where to send the money).”
So what we have going on so far is there are two long Bitcoin addresses representing two different people who are ready to do a deal. Let’s say Berry is the buyer and Sally is the seller.
In every Bitcoin transaction, there are three pieces of information: the input, the output, and the amount.
The input is the buyer’s address (where the Bitcoins are coming from). The output is the seller’s address (where the Bitcoins go). The amount is how much the buyer is paying.
Sally the seller is going to tell Berry her unique Bitcoin address. Berry the buyer is going to create a transaction where he sends the agreed upon amount of Bitcoins from his wallet to Sally’s unique address.
Everyone in the Bitcoin network is able to see the transaction including the buyer and seller’s Bitcoin addresses along with the amount of Bitcoins being transferred. (Here is an example of a completed transaction.) However, only the buyer and seller’s private keys can unlock the transaction to put Bitcoins in and take Bitcoins out.
To put everything so far in context, imagine this:
You and I are in a flea market. You’re the vendor and I’m a shopper. This particular flea market assigns every vendor a number. Shoppers are also assigned a number when they walk in. These numbers are simply a way of identifying us.
I decide to buy your antique plate collection for $100. The way this flea market works is I give an attendant a piece of paper that has your vendor number on it as well as my shopper number and the amount of the transaction.
This piece of paper is posted on the bulletin board upfront to alert everyone that a deal has been struck. However, the only way the deal is completed is that we both sign the piece of paper. I give you the $100 and you then give me the plates.
Although this isn’t an exact parallel of how a Bitcoin deal goes down, it does have several similarities:
– The vendor and shopper numbers are like our Bitcoin account numbers.
– The $100 is the amount of the transaction.
– All components of the transaction are public.
– The money is only released once we both authenticate the transaction with our signatures which are like private keys on Bitcoin.
Private keys are what makes the transaction secure. Every wallet comes with 100 private keys. The keys will never run out because when one is used, another is generated to take its place.
When addresses are created, sometimes multiple private keys are required as a condition to using that address. Even though using one private key is extremely secure, adding another private key enhances security that much more.
Think of private keys as an authentication factor which helps verify the transaction is going according to plan. If the transaction is not able to be authenticated by having all the correct addresses and corresponding private keys matchup, the Bitcoins will not transfer.
Once the transaction has been approved by both buyer and seller, it must be verified by miners. The verification process takes approximately 10 minutes.
Typically, the seller will wait the 10 minutes until the verification process is complete and the transaction is confirmed to deliver or send your purchase.
“Ok, you lost me at miners,” you say.
Here’s the deal: Miners are pretty much people in the Bitcoin network who offer their computer processing power so that every transaction can be recorded on the ledger. In other words, miners build a history of all Bitcoin transactions.
Miners are competing against one another to verify transactions because they are rewarded with Bitcoins for recording the next series of verified transactions or block on the Bitcoin history ledger.
A block is comprised of a group of completed and verified transactions during a set period. Once the set period is over, miners apply a complex mathematical formula to it and create a sequence of random numbers called a hash. Think of the hash as a protective seal that goes around the block to protect against people that might try to alter the block.
The block and the hash are then placed at the end of the block chain, in chronological order.
The block chain is a chain of blocks that starts at the first group of transactions ever completed on Bitcoin and stops at the last verified group of transactions. The reason this block chain is important is because it protects the integrity of the system.
Once a transaction is verified on Bitcoin, it can never be changed, reversed, or modified in anyway. Blocks of recorded transactions are stacked upon one another so that history cannot be rewritten. This prevents fraud and deception that might otherwise be possible in the digital realm.
By closing transactions after confirmation, ledgers are cleared, Bitcoin transfers are finalized, and everyone can move on.
Congratulations! You now know the basics of what Bitcoin is and how Bitcoin works. Now let’s look at some more important stuff about Bitcoin.
There are a number of ways to get Bitcoins. The most common way to obtain Bitcoins is to buy from an exchange. An exchange buys and sells Bitcoins for currencies like the dollar or euro.
As of the day this book was written, 1 Bitcoin or BTC was trading for $827 so if you paid $827 at an exchange, you could buy 1 Bitcoin.
MtGox was the most popular place of exchange for Bitcoins until BTCChina overtook it as the largest exchange in mid-November 2013. BitStamp is another prevalent Bitcoin exchange. All three websites are considered established places to trade international currency for Bitcoins.
You can also buy Bitcoin on sites like Ebay or you can make a deal with people who live in your local area at localbitcoins.com. It’s recommended you buy Bitcoins with credit cards as they offer some form of protection to their users in the event of fraud.
Note: Be careful when buying Bitcoin on Ebay or using Paypal to purchase Bitcoins because digital currency is not covered under Paypal’s terms (Ebay owns Paypal and uses Paypal as a payment processor.)
Wherever you decide to buy Bitcoins, you should carefully research the company, seller, and/or website because many fake websites and sellers have surfaced due to the selling opportunity.
Aside from buying Bitcoins outright, you could also sell something and accept Bitcoin as payment to get Bitcoins.
So far, yes. However, as Bitcoins gain popularity, Bitcoins and digital currency in general are closely being inspected by governments and regulatory agencies. This may lead to regulation or laws that directly impact Bitcoin in the near future.
Bitcoins are not backed by anything. Bitcoins are simply a currency that has been picked up as a medium of exchange.
Think of Bitcoin as modern day gold. Gold was traded and became valuable because people decided gold had inherent value and was a good means of trade.
The Bitcoin supply is limited to 21,000,000 Bitcoins. Currently, approximately 12,000,000 Bitcoins are in circulation. The remaining 9,000,000 Bitcoins are expected to be completely mined by 2140.
Yes, Bitcoins can be sold and traded in fractions. For example, you can spend .12 Bitcoin to buy an item online.
The smallest fraction that can be used is one hundred millionth of a Bitcoin. This fraction is called a Satoshi. Recently, the Bitcoin developers limited transactions in the Bitcoin network to a minimum of 5430 Satoshis to promote efficiency.
When a hash is successfully created (remember after each block, a hash is created), the miner(s) who created that hash are currently rewarded with 25 Bitcoins.
Bitcoin makes mining intentionally difficult so that Bitcoins aren’t released too fast.
You need hardware to mine for Bitcoins. In theory, your computer can mine for gold but at this point, you’re not even in the game with just a computer. You must now buy additional hardware to have a chance to compete for Bitcoins.
Most of the worthwhile hardware starts at several hundred dollars and goes into the thousands.
Even should you have the requisite hardware, keep in mind that electricity costs must also be calculated as part of your overhead as mining for Bitcoins will run up your electricity bill.
For almost all beginners, beating the learning curve and costs (hardware, time, and electricity) to mining Bitcoins will be very difficult. It is therefore recommended that ambitious new miners look at mining as a hobby, rather than taking mining as a serious business.
The best chance to successfully mine Bitcoin comes by joining a pool of Bitcoin miners working together and sharing in the profits.
Yes. If your wallet is stolen or inaccessible, then you will lose all the addresses and private keys inside it unless you have a backup copy.
While Bitcoin wallets are very secure, they are susceptible if your laptop or mobile device is hacked or contains malware, spyware, or key loggers (key loggers track all of your keystrokes).
First, you should create a backup copy of your wallet and keep a copy on a removable disk like a USB key.
Note: Your backup copy should be kept up to date with the latest software version.
Second, you should run a sweep to make sure your computer or phone is clean of any malware or spyware. Also, make sure you have a strong anti-virus program up to date and running.
Third, you can encrypt your Bitcoin wallet to add an additional layer of protection.
Bitcoin isn’t the only digital currency around – it’s just the first viable digital currency to come into prominence and is garnering most of the media attention.
Litecoin, Namecoin, and PPcoin are competitors to Bitcoin that use the same basic framework as Bitcoin but with slight modifications.
Bitcoin’s software is open source code so anyone is able to view it and create their own version of digital currency. Litecoin, Namecoin, and PPcoin have all used Bitcoin’s code to spawn their own versions of digital currency.
Ripple is another player in the digital currency market. However, Ripple uses its own source code.
Transactions on Bitcoin are usually free as long as they are for more than .01 Bitcoin.
If transactions are for a very small amount, there is usually a small fee attached to provide the miners incentive to record the transaction in the block chain. Also, transactions that have a large data size will usually have a nominal transaction fee attached.
No. Bitcoin forces buyers to closely evaluate the reputation of who they’re dealing with because there are no consumer protections.
Think of meeting someone off Craigslist in a parking lot and buying a dog house from them. You hand over $100 cash and get the dog house. When you get home, you realize the wood is rotted. That $100 is gone and there’s nobody to save you.
That’s the harsh but efficient nature of using Bitcoin to transact online.
Bitcoin is said to be a decentralized currency, but what does that actually mean? It means that no single institution or nation controls Bitcoin. You know how a central bank (bank controlled by a nation or central authority) can do things like print more money whenever the central bank’s administration decides to?
One of Bitcoin’s selling points is that it is said to be decentralized. For the purposes of this book, to decentralize means to distribute the administrative powers and authority from a single authority or concentrated few to several individuals and/or groups.
Decisions within Bitcoin come from Bitcoin software developers who help maintain the software and viability of the Bitcoin system. An example of one such change implemented was when lead developer Gavin Andresen introduced a patch that increased the default minimum fractional number of Bitcoins in a transaction eligible to be verified to 5430 Satoshis or .00005430 BTC.
In other words, one of the software guys said, from now on, we’re going to change the software so that by default, it’s only going to process transactions that are more than a few cents (the amount itself depends on how many dollars the Bitcoin is worth) because it’s just not worth our while to process extremely small transactions.
Although this software patch marked a noteworthy change in how Bitcoin transactions are processed, Bitcoin has, for the most part, strictly adhered to their protocol (it’s like a Constitution) for how Bitcoin is to be run.
The takeaway here is that Bitcoin has a pretty strong system in place that they’ve followed. As Bitcoin is a fairly new technology, there are developers who make changes along the way to maintain its functionality and usefulness but huge changes like how much currency is produced (that go against protocol) are highly unlikely to ever happen.
Satoshi Nakamoto is said to be the creator of Bitcoin but it’s widely held that is an anonymous pen name.
When you first read about Bitcoin and all that comes with it (addresses, private keys, miners, 10 minute confirmations, wallet security, etc.), it sounds too jumbled and complicated to deal with. However, if you download Bitcoin and play around with it, you’ll see it’s actually very straightforward and extremely easy to use.
By reading Bitcoin Made Easy, you have a firm grasp of how to use Bitcoin and a basic blueprint of how it works. You don’t know all of the details behind Bitcoin but you don’t need to.
How many people can tell you all of the parts of a car engine?
How many people can drive a car?
About the Author
Kris Rivenburgh is a tech entrepreneur, consultant, and licensed attorney in the state of Texas.