Bitcoin is a digital currency, and one of its most interesting aspects is the fact that no one controls it. Read on to learn more about what bitcoin is, how it works, and how to get it!
Bitcoin is a decentralized digital currency that was invented by someone using the alias “Satoshi Nakamoto” in a paper called “Bitcoin: A Peer-to-Peer Electronic Cash system”. Unlike other currencies, the amount of bitcoins is capped at 21 million, and this limit will be reached by 2040 as per the bitcoin protocol. The main advantages of bitcoin are:
- Privacy – the owners of each bitcoin transaction are not identified even though all transactions are public.
- Low Transaction Fees – there is usually no transaction fee as one does not need to go through an intermediary. However, users can choose to pay a small fee in order to have their transaction processed faster.
- Decentralization – one of the most intriguing aspects of bitcoin is that no central authority controls it – as is the case with other currencies like the USD and the Euro.
In my opinion, the idea behind bitcoin is terrific. However, there are many practical hurdles to overcome. The primary issue I am concerned with is the general acceptance of bitcoin by governments. Let’s think about currencies in general, and why there are so many. It really boils down to the fact that if you live in a particular country, you have to pay taxes in that country’s currency. Will any country accept tax payments in bitcoin? Maybe one day, but it’s not looking that promising at the moment. Now that you have a good idea of what bitcoin is, let’s move on to how it works.
You might ask how a currency system with no central oversight can be trusted. Bitcoin solves this problem by maintaining its integrity through an ingenious invention called the “block chain”. The block chain is essentially a public ledger (accessible to everyone with an internet connection and free bitcoin software) that maintains a history of all transactions, and is updated about six times an hour. For example when Person A sends Person B bitcoins, the transaction is broadcast to the entire public bitcoin network. Each network node adds this transaction to their copy of the ledger, and then broadcasts these ledger additions to other nodes. Since everyone sees every transaction, there is little opportunity to “double spend” your bitcoins. You might ask why someone would use their computer to help maintain the block chain, and this brings us to the third point of our discussion – how to get bitcoins.
New bitcoins are created via “mining”. Miners are basically providing a record keeping service that keeps the block chain consistent, complete, and unchangeable by repeatedly verifying and collecting new transactions broadcast through the network. The miner who successfully verifies the latest group of transactions (called a block) is rewarded with bitcoins (currently 25 coins per successful verification). The verification process is essentially solving a time consuming math puzzle. Furthermore, the difficulty of the puzzle is raised about once every two weeks. When bitcoin first came out, it was possible to successfully mine new coins using your personal computer. Today, the probability of someone using their personal computer to successfully mine new coins is very small. Most miners group themselves together into pools to combine their computational power, and then split the reward. If you want to start mining bitcoins, I would recommend the following:
- Download a bitcoin mining program. I would recommend BFG Miner (http://bfgminer.org/)
- Use a bitcoin return calculator to see how much money you can expect to make. The “hash rate” is essentially the speed of the hardware you are using. You can play around with this number to see how high the hash rate has to be before you make a return you are happy with. Remember to obtain the approximate cost of your hardware through a quick google search when you increase the hash rate. I would recommend using this calculator: http://www.coinwarz.com/calculators/bitcoin-mining-calculator.
- Do some research on what hardware will most economically get you the hash rate you need, and order it. Most of the available hardware can be plugged into an USB port.
- It’s now time to join a mining pool. As previously mentioned, people in a pool combine their computational power in solving the math puzzle and split the reward. I would recommend joining Slush’s Pool: https://mining.bitcoin.cz/home/.