When you dig into the details of Bitcoin, it’s almost an unbelievable tale about how to create money. Although it seems like fiction, it’s actually the best-known version of digital currency in use today. To help you wrap your head around what it is, what it does and how to earn Bitcoins, I pulled together this complete beginner’s guide to Bitcoin
Before we go any further I just want to reiterate that investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.
Bitcoin was the first established cryptocurrency—a digital asset that is secured with cryptography and can be exchanged like currency. Other versions of cryptocurrency had been launched but never fully developed when Bitcoin became available to the public in 2009. The anonymous Satoshi Nakamoto—possibly an individual or a group whose real identity is still unknown—is behind the development of Bitcoin who stated the goal of the technology was to create “a new electronic cash system” that was “completely decentralized with no server or central authority.” In 2010, someone decided to sell their Bitcoins for the first time to purchase two pizzas for 10,000 Bitcoins. I hope the pizza was good, because if that person would have held onto those Bitcoins, they would be worth more than $100 million today. In 2011, Nakamoto shared the source code and domains with the Bitcoin community and hasn’t been heard from again.
What is Bitcoin, really?
Bitcoin is a digital currency, so there are no coins to mint or bills to print. There is not a government, financial institution or any other authority that controls it, so it’s decentralized. The owners who have Bitcoins in the system are anonymous—there are no account numbers, names, social security numbers or any other identifying features that connect Bitcoins to its owners. Bitcoin uses blockchain technology and encryption keys to connect buyers and sellers. And, just like diamonds or gold, a Bitcoin gets “mined.”
How do you “mine” Bitcoins?
People—or more accurately extremely powerful, energy-intense computers—“mine” Bitcoins to make more of them. There are currently about 16 million Bitcoins in existence, and that leaves only 5 more million available to mine because Bitcoins developers capped the quantity to 21 million. Ultimately, each Bitcoin can be divided into smaller parts with the smallest fraction being one hundred millionth of a Bitcoin called a “Satoshi,” after the founder Nakamoto. The mining process involves computers solving an extremely challenging mathematical problem that progressively gets harder over time. Every time a problem is solved, one block of the Bitcoin is processed and the miner gets a new Bitcoin. A user establishes a Bitcoin address to receive the Bitcoins they mine; sort of like a virtual mailbox with a string of 27-34 numbers and letters. Unlike a mailbox, the user’s identity isn’t attached to it.
How are Bitcoins used?
In addition to mining Bitcoins, there are other ways to earn Bitcoins. First, you can accept Bitcoins as a means of payment for goods or services. Setting up your Bitcoin wallet is a simple as setting up a PayPal account and it’s the way you store, keep track of and spend your digital money. They are free and available through a provider such as Coinbase. While this might take more time than it’s worth, there are websites that will pay you in Bitcoins for completing certain tasks. Once you’ve earned Bitcoins, there are ways to lend them out and earn interest. There are even ways to earn Bitcoins through trading and recently Bitcoin futures were launched as a legitimate asset class. In addition, you can trade your regular currency for Bitcoins at Bitcoin exchanges, the largest one being Japan-based Mt. Gox that handles 70 percent of all Bitcoin transactions. There are more than 100,000 merchants who accept Bitcoin for payment for everything from gift cards to pizza and even Overstock.com accepts it.
What are the risks?
There’s risk as well as a great opportunity with Bitcoin. While it has been appealing to criminals due to its anonymity and lack of regulation, there are lots of benefits to all of us if you’re willing to accept some risk to jump into the Bitcoin marketplace. Since there is no governing body, it can be difficult to resolve issues if Bitcoins get stolen or lost. In 2014 Mt. Gox went offline, and 850,000 Bitcoins were never recovered. Once a transaction hits the blockchain it’s final. Since Bitcoin is relatively new, there are still a lot of unknowns and its value is very volatile and can change significantly daily.
What Can You Buy with Bitcoin?
After an initial flurry of interest among merchants in accepting bitcoin in their retail or online stores, interest has largely died down as increasing bitcoin transaction fees and volatile price movements made it less attractive as a means of exchange
That doesn’t mean that there are no outlets to spend your bitcoin, however, far from it. It’s just that bitcoin volumes at these outlets has generally not met expectations, and by the time you read this, some may have discontinued that option.
At time of writing, however, you can still buy a wide range of goods and services with the cryptocurrency. Among the advantages of doing so are the ease of cross-border transactions, and anonymity (unless you want physical delivery, of course). By accepting bitcoin, merchants get access to a broader market, and don’t have to worry so much about chargebacks (where the buyers cancels the payment after receiving the product).
If you want to use bitcoin to buy presents, the most obvious solution is gift cards, via Gyft or eGifter. The recipient will then be able to spend the gift card at one of a wide range of retailers.
You can pay for flights and hotels with bitcoin, through Expedia, CheapAir and Surf Air. If your ambitions are loftier, you can pay for space travel with some of your vast holdings, through Virgin Galactic.
Microsoft accepts bitcoin in its app stores, where you can download movies, games and app-based services.
Some musicians (Bjork, Imogen Heep) will let you download their music in exchange for cryptocurrency.
Need to furnish your house or buy a special present for someone? Overstock was one of the first big retailers to start accepting bitcoin, back in 2014, and its founder – Patrick Byrne – is still one of the technology’s most active proponents. Fancy some gold? Sharps Pixley, APMEX and JM Bullion will take bitcoin off your hands in exchange for bullion. And if you’re hungry and live in the US, PizzaforCoins will get a pizza delivered to your door (depending on where you live) in exchange for bitcoin. If it’s knowledge you’re hungry for, several private and public universities as well as a couple of New York preschools accept bitcoin. Some legal and accounting firms also accept payment for their services in the cryptocurrency. Of course, you could always buy yourself some happiness by donating to one of the bitcoin-accepting charities or crowdfunding sites, such as BitHope, BitGive or Fidelity Charitable. For a list of offline stores near you that accept bitcoin, check an aggregator such as SpendBitcoins or CoinMap.