So you might have vaguely remember hearing the word BitCoin (BTC) thrown around in the media during the past year and you might even been aware that it is a digital/virtual currency, but did you really understand what the BTC is? If you ever wanted to know what the BTC is, how it is made/used/sold, and most importantly, how you can make money off of it; this post is for you.
1. Introduction to the BTC
The BTC tends to have a bad rep from a lot of ill-informed individuals on what it actually is and how it operates. Some believe that BTC is a scam (these tenants can even be further divided into what particular scam they believe it to be) and others believe it is currency made to fuel the black market. I can assure you that these statements are not entirely true.
Not entirely true, you are thinking, isn’t exactly assuring. Well to understand the reason for the caution, you will need to understand the underlying philosophy behind the BTC: it is a decentralized, unregulated, virtual currency. There is no governing body over the BTC and all transactions can be performed pseudo-anonymously. The BTC is rewarded in blocks of 50 BTCs to individual computers that are the first to solve a complex calculations (by cracking a SHA-256 hash) on the BTC network. After one calculation is solved, a new one starts and this process is continued indefinitely until 2033, when BTC mining is expected to cease.
At this point, a rational reader (or anyone who has taken an economics course) might have a few concerns for a currency that is unregulated and decentralized. One such concern is likely that to address the issue of inflation or deflation. Without a regulating body, how does the BTC address inflation and deflation? How does the BTC pervert counterfeiting?
Total amount of BTC to be released per year
As you can see from the graph above, BTC to be minted is set to a pre-defined schedule. There is not an endless supply of BTC, it is capped at a total of 21 million. The total amount of BTC to be minted a year is kept in check by adjusting something called a “difficulty level”. This difficulty level impacts how easy it is to solve the hash and consequently, how many BTC is released. Difficulty is adjusted to current minting rates every two weeks.
This may address the issue of inflation, but it doesn’t necessarily address the issue of deflation. This is one currently debated and it might be more appropriate to read a better posed argument for and against how BTC deals with inflation/deflation on the BTC wiki (provided in the link below).
The BTC prevents counterfeiting by utilizing a peer to peer (P2P) system that records every transaction performed on the network. This record is kept individually on each computer and each transaction receives a confirmation through the network.
For example, say in the rare event that John Doe is able to counterfeit a shiny BTC without solving a hash distributed by the network; when he connects to the BTC network, there would be no confirmation of him actually receiving that shiny BTC on any of the other computers on the BTC network. Everyone would know that John is not holding a shiny BTC, his family would be so embarrassed with his failures that they would leave him, and John would be forced to live out his life deep in the trenches of the Dark Internet mining for Name Coins… In effect, counterfeiting is not possible. There could be an issue of hacking the network to disrupt it, but each time that SHA-256 hash is cracked by millions of computers (BTC is the most powerful distributed computing network in the world), it contributes to the overall “strength” of the system. As it stands right now, there is a very slim chance that there is any network out there that can counter the computing power of the BTC network.
2. How to use BTC
Well I am sure you are more than excited to continue reading more on the history of the BTC (links are provided below on some additional reading sources), but lets move on how to actually use it.
To begin, you must install the BitCoin application on your PC. This application contains a very important file, your wallet file (wallet.dat to be specific). With your wallet, you can have BTC deposited or withdrawn from your account. You do this by generating a wallet id (or using an existing one and telling people to send funds to that wallet id (that 33 key with a mix of words and letters) or by sending BTC you have in your account to another individual’s wallet ID. Transactions are instantaneous, incur no transaction fees, cannot be charged back, and can be done without revealing any personal information (all great reasons to use BTC over systems like PayPal).
The program also includes software to utilize your CPU in mining for BTC. Unless you plan on only having 1 BTC in the next 20 years, this is not the route to go (I will talk more about how to mine later). So how do you get BTC without minting it? If you are looking to just play around, there are sites that offer a small amount of BTC to get your “feet wet”. One such site is called the Bitcoin Faucet. If you plan on utilizing more BTC, you are likely better off exchanging your real money for BTC. Somewhat ironically, there are only 2-3 primary exchangers in a given country. If you are in Canada, you are likely going to be using CaVirtex. If you are in America or want to use the largest exchange site, you are likely going to be using MTGox. There are smaller exchangers out there but they don’t have the best rate or guaranteed service like these guys do.
Once you have BTC in your wallet, you are free to do whatever you want with it. I have included a link below to show what you can buy with your shiny new BTCs.
Stay Tuned for Part 2 where I will show you how to make money from BTC (well, at the very least, how I made money).
Relevant Links:
Bitcoin Wiki
Windows Installer
Free BitCoins - Bitcoin Faucet
CAVirtex
MtGox - USA/International