Bitcoin, properly explained

This article is also available in Swedish. Den här artikeln finns även på svenska.

Ever since Bitcoin was announced in early 2009, I have attempted to understand it on both a conceptual and technical level. It's been anything but easy to get all the question marks straightened out, and I certainly don't blame anyone for finding it very confusing. I wrote this description in order to explain Bitcoin as simply as possible without leaving out important facts since, as is so often the case, I was unable to find anything that explained it the way I would want it explained to me. Thus, this may not work for everyone, or be the "ultimate guide", but I hope it's a good starting point.

Even though the vast majority doesn't need to know every technical detail about the inner workings, they still need to know what Bitcoin actually is, and how it works in a general sense. I'm going to attempt to communicate that here.

There are many problems with Bitcoin. However, it does exist, it is somewhat established and, most importantly, it is the only practical/realistic alternative to the criminal banksters' deliberately shitty systems, established scammers such as PayPal (which frequently bans random accounts and steals all their money without stating any reason or ever speaking to the victims again, and which outs people without letting them know) and the constant oppression from the governments. It is clear that Bitcoin has by far the greatest chance of working out in the awful situation at hand. It's simply all we've got.

Elevator pitch

Through the system of Bitcoin, you can send and receive the BTC currency to and from anyone in the world, entirely bypassing the insanely awkward and obnoxious bank wire/credit card systems, privacy violations and all kinds of fees and censorship which exist with every commercial/centralized service. If you, like many of us, are sick of being harassed by the government and the evil multinational corporations, using Bitcoin is equivalent to telling them to go fuck themselves. It may still be experimental, but it's no joke.

The absolute basics

The term "Bitcoin" may refer to four separate but closely intertwined things:

The decentralized, peer-to-peer currency itself as a concept.
An individual Bitcoin "coin". This is not something tangible but an abstract entity. Shortened as BTC, ฿, Ƀ, etc.
The technical "protocol" which dictates the rules for how it is supposed to work. (This is unfortunately still largely defined by the source code to the official Bitcoin client.)
The Internet-connected software which makes it actually work and which you interact with on your computer, which adheres to the protocol rules. There is not just one "client", but several different ones, just like with Web browsers or word processors.

Every user of Bitcoin installs a Bitcoin client, usually the official one, thus becoming a "node" of the global Bitcoin network and essentially their own little bank in a sense. While it is possible to use one of many Web services which manages your "wallet" for you, relieving you from the need to install any software, this is very risky. You are trusting a third party with all your money, and lots of people have indeed lost their Bitcoins this way (due to outside hacks that were possible due to sloppy security, or simply the owners being thieves who ran away with the dough).

The safe/sane way of using Bitcoin is to be your own actual node and manage your digital "wallet" yourself. This, of course, needs to be kept secure, and you should have multiple safe backups (it's a very small file). There is malware which will steal your wallet, which ought to make computer security more important than ever for the general public. There are people who have printed out physical papers with the secret codes for their Bitcoins and keep them entirely offline in a safe. That should give you an idea of the power of this strange currency.

You, just as everyone else, will have a complete log of every single Bitcoin transaction by every single Bitcoin "user" (these are just unique text strings — not your actual name or anything, obviously) that has taken place from day one. This is necessary due to the lack of a central authority; every member of the network must be able to verify the integrity of the transactions. This "block chain" is constantly being synchronized (growing) with other nodes as long as you are online. It is currently a number of GB large. The longer you stay offline, the longer it takes to catch up when you come back.

Sending and receiving

To send money, you enter the "receive address" (looks like this: 19HQ1PKvkhUpeqFRtYU7WRFZkifWJrpa4M) you are given by the person asking for money, and the amount. (Any Web page can link directly to this, so that when you click a link, your Bitcoin client opens up with their address and the amount already filled in. It's beautiful.) Then you submit it with the push of a button. The transaction will now start propagating through the network until enough of the nodes have verified that it's OK. They do all this through advanced mathematical calculations. The people who designed this are not stupid. It is not possible to fool the system as an individual. Due to the peer-to-peer nature of the currency, the transactions are not instant. They cannot be instant. However, there is now the ability to add an optional "reward" (yes, a fee) so that your transaction is processed faster, with the reward given to the "miner" who spends the time to process it.

To receive money, you simply click a button in the client to generate a new "receive address" and give it to the other person. It is strongly recommended that every single transaction uses its own receive address, for privacy and to keep track of it all. (It is free to make any number of receive addresses, a bunch are kept pre-computed in a constant buffer in order to make your backups less likely to lose money, and they are all tied to and part of your single "wallet".) The client allows you to "label" these addresses for your own personal reference, such as "Cash from Joe for the bike". The labels are not sent over the network or leaving your wallet file in any manner.

Getting Bitcoins

There are three ways you can get Bitcoins:

Somebody who already has Bitcoins can send some to you (or little pieces of one). They won't do this for free (just ignore the many scam sites that promise "free Bitcoins"), so you have to either provide a service or sell something, just like with any real currency.
You can "simply" (it's a pain) buy them at a trusted Bitcoin exchange (such as Mt.Gox) for traditional, "fiat" currency such as US dollars. At the time of writing, a Bitcoin costs over 70 USD!
You can mine Bitcoins yourself. However, at the time of writing, this has become so hard that you might as well forget about it if this is the first you hear about it. Even so, I have to address this concept…

Mining and confusion

There are many misconceptions about Bitcoin. The most common is probably the notion that anyone can "print" unlimited Bitcoins since there is no central authority. This is obviously false as it would make the currency entirely worthless. "Mining" new Bitcoins is not easy and gets harder all the time, and this is not something that the average user should even think about doing. In fact, all this talk about Bitcoin mining has largely shifted focus from its potential as, finally, a way for people to send money over the Internet in a sane manner, into some kind of "get rich quick" scheme, where both mining and speculation overshadow any talk about actually using it as a currency for trading goods and services. This is unfortunate.

The maximum number of Bitcoins that can ever exist is 21 million. You might think that this limits its usefulness on a mainstream scale. Not so. Bitcoins can be divided into much smaller parts and freely traded. It's a good thing that they aren't unlimited.

"Mining" refers to running a software on a computer which constantly tries to generate the correct "code" for a Bitcoin "block", over and over again, many, many times per second. It has no memory of previous attempts and has no idea when it "gets close". It just tries random ones until, eventually, a "block" of 25 Bitcoins is found. It is then said to have been "mined". This becomes mathematically more difficult/unlikely to happen all the time. Thus, originally, this was done with the computer's main processor, then switched to graphics cards (GPUs) which were much better at calculating this kind of thing, to, now, specialized hardware that is made purely for the sake of mining BTC. Those machines are both rare and very expensive. Do yourself a favour and forget any ideas you may have about "generating virtual money" and getting rich from it. If that was ever possible, it was when Bitcoin was fresh and you were one of the few who recognized its potential early on. I was not one of those. Most of the ones who did hoard coins early on sold them very cheaply (or even threw them away!) and now regret not holding on to them.

Problems

Exchanging between your local fiat currency and Bitcoin is a chore, and it's not likely to get easier as long as the banksters rule the world. However, this shouldn't be something you do regularly. In fact, eventually, the goal should be to go all Bitcoin, at least for electronic transactions. For physical transactions, "good old" cash, precious metals or whatever rare and desired items may be around work well. (That is, until they start installing minimal tracking chips in all new bills and coins and outlaw the old money, or simply push their own "cashless society" madness on their own sick terms.)

In spite of being decentralized, I can think of many ways in which "They" could stop Bitcoin if they feel it's becoming too big and a real threat to their reign of terror. They can pass laws forbidding the use of the currency, they can get Internet providers to block Bitcoin traffic, they can make it impossible to trade in fiat currency to Bitcoin (thus making it even harder for it to truly take off), and many other evil things. However, as stated earlier, there simply is no choice. Precious metals and similar may be hoarded locally and used to trade services and goods in person, but it cannot be sent all over the world in a sensible manner.

Whether you like it or not, Bitcoin is the one chance to finally get the means to charge money and pay online in a sane fashion. Finally. In 2013. 13 years into the "digital millennium".

External links

Now what?

You can send me some feedback, tip me or link people here. Also read my article on Tor.

Short address to this page: http://kimmoa.se/btcen
Published 2013-04-03. Last touched 2013-08-27.