Q. How does bitcoin work?
Bitcoin is a peer-to-peer network, a set of protocols (standards for interoperability), client interfaces (called wallets) and a currency that operates on top of all of those technologies. The bitcoin system allows any person to send or receive a fraction of a bitcoin (the currency unit) to another person, anywhere in the world. The bitcoin system operates on the Internet without the need for banks or bank accounts and allows people to send money like they send email.
To start using bitcoin, you need a bitcoin client, or "wallet" application. The bitcoin client allows you to use the bitcoin network, just like a web browser allows you to use the web. There are many different types and makers of bitcoin wallets, for desktop and mobile operating systems and also available as web applications. To receive bitcoin, you need a bitcoin "address", which is a bit like an email address or bank account number. If someone knows your bitcoin address, they can send you money, but cannot do anything more, not even identify who you are or where you are. Therefore, you can freely share your bitcoin addresses with anyone without fear or security risk. Once you have a "wallet," it can create any number of bitcoin addresses for you, even one per transaction. Give those addresses to anyone you want to send you bitcoin. Tip: bitcoin addresses are created by your wallet and do not need to be registered with anyone, or linked to your identity or email address. They can be used immediately to receive money from anyone and become part of the network once they have some bitcoin sent to them. Bitcoin addresses always start with the number "1" and they look like a long string of number. One of my bitcoin addresses is "1andreas3batLhQa2FawWjeyjCqyBzypd". This is known as a vanity address, because it has my name in the beginning, but it works just the same as if it was a long string of random letters and numbers. I use it to receive tips and donations from people all around the world.
Your wallet also allows you to send bitcoin to another bitcoin address. If a friend of yours has a bitcoin address, you can ask them to email it to you, or they can show it to you in the form of a barcode (QR code) that your mobile bitcoin wallet can easily scan with its camera. Once you have an address to send bitcoins, you can then use your wallet to create a "transaction", which is like writing a check. You tell your wallet which address should receive the bitcoin (your friend's address) and how much bitcoin you want to send. You can send a whole bitcoin (about $660 at this time), but that's usually too much! Instead, you can send a small fraction of a bitcoin, for example 0.001, which is 50 cents. When you send bitcoin, your wallet will also calculate a small fee that is paid to the bitcoin network in order to process your transaction, usually half a cent ($0.005 US dollars). Hit send, and your friend will see their wallet receiving 50 cents, in a matter of seconds. Within 10 minutes the transaction will "confirm" (like a check "clearing" in your bank) and your friend can then spend it.
Bitcoin transactions are "push" transactions, meaning that you are always in control of your wallet. No one can "deduct" bitcoin from your wallet, you have to explicitly sign a transaction to send it out. This makes bitcoin much safer than credit cards when shopping online, as your transaction only authorizes a single payment and never reveals your private identity.
Q. I don’t own any bitcoin. How do I get some?
Now that you have a wallet, how to get some bitcoin? Well, the easiest way is to sell a product or service for bitcoin. You can start accepting bitcoin, by adding a bitcoin address for payments on your invoices, your shop window or lemonade stand! Most merchants use a service like bitpay to facilitate this, acting as a payment processor. Their service can create a new bitcoin address for each transaction, keep accounts, handle refunds and even convert bitcoin to USD or your local currency instantly, shielding you from exchange rate fluctuations. They also offer plugins for many popular online store applications, for easy integration. If you plan on using bitcoin for many transactions it might be best to use such a service. Services like Shopify, Square and Stripe also offer bitcoin as a payment option for their online merchants, so that might be a good option.
If you don't want to trade products or services for bitcoin, you can buy some instead. To buy bitcoin, you have to convert your local currency into bitcoin, at the current exchange rate (see bitcoinaverage.com for the current rate). For this purpose you can use a broker or exchange that facilitates a market for buyers and sellers of bitcoin: Coinbase (US), Bitstamp (Europe), BTCChina (China) and others. If you use these services to buy bitcoin it is prudent to transfer your bitcoin once purchase into your own wallet. That way you control the bitcoin and do not have to trust them not to lose it.
Another way to buy bitcoin is using a local trader. You can find local traders using localbitcoins.com and your city or zip code. Localbitcoins can help you arrange a meeting with someone in a public space (like a cafe) and will handle the escrow of bitcoins to protect you from fraud. It is the fastest and easiest way to purchase small amounts of bitcoin (eg. $100-$500 USD worth)
Q. Where do I keep my bitcoin?
Keeping your bitcoin keys out of the hands of hackers is not easy. Your bitcoin wallet contains the keys that unlock the bitcoin you own. The actual bitcoins are stored on the network in a public ledger of accounts. Protecting your keys (your wallet) is therefore critical to protecting your bitcoin. If your keys are stolen, then your bitcoin can be easily stolen and you will have no way of getting it back. You should also be extremely careful with any services that hold your bitcoin wallet on your behalf. Custodial accounts of this sort can be hacked or have the funds stolen by insiders.
I personally keep a small amount of bitcoin on the web-wallet service blockchain.info (Disclosure: I am the Chief Security Officer of Blockchain). This service uses software that operates a wallet entirely in your web browser, doing all the key management and transaction signing in your browser. That means the web service never sees your keys or has access to your funds. Combined with two-factor-authentication (2FA), this provides an excellent level of protection for small amounts (< $1000). You can also have a mobile wallet linked to your account to use your bitcoin on-the-go.
For larger amounts, it is best to combine to keep bitcoin offline in "cold storage". This can be achieved with an dekstop wallet on an old laptop that is kept offline or using "paper wallets" which are bitcoin keys printed on paper and stored in safe or safety deposit box.
Q. How do I spend bitcoin?
You can spend bitcoin at thousands of merchants that accept bitcoin directly, as well as using intermediaries such as gift cards (Gyft.com) or travel agents (CheapAir.com) that allow you to use bitcoins with merchants who are not yet accepting them directly. To find companies that take bitcoin, you can use a number of online maps and directories, such as coinmap.com, spendbitcoins.com, or bitpay.com/directory. Several large merchants now accept bitcoin too: Overstock.com, Tigerdirect.com, Square Market (squareup.com/market) and others. Every week more and more merchants start accepting bitcoin. Next time you are shopping in a store, ask "Do you take bitcoin, yet?"
Bitcoin is not just about shopping, though. Use bitcoin to support your favorite charity or to send money to victims of disasters. Many charities are beginning to accept bitcoin, including some of the charities that pioneered bitcoin: Seansoutpost.com, Bitgive.com, Fr33aid.com and others. Bitcoin can also be used to hire contractors and service professionals from around the world, making payments easy, secure, instant and much much less expensive than Paypal or Western Union. Bitcoin crosses borders as easily as email or Skype and can allow you to connect with the world in a way that was never possible before.
Licensed as CC-BY-SA, by Andreas M. Antonopoulos (Twitter:@aantonop, http://antonopoulos.com/)
Published 6:00 am Wed, Jun 4, 2014