/ Andreas Antonopoulos / 6 am Wed, Jun 4 2014
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  • A beginner's guide to Bitcoin

    A beginner's guide to Bitcoin

    Andreas Antonopoulos explains what bitcoin is, and how you can start using it.

    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

    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,