How to earn, spend and mine bitcoins
Bitcoin is the world’s first crypto-currency – a currency that exists in the virtual world, and which is supported not by government fiat but by computing horsepower.
If that sounds complicated, or even subversive, don’t worry. The Bitcoin system is easy to use, and while some of its characteristics appeal to criminals and revolutionaries, it has plenty to offer ordinary people. You can even get involved and use your own PC to generate currency.
Bitcoin isn’t a get-rich-quick scheme: no matter what you do it’s extremely unlikely you’ll become a millionaire overnight. Like any currency, bitcoins aren’t even guaranteed to hold their value from one day to the next. But if you’re curious and want to learn more about this fascinating economic experiment, read on.
Where did Bitcoin come from?
The Bitcoin system was originally described in a research paper published online in October 2008 under the name Satoshi Nakamoto. The paper was a blueprint for a decentralised network that would make it possible for individuals to own and trade virtual currency. The code to make this system a reality was implemented and developed by Satoshi and a team of volunteers in the years that followed.
Bitcoin isn’t a get-rich-quick scheme: no matter what you do it’s extremely unlikely you’ll become a millionaire overnight
Curiously, Satoshi Nakamoto appears to be a pseudonym. Before the Bitcoin paper appeared, his name was wholly unknown in programming and mathematics circles, and emails to his public address haven’t been answered since 2010.
Satoshi may have chosen to be anonymous in the hope of avoiding a legal backlash: previous attempts to create virtual currencies have attracted sanctions from the US Department of Justice, under laws intended to prevent money laundering.
Satoshi’s identity may be a mystery, but his code is wholly transparent. The software that runs the Bitcoin network is open source, and its security model is based on transparent mathematical principles (as we’ll discuss below).
What’s more, countless independent developers have contributed to the Bitcoin system. So while there may be something cloak-and-dagger about Bitcoin’s genesis, there’s no reason to think any nasty surprises might be lurking within the code.
How does Bitcoin work?
You can think of a bitcoin – the currency unit, with a lower-case “b” – as simply a number that belongs to you. You may have been given it by someone else, or awarded it by the network itself (something we’ll discuss below), but somehow it’s become yours.
While there may be something cloak-and-dagger about Bitcoin’s genesis, there’s no reason to think any nasty surprises might be lurking within the code
As with physical currency, you can keep it, or you can give it to someone – perhaps as a gift, or in exchange for goods or services.
Clearly, your ownership of this number can’t be demonstrated by physical possession of a note or coin. But the Bitcoin network maintains a complete record of all transactions since the beginning of time, so within the system it will be universally attested that a particular bitcoin has been received by you – or, to be precise, by a particular virtual identity, which you may happen to own – and not yet spent.
When you want to pass a bitcoin on to someone else, you can do so by broadcasting this fact and signing the message with a public encryption key to prove it’s from the same Bitcoin ID that previously received the coin.
Each computer on the Bitcoin network automatically shares transaction details with its peers, so within minutes every computer on the network will know about the transfer, and ownership will have passed to the recipient.
Understanding the block chain
From the user’s perspective, that’s all there is to Bitcoin – but behind the scenes, things aren’t so simple. If they were, the system would be vulnerable to “double-spending”: that’s to say, you could use two different computers to send the same coin to two people at once, causing problems for the network and for the recipients.