Bitcoin Basics – What are they? (Pt. 1 of 3)

Bitcoin Basics – What are they? (Pt. 1 of 3)

If you haven’t heard already, Bitcoins are the latest craze for speculative Wall Street savants, risk-taking investors, and forward-thinking venture capitalists. These little bits are old news, though, for true techies and frequent peer-to-peer shoppers – especially since they’ve been in use for over three years now. Launching in January, 2009, the digital coinage didn’t really take off until June, 2010, when the first pizza purchase launched a historical, populist response to the status quo money system.

Today we’ll explore how these hot commodity coins originated as well as break down the basics. How to get new coins and where the currency’s real value derives from, however, gets a little complicated. We’ve broken the Setuix Bitcoin Series up into three digestible bits – where part two explains how to “mine” and exchange them, and part three delves into their economic implications. For now, we’ll review some basics, a brief history, and prepare to use/exchange them.

Bitcoin Basics

In a nutshell, Bitcoin (capital B) is a form of digital currency likened to global, electronic cash. Almost entirely anonymous, authentication is required over a public network of computers, using cryptography as a transaction language. Bitcoin is the first ever to combine complex electronic verification with trading valued goods in a marketplace and is dubbed the original cryptocurrency. There are a few other cryptocurrencies currently in circulation, but none match Bitcoin’s level of popularity and number of vested backers.

Though it depends on the vendor, Bitcoins are quickly becoming an accepted form of payment (all the recent hype definitely helps the cause). It is important to note how Bitcoin differs from current national currencies—as transactions are verified on publicly supported equipment, with no overhead and little oversight. Operational costs are very small compared to other financial institutions (i.e. Visa or PayPal), but there is no regulating body or single nation behind the open-source, algorithmic scheme. Finally, the electronic currency is finite, similar to a precious metal, released into the public on fixed schedule. The number of newly released coins halves every four years (i.e. no “quantitative easing” or printing coins out of thin air).

 

Bitcoin Origins

Bitcoin is attributed to a pseudonym creator, Satoshi Nakamoto, who published the online paper “Bitcoin: A Peer-to-Peer Electronic Cash System” in November, 2008 (pdf). The article was released at an interesting and opportune time—as the US and global financial bubbles, fueled in large part by loose underwriting practices and reckless market betting, had just burst all over the public’s proverbial face. Fiscal crises in numerous national and private banks led to an economic crunch [recession] that many are still feeling headed into 2014.  Using cryptographic means, though, to spur global change is the advocating mantra for those of the Cyberphunk persuasion (*not to be confused with cyberpunk). Satoshi, whoever he or she may truly be, merely applied this old idea to our entrenched concepts about money, seizing a favorable moment to introduce a new form of currency to the public.

Getting Started: Setting Up a Wallet

While the gritty details of a full transaction are saved for part two of this articles series, we’ll start by setting up a wallet so that you can at least start exchanging Bitcoins for goods and services. A wallet is really just a “client” acting as a user interface – allowing your computer to talk with other public computers on the Bitcoin exchange network. Similar to file sharing services requiring a torrent program, you’ll need to install a wallet to securely track and house your Bitcoins.

To start, either visit  this site and select your computer’s operating system, or click a company resource from the table below to nab your shiny new Bitcoin wallet.

Company

Blockchain , Coinjar,

CoinbaseCoinpunk

BitcoinQT,

ArmoryMultibit

Trezor,

BitSafe

Wallet Type

Web &/or Mobile

Software

Hardware

How it differs

Hosted on internet

Runs from computer

Protects private keys

Strengths

Convenient, easy

More secure

Most secure

Weaknesses

Less secure

Long installation time

Not available yet

Table source

Some may equate the anonymous nature of Bitcoin transactions with shady, black market dealings…like when the FBI shut down the online marketplace Silk Road and seized $28 million USD worth of Bitcoins. In reality, the public network transaction log (the blockchain) provides a trail of breadcrumbs (called timestamps), which usually keeps illicit activity to a minimum. We’ll delve more into mining, exchanging, and earning bonus Bitcoins in part two of this series.