Get Our NewsletterWIRED’s online bitcoin drugs stories delivered to your inbox. 900 last week, an enormous surge in value that arrived amidst Congressional hearings where top U. The spike was big news across the globe, from Washington to Tokyo to China, and it left many asking themselves: “What the hell is a bitcoin?
The spike was big news across the globe, from Washington to Tokyo to China, and it left many asking themselves: ‘What the hell is a bitcoin? Bitcoin is a digital currency, meaning it’s money controlled and stored entirely by computers spread across the internet, and this money is finding its way to more and more people and businesses around the world. With that in mind, we give you this: an idiot’s guide to bitcoin. And there’s no shame in reading. Nowadays, as bitcoin is just beginning to show what it’s capable of, we’re all neophytes. Bitcoin isn’t just a currency, like dollars or euros or yen. It lets you hold money, but it also lets you spend it and trade it and move it from place to place, almost as cheaply and easily as you’d send an email.
As the press so often points out, Bitcoin lets you do all this without revealing your identity, a phenomenon that drove its use on The Silk Road, an online marketplace for illegal drugs. But at the same time, it’s a system that operates completely in the public view. Bitcoin is much more than a money service for illegal operations. It’s a re-imagining of international finance, something that breaks down barriers between countries and frees currency from the control of federal governments. The software runs on thousands of machines across the globe, but it can be changed. In short, Bitcoin is kind of like the internet, but for money. About five years ago, using the pseudonym Satoshi Nakamoto, an anonymous computer programmer or group of programmers built the Bitcoin software system and released it onto the internet.
This distributed software seeded the new currency, creating a small number of bitcoins. Basically, bitcoins are just long digital addresses and balances, stored in an online ledger called the “blockchain. But the system was also designed so that the currency would slowly expand, and so that people would be encouraged to operate bitcoin miners and keep the system itself growing. When the system creates new bitcoins, you see, it gives them to the miners.
Miners keep track of all the bitcoin transactions and add them to the blockchain ledger, and in exchange, they get the privilege of, every so often, awarding themselves a few extra bitcoins. Right now, 25 bitcoins are paid out to the world’s miners about six times per hour, but that rate changes over time. Why do these bitcoins have value? Though the system continues to crank out bitcoins, this will stop when it reaches 21 million, which was designed to happen in about the year 2140. The idea was to create a currency whose value couldn’t be watered down by some central authority, like the Federal Reserve. Bitcoins can be broken into tiny pieces.
Each bitcoin can be divided into one hundred million units, called Satoshis, after the currency’s founder. That means that the rules that govern bitcoin’s accounting are controlled by cryptography. Basically, if you own some bitcoins, you own a private cryptography key that’s associated with an address on the internet that contains a balance in the public ledger. The address and the private key let you make transactions.
The internet address is something everyone can see. Think of it like a really complicated email address for online payments. If someone wants to send you bitcoins, they need your address. This is an even more complicated string that you use to authorize a payment. If the math doesn’t add up, the transaction is rejected. Crypto systems like this do get cracked, and the software behind Bitcoin could have flaws in it.
But at this point, Bitcoin has been tested pretty thoroughly, and it seems to be pretty darned secure. You can install a wallet on your computer or your mobile phone, or use one that sits on a website. With these wallets, you can easily send and receive bitcoins via the net. You can, say, buy a pizza on a site that’s set up to take bitcoin payments. You can donate money to a church.
You can even pay for plastic surgery. The number of online merchants accepting bitcoins grows with each passing day. But you can also make transactions here in the real world. That’s what a mobile wallet is good for.
The Pink Cow, a restaurant in Tokyo, plugs into the Bitcoin system via a tablet PC sitting beside its cash register. If all that makes sense and you wanna give it try, the first thing you do is get a wallet. Then, once you have a wallet, you need some bitcoins. For a one percent fee, Coinbase links to your bank account and then acts as a proxy for you, buying and selling bitcoins on an exchange. Coinbase also offers an easy-to-use wallet. You can also make much larger bitcoin purchases on big exchanges like Mt. Ironically, the best way to keep bitcoin purchases anonymous is to meet up with someone here in the real world and make a trade.
If you use a service like Coinbase or Mt. Gox, you’ll have to provide a bank account and identification. Ironically, the best way to do this is to meet up with someone here in the real world and make the trade in-person. Or you can attend a regular Bitcoin meetup in your part the world. Because credit card and bank transactions are reversible and bitcoin transactions are not, you need to be very careful if you’re ever selling bitcoins to an individual.