Frequently Asked Questions

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How did bitcoin begin?

Satoshi Nakamoto, the inventor of bitcoin, defined bitcoin as “A Peer-to-Peer Electronic Cash System” in his 2009 Bitcoin whitepaper. This writing became the base and blueprint for bitcoin. Even today, it's also arguably the clearest, most accurate description.

What is the blockchain?

Thanks to the blockchain process behind it, bitcoin is perceived as the most prominent triple entry bookkeeping system in existence. Transactions are recorded permanently in a distributed ledger called the blockchain. The bitcoin miners share this ledger's information around the world, even making it visible by the public.

What makes bitcoin valuable?

Bitcoins have value because they are useful to merchants and consumers. As they are accepted by more merchants, their value stabilizes and grows. Unlike regulated currency, backed up by governments and gold bars, bitcoins are backed up by the variety of merchants that accept them. Thus, crypto currency value increases as it becomes useful to more people. It's supply and demand, utility style.

Couldn't a bright and shiny new cryto currency make bitcoin obsolete?

Yes, a superior virtual currency could overtake Bitcoin and render it valueless. But for now, Bitcoin remains the most popular decentralized virtual currency. There's just no guarantee it will retain that position. However, a new currency would have to be spectacularly better in several aspects to overtake bitcoin in terms of established market and popularity. That's a tremendous task and bitcoin could always make adjustments to match their competition. Bitcoin just needs to stick to their protocol fundamentals and stay recognizable.

How can I get started as a bitcoin miner?

In the early days of bitcoin, anyone could find a new block using their computer's CPU. But, as additional miners get active in bitcoin, finding new blocks increases in difficulty at a snowballing rate. So, now it's at the point where the only cost-effective method of mining uses specialized hardware. You can visit sites like BitcoinMining.com for more information about how to get started. They include comparison between different hardware and break it out for you nicely, Consumer Reports style.

Are regular people actually using bitcoin to buy stuff?

Yes. A growing number of businesses and buyers use bitcoin. This includes restaurants, apartments, and law firms. Even popular online services like Overstock.com, Expedia, Microsoft, and Reddit take bitcoin now. Crypto currency is still pretty new-fangled for most people but its popularity keeps growing. As of May 2018, the total value of all existing bitcoins exceeds 100 billion US dollars, with millions worth of bitcoins exchanged daily.

So, how do these people get those bitcoins?
  • They might receive bitcoin as payment for goods or services.
  • Or some people buy bitcoins at a bitcoin exchange market.
  • Others exchange one-on-one using services like localbitcoins.com.
  • Ambitious people can also earn bitcoin through competitive mining.
Cool. What about Paypal? I'm already using that…

People buy physical bitcoins with PayPal but it may be difficult and/or expensive to use Paypal for non-physical bitcoins. That's because of significant risk on the seller side. PayPal's policy usually sides with the buyer when conflicts arise. It's easy for a fraudulent buyer claim they never received bitcoin from a vendor. Because of Paypal's policy, this seller then won’t get paid for the sale. Thus, sellers need to cover that risk with higher fees or refuse to accept PayPal as a policy. So, it may be a challenge to find a bitcoin vendor willing to take Paypal.

What is bitcoin mining?

A bitcoin miner works like a calculator that's set up with a special bitcoin-specific software. If you take away the bitcoin part, a miner simply creates calculations over and over to solve a mysterious math problem. It's a guessing game. When you add in the bitcoin element, there's now a monetary prize for the game winner. Miners use computer calculations to guess the bitcoin number until they finally hit on the right one. Then their prize is that block of bitcoin they guessed. Each miner does these calculations millions of times per second. So, it's essentially a numbers game and speed plays a big role. The more calculations you set up and the faster you do it, the better your chances of guessing right before some other miner.

How do you spend bitcoin?

Bitcoin payments are easier to make than debit or credit card purchases. Not only that, you don’t need a merchant account to accept then as payment. Payments are made from a wallet application, either on your computer or smartphone. All you do is enter the recipient's address, the payment amount, and press send. To make it easier to enter an address, many wallets can obtain the address by scanning a code or touching two phones together with NFC technology. It's as easy as it is high tech.

What is double spending?

Double spending means using the same bitcoin to pay in two different transactions. Let’s say I send one bitcoin to you. This payment goes into an unconfirmed pool to wait for validation. Thing is, I'm tricky. I also send that same bitcoin to Meg at the same exact time. It also goes into the unconfirmed pool. So I sent out one Bitcoin twice – to you and to Meg.

These two payments will exit the waiting pool for confirmation checkpoints in the blockchain. If they get pulled from the pool at the same time both will show that I have the money needed. In that case, the two blockchain branches will race to verify each transaction. The first to achieve confirmation will win. But if they reach the next checkpoint in tandem as well, there's another race and so on.

It's highly unlikely (like extraordinarily unlikely) that this race will happen more than six times. So, many transactions maintain unconfirmed status until they've been through six checkpoints. That's to prevent trixters from double spending.

Can I trust bitcoin?

Bitcoin is so transparent, it requires no trust at all. That's because it's fully open-source and decentralized. This means anyone has access to the entire source code at any time. Any developer in the world can verify exactly how bitcoin works. All transactions and bitcoins issued into existence are right out there to be seen in real-time. Payments happen without reliance on a third party. That's because the whole system is protected by peer-reviewed cryptographic algorithms. Thus, no organization or individual has control. So, the network remains secure because it's all done by consensus.

Just how anonymous is bitcoin?

Bitcoin's design gives users the same level of privacy as any other form of money except cash. It's not anonymous because the use of Bitcoin leaves extensive public records. Mechanisms are used protect privacy and more are in development. But none of these are perfect at protecting the privacy of bitcoin users. In fact, it's hard to imagine how bitcoin could be truly anonymous within such an open-sourced network and process. After all, the story of bitcoin is all about transparent transaction chains of proof.

What if I lose my bitcoins?

If you lose your wallet it removes that money from circulation. Lost bitcoins still remain in the block chain just like any other bitcoins. However, lost bitcoins remain dormant until found. They can’t be spent without their specific private key. Because of supply and demand, when fewer bitcoins are available, the ones that are left (your lost ones) will grow in demand and thus increase in value. So, if you lose your bitcoins only to find them later, it may be to your financial advantage. Best to keep them somewhere safe and helps to take note of this location for later, hopefully richer, reference.

What if Scrooge McDuck or Jay Gatsby buy all the bitcoin that are left?

Bitcoin markets are competitive thanks to supply and demand - just like all financial markets. Currently only a fraction of bitcoins issued to date are found on exchange markets for sale. So, sure, a buyer with lots of money could buy all the bitcoins offered for sale. But unless those holding the rest of the bitcoins offer them for sale as well, even the richest, most determined buyer can't get at them. Also, miners aren't obligated to sell their bitcoins so not all bitcoins will even make it to the markets. Sorry, Scrooges!

How secure is bitcoin?

Bitcoin technology has a strong security track record. That's thanks to its unique protocol and cryptography. Thanks to them, the network is likely the biggest distributed computing project that exists. Bitcoin's most common challenge lies with user error. For instance, wallet files store private keys and can be accidentally deleted, lost or stolen. It's a lot like physical cash that's stored in digital form. The good news is there are sound security practices to protect your money. For instance, always use service providers with security and insurance against theft or loss.

Gotcha. But what about those hacks I heard about?

The security of Bitcoin depends on how quickly problems are found and fixed. The network matures and establishes its security through these tests. But there are misconceptions about thefts and security breaches on crypto currency exchanges. Although such events certainly stink for the people involved, bitcoin itself wasn't hacked in these cases. In fact, hacks happened because individuals didn't completely secure their money. This shows why users need security solutions to reduce these risks. Thanks to innovations like wallet encryption, offline wallets, and multi-signature transactions individuals have more tools to keep bitcoin secure.

What about bitcoin and taxes?

Bitcoin doesn’t maintain legal tender status in any jurisdiction. Still, tax liability can accumulate no matter what form the currency takes. There's lots of legislation in process for multiple jurisdictions about taxing bitcoin. That means income, sales, payroll, capital gains, or some other form of tax liability are likely to arise with Bitcoin. More bad news for Scrooge, maybe. But the rest of us are accustomed to Uncle Sam.

How's bitcoin for an investment?

Even though bitcoin's value goes up and down as the market fluctuates, there is also built-in value to bitcoin. Bitcoin protocol is hard-limited to 21 million bitcoins. So, no more than that can ever be created. In other words, no central bank, individual or government can come along and make more bitcoin. So, bitcoin is deflationary currency and thus likely to grow in value based on this alone.

But won’t the finite number of bitcoins also present future limitation?

One thing that makes bitcoin unique is this 21 million production end point. However, it doesn’t have to be a limitation. Transactions can be denominated in smaller sub-units of a bitcoin, such as bits. For instance, there are 1,000,000 bits in one bitcoin. Each bitcoin can currently be divided up to eight decimal places (0.000 000 01) and there's certainly future potential for even smaller units. So, when you look at these vast divisible possibilities, limits are not an issue with bitcoin.