is an open source peer-to-peer
) electronic cash system that's completely decentralised
, with no central server, trusted authorities or middle men. The availability of bitcoins can't be manipulated by governments or financial institutions.
Bitcoin is the first truly decentralised currency and has paved the way for hundreds more to compete together in Cipherspace over the coming years. This is one of the key factors in the transition of global society into the post-nation-state economy talked about in books like The Sovereign Individual and which is coming to be known by agorists as The Second Realm.
If you have a bitcoin, what that means is that there is an agreement among its users that the world owes a certain amount of labor to you. The value of the bitcoin approximately depends on the size of the network, and essentially gives you a 1 / 21000000 share in the value that can come out of this network and its ability to facilitate trade. When gold was the dominant currency, it seemed that it represented physical value while bitcoin is a looking glass that shows us what money really is: social value.
Bitcoin is the first online currency to solve the so-called “double spending” problem without resorting to a third-party intermediary. The key is distributing the database of transactions across a peer-to-peer network. This allows a record to be kept of all transfers, so the same cash can’t be spent twice–because it’s distributed (a lot like BitTorrent), there’s no central authority. This makes digital bitcoins like cash dollars or euros: Hand them over directly to a payee, and you don’t have them anymore, all without the help of a third party.
A couple of good introductions to bitcoin are this one by Bitcoin Weekly and this one by Bitcoin Bytes.
How it works
In a p2p computer network there are no servers, the entire network is composed of users running instances of the application on their computers. Each running instance offers a small amount of processing and storage resource to the network so that it can deliver the services it was designed for such as redundant storage, anonymity or voice-over-IP applications.
In the case of a p2p currency system, some of the services the network is designed to offer are privacy, verification, authentication, currency creation and transfer of ownership. To ensure a reliable and tamper-proof system requires a lot of resource, and that amount is proportional to the amount of coins in the network. The network is able to pay the users for the resource they offer by making the coin-creation process part of the network protocol itself instead of being handled by a central trusted authority. This creates a natural and incorruptible link between the supply of currency in the network and the demand for it.
Even aside from the ability to exchange bitcoins for other currencies, it still makes a very useful tool for independent organisations and groups because it allows them to trade and settle accounts amongst themselves independently and privately. It effectively gives them a "bank" that has a trustworthy system of accounts that can't be tampered with and requires no corruptible central authority to operate. See the following links for more detailed information about how it works.
How to use it
After you've installed the bitcoin applicaton
on you computer and run it, you'll see a simple application window with six tabs across the top which ara each explained as follows:
Ovreview: this is the default tab and gives you a basic summary of your confirmed and unconfirmed (by other nodes in the network) balance, and a list of the last few recent transactions.
Send coins: this allows you to send bitcoins to any number of recipients. For each recipient you enter an amount to send them, and their bitcoin address with an optional name for you to remember the address by. You can also select the address from your "address book" which is a list of all the addresses you've given a name to. There's an "Add Recipient" button at the bottom for adding more recipients to send to at the same time.
Receive coins: this a list of your bitcoin addresses that other people can send coins to. The sender is anonymous, so you can use these named receiving addresses to kepp track of where your coins have come from by telling each contact a specific address to send to. You can create as many receiving addresses as you like using the "New Address" button at the bottom.
Transactions: this tab is a simple list showing all your transactions with you can filter by amount sent or received, and by period. Each item in the list shows the date/time of the transaction, your local name for the address the transaction was received with or sent to, and the amount in bitcoins.
Address Book: this is a list of the addresses you've created for sending bitcoins to and the local name you've chosen for each address. You can edit or delete each address by right-clicking on it, and you can add new addresses with the "New Address" button at the bottom (which is the same as useing the "Add Recipient" button in the "Send Coins" tab.
Export: this a button that brings up a file-save window to export the data shown in the currently selected tab. This button can't be used if the "Overview" tab is selected since it only works for the tabel-data in the other four tabs.
When the application is started for the first time (or after a few days or more of disuse) there is a long delay while your instance of the application synchronises its local data with the current state of the network. This is very computationally intensive and can take many hours. Your displayed balance may be incorrect until its fully sycnhronised, but you can still send coins from out of the currently confirmed coin-balance. You can never spend any coins you don't have because the locally out-of-date information only applies to incoming transactions, because all outgoing transactions are done locally.
The Bitcoin Wallet
The term "wallet" is actually a little bit missleading because the information representing coins and transactions are actually stored throughout the entire network, not in the wallets. The wallet actually stores private keys that give the wallet-holder the ability to spend coins in the network that are confirmed as being currently associated with one of your private keys. A bitcoin address that you show to other people in order for them to send you money is the public half of one of the private keys in your wallet.
This means that it's very important to back up your wallet and to remember the password you've locked it with, because if you lost access to your wallet you'd no longer have control over any of the coins in the network that are associated with your addresses. You must back up your wallet whenever you create a new address, but there's no need to back up your wallet every time you receive new coins, because these are not stored in your wallet. For example, you could have a bitcoin wallet on a computer that's never been connected to the network and be paid into that wallets address for years before you got around to connecting it and checking your balance.
Other sites about Bitcoin
Bitcoin statistics and charts
Bitcoin exchange sites
Buying Bitcoins is more difficult than expected considering that there's so many people trying to buy them. The reason is because Bitcoins more closely resemble cash than they do credit. This is because the transactions are irreversible whereas credit cards, Paypal and many other electronic forms of credit can be reversed up to six months later. To make matters worse, PayPal and most credit card company's have reversed many Bitcoin transactions because they consider Bitcoin to be a fraudulent operation. So the bottom line is that buying Bitcoins needs to be done with a solid irreversible form of currency such as cash in person or posting a cheque. Following are some exchanges offering various means of buying and selling Bitcoins. I find the easiest method is to use a wire transfer from a bank account which many exchanges accept (even though wire transfers can actually be reversed, but it's quite a procedure).
- Intersango - (based in London) allows international wire to deposit funds into EUR, GBP or PLY
- Bitstamp - (based in Slovenia) allows international wire in USD and a few other currencies
- Bitcoin-24.com - no BTC transfer fees, only $3.20 international wire fee, no ID for signup, based in Britain, accounts in Poland
- MtGox - (based in Tokyo) extremely strict signup & verification procedures
- BTC-e - (based in Russia) allows international wire in USD and a few other currencies, minimum US$5000 (also handles Namecoin, Litecoin and others)
- BTC China - doesn't currently have wire transfer option, support liberty reserve and Chinese payment systems
- IMCEX - a user-to-user Bitcoin, Namecoin and LibertyReserve exchange
- BitInstant - Providing instant transfers for the bitcoin economy
- BitFloor - US-based exchange focussing mainly on US users
CampBX - requires Dwolla to use which is only available to US employees (citizens)
Crypto X Change - (based in Australia) does not allow international wire transfers
Bitcoinica - hacked and died May 2012
TradeHill.com - shutdown late 2011
- GoldSilverBitcoin.com - buy metals with btc
Bitcoin Stock Exchanges
Extending Bitcoin functionality
Bitcoin could become a multipurpose network by adding additional information to coin blocks, for example NameCoin extends the network to provide a distributed DNS alternative. Similar things could be done to provide distributed authentication and a distributed ontology for shared knowledge and organisation.
Bitcoin Set To Unleash Massive Tsunami Wave Of New Development With New Features
Bitcoin will be more than a currency if multi-transactional features are added to the core code. Right now the developers of theCryptocurrency are designing initial support for new types of transactions. What are multi-transactions? Multi-transactions allow the possibility of ‘contracts’. According the [Bitcoin Set To Unleash Massive Tsunami Wave Of New Development With New Features wiki], “A distributed contract is a method of using Bitcoin to form agreements with people via the block chain. Contracts don't make anything possible that was previously impossible, but rather they allow you to solve common problems in a way that minimizes trust.” This means services based on cryptographic trust are now possible that was previously only possible with paper, pen, and a line to sign. The new possible services that could be developed include escrow services, secured deposits, dispute mediation, assurance of goods, smart property, etc. These features would eliminate the need for paper contracts in many different industries. In addition to banking, currently existing sectors that could be affected include title companies, lending services, billing services, ownership of anything digital (cars, phones, computers), home loans, car loans, funding services, etc. The cost of creating these contracts in bitcoin will be practically zero. (more...)
The 21 Million Coin Limit
Many people are concerned about this "21 million coin limit" for example this blog post about Why Bitcoin Will Fail as a Currency is based on this belief. But it's not actually a problem because Bitcoins are divisible into eight decimal places (and future versions of the protocol could easily be designed to divide it further if there becomes demand for that) so even if there were only a few Bitcoins in existence, the entire Bitcoin economy could still operate properly.
Inflation and Transaction Fees
By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.
The incentive (for nodes to support the network) can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.
The following links suffer from dubious credibility, bearing hallmarks of poor writing and fuzzy understanding of cryptography, economics and monetary terminology and concepts. Nevertheless, they point out some useful and interesting information:
Further reading on bitcoin's value
- The clear divisions on Bitcoin - Blogdial, June 22, 2011
- Another Take on Bitcoins - Gary Kinghorn, June 22, 2011
- A Bit of Sound Money: Free Banking or 100% Reserve Banking - Theodore Phalan, June 21, 2011
- Bitcoin's Value is Decentralization - Paul Bohm, June 17, 2011
- The Economics Of Bitcoin – Why Mainstream Economists Lie About Deflation, Michael Suede, June 11, 2011
- Bitcoin and the Denationalisation of Money - C. Harwick, June 8, 2011
Economics & Liberty articles
Interesting articles about Bitcoin