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Spending and Accepting Bitcoin

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You’ve got your coins, and they are safely stored, but what can you do with them? Since Bitcoin is digital money, any way you currently spend your money could be done with Bitcoin. The only restriction is on the other party being willing to accept them as payment. 
 
 
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While the Bitcoin economy is still young, more and more businesses are accepting this digital currency every day. Even apart from businesses, there is an ecosystem of individuals who are trying to transact as many of their affairs as they can in Bitcoin. 
 
For a list of businesses and websites that accept Bitcoin, <a href="https://en.bitcoin.it/wiki/Trade" rel="nofollow" target="_blank">visit here</a>. Another good site is <a href="http://bitcoin.travel/" rel="nofollow" target="_blank">here</a>. Here are some of the more popular ways to spend coins. 
 
Bitmit. This platform allows buyers and sellers to list their goods for Bitcoin. 
 
Coingig. Another platform service. 
 
Craigslist. Search for Bitcoin on Cragislist and you’ll find people willing to sell for coins. 
 
Rediff Bitmarket. A subreddit community for buying and selling goods in Bitcoin. 
 
BitcoinTalk Forum. This forum is full of very active users, and has a section entirely dedicated to buying and selling goods and services in Bitcoin. 
 
Gyft. This is a smartphone app that allows you to purchase gift-cards with Bitcoin. Gyft has rapidly become a convenient way to spend coins at stores that don’t accept them directly. 
 
Bitspend. This service allows you to spend your Bitcoin almost anywhere (Amazon is popular). You tell them exactly what you want to purchase, send them the Bitcoin in the corresponding amount, and they make the transaction for a fee. There are several of these services available; Bitspend is currently the most popular. 
 
Bitcoin Store. This site deals with electronics, and has surprisingly low prices. A very popular site. 
 
Wordpress. The largest online blogging platform accepts Bitcoin as payment. 
 
Reddit. This extremely popular content aggregation site takes Bitcoin for its extra services. 
 
Satoshidice. A popular gambling site that lets you send Bitcoin as a bet. It’s fun, but please play responsibly! 
 
OKCupid. One of the more respected online dating sites accepts Bitcoin for their paid services. 
 
NameCheap. One of the larger web domain and hosting sites. 
 
Amagi Metals and Coinabul. These precious metals dealers are well-known and happily accept Bitcoin. 
 
BitPremier. If you’re rich, check out this luxury site. They have everything from high-end sports cars to yachts. 
 
Private Internet Access. A Virtual Private Network (VPN) that allows you to connect anonymously to the internet. One of the first to accept Bitcoin. 
 
Seals With Clubs. Great online poker site, only uses Bitcoin. 
 
Betting. There are multiple platforms that allow for betting with Bitcoin. BetsofBitcoin and BitBet are two of the best. 
 
Charity. Many charities and political organizations now accept Bitcoin. Here is a list of some of the more popular ones. 
 
Hidden services. There are many sites that aren’t accessible through the regular internet that offer goods and services of questionable legality. The most prominent is called The Silk Road, a marketplace for drugs and other items. I would advise against using these sites. Obviously, you do so at your own risk. 
 
This is only the tip of the iceberg. Search around online and you’ll find many opportunities to spend your coins. 
 
Read More: <a href="http://webitcoin.blogspot.com/2016/03/how-to-buy-bitcoin-with-credit-card-and.html" target="_blank">How to Buy Bitcoin with Credit card and Cash</a> 
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Accepting Bitcoin</div>
 
Since this is a growing market, don’t just look for ways to spend your coins—consider offering your own goods or services for Bitcoin as well! You can use the platforms we mentioned above to do this, but you can also use services created specifically for merchants (one of the best is BitPay). Here is a <a href="http://webitcoin.blogspot.com/2015/08/best-way-to-accepting-bitcoins-in-your.html" target="_blank">guide for </a><a href="http://webitcoin.blogspot.com/2015/08/best-way-to-accepting-bitcoins-in-your.html" target="_blank">small-businesses</a> who want to accept Bitcoin.</div>

Spending and Accepting Bitcoin

You’ve got your coins, and they are safely stored, but what can you do with them? Since Bitcoin is digital money, any way you currently spe...

06:20

How to Avoid Risks of Bitcoin

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There are some specific measures you can take to avoid these risks. A few of them are simple, but some require technical knowledge and some time commitment. You determine how safe your coins are; if you don’t have many coins to protect or you are so rich that you don’t care, then you don’t need to feel compelled to follow these suggestions. 
 
 
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1. Have a Clean Operating System 
 
Your operating system (OS) is the type of software you use to run your computer. There are three main OS used today: Windows, Mac OS, and Linux. Malware is most happy running on Windows, so it is the least safe client to run a Bitcoin client on. A Mac isn’t a whole lot better, but Linux is significantly safer to use for Bitcoin.  
 
If you plan on keeping a significant amount of coins on a computer, I would recommend installing a Linux distribution and learning how to use it. They are free and have nearly all the same features that their expensive counterparts have, besides being safer. 
 
In fact, I would recommend getting an older laptop, wiping the hard drive completely, and installing Linux. Finding an old laptop online, through Ebay or Craigslist, is usually simple and cheap. This gives you the most security, since you are certain the OS is clean and cannot have malware. If you are looking for a good distribution of Linux (there are many kinds of Linux to install), I recommend either Ubuntu or Mint. 
 
Read More: <a href="http://webitcoin.blogspot.com/2016/03/how-to-protect-bitcoin-from-threats.html" target="_blank">How to Protect Bitcoin from Threats</a> 
 
2. Recognize the Internet is Dangerous 
 
The internet is an accident waiting to happen, in terms of Bitcoin safety. Your computer—and coins—have a direct connection with anyone else in the world. You have a few options to mitigate this risk. You can operate offline altogether, by using a paper wallet or offline service (the Armory client allows for this). This is the best option for large amounts of Bitcoin, and it is generally true that the more you are able to do offline, the better. Storing Bitcoin offline is called ‘cold storage.’ 
 
Or you can carefully work on a computer connected to the internet. Using Linux, you will be somewhat safer, since it isn’t as easy for an attacker to directly access you, or contract malware. If you are using Windows, you need to ensure you are up to date on your protective software.  
 
I recommend using Microsoft Security Essentials, a free program that gives excellent protection. Also make sure to regularly update your software and run the appropriate scans to make sure you are clean. Just remember that even if your scans show you are clean, it is possible to have malware on a Window system. 
 
Whenever you are browsing the internet, be careful where you go and what you click on. The same is true for downloading files, and torrents. Malicious software is frequently spread through falsely labeled downloads. 
 
3. Use 2-Factor Authentication 
 
Online exchanges and wallets nearly all offer a service called 2-factor authentication. This means that when you try to log into your account, or when you try to send Bitcoin, it requires that an outside source verify the requests are genuine and not from a malicious source. Typically, this happens by sending you a text on your smartphone or by requiring you to input an authentication code generated by a program elsewhere. 
 
You should always enable 2-factor authentication. I use the Google Authenticator app on my phone, which I prefer, but there are plenty of other systems like this. 
 
4. <a href="http://webitcoin.blogspot.com/2015/08/your-bitcoin-wallet-and-how-to-use.html" target="_blank">Use Paper Wallets</a> 
 
I’ve mentioned paper wallets multiple times, and that’s because they are the most secure and simplest way to store your coins. To generate a truly secure paper wallet, you need to make sure that your private keys are never on an OS that isn’t clean and that they never see the internet. To do that, you need to follow these steps. 
 
1. Find a paper wallet generator that is trustworthy. I would suggest using Bitaddress to create your wallet. 
 
2. You can print off the paper wallet from Bitaddress above, but this is not truly secure, since the private keys are created by a third party while connected to the internet. You need to use their tools while offline. To do this, save the Bitaddress page (as an .htm file). 
 
3. Put the file on a USB drive. 
 
4. Open the file on a clean OS that is not connected to the internet—and preferably never has been. 
 
5. Generate a new Bitcoin address using the Bitaddress service. 
 
6. Print off the paper wallet. 
 
7. Delete the file and make sure that there is no electronic record of the private key remaining on the computer or USB drive. 
 
8. Ensure the printed paper wallet remains secure from theft, fire, flood, bugs, or other damage. If you lose your paper wallet, or is it not readable, you cannot retrieve your Bitcoin! Remember, to use Bitcoin, you must have a private key that corresponds to your public address. A paper wallet—properly created—ensures that the private key only resides on a piece a paper, and no one else can use the coins in that particular public address. That’s why if you lose your paper wallet, you lose your private key, and you lose the ability to access your coins too. 
 
9. Send coins to the public address of your paper wallet. You’re done! 
 
Now, if you want to use those coins, you import your private keys into whatever wallet you are using. Bitaddress, and most paper wallet generators, generate a QR code that allows for quick recovery of your private key when you need it by scanning the code with a smartphone or webcam. 
 
A quick note on paper wallets: If you do choose to ‘withdrawal’ from the wallet, make sure you take out all the coin from that wallet at once. A paper wallet that has been used once means it is no longer a paper wallet; you will need to create a new one to be completely secure again. 
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<a href="http://webitcoin.blogspot.com/2016/03/how-to-store-and-secure-your-bitcoin.html">Read Next: How to Store and Secure Your Bitcoin</a></div>
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How to Avoid Risks of Bitcoin

There are some specific measures you can take to avoid these risks. A few of them are simple, but some require technical knowledge and some...

05:58

How to Store and Secure Your Bitcoin

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Now you know what Bitcoin are, and how to obtain them. There is only one more thing you need to know before you can begin using Bitcoin: storage and security. This is one of the more daunting aspects about using Bitcoin, because if you make a mistake you could lose your coins permanently. It requires some technical skill, though nothing too complex. This isn’t a section you can skip. If you do, you may as well be juggling your key-ring over a sewer grate or leaving your wallet behind in a taxi-cab. 
 
 
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First, let me explain some terminology. When the media discusses Bitcoin, they often say that the coins are kept in wallets, which is true but misleading. The coins are actually in their deposit boxes (their public addresses), and a wallet is simply a service that collects all of a user’s deposit boxes into one place. Think of a wallet as your own little bank: you have your own row of deposit boxes, and all the private keys to those boxes as well. When you need to send Bitcoin from any of your public addresses, the wallet has your private key right there for you. 
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Read More: <a href="http://webitcoin.blogspot.com/2016/03/how-to-protect-bitcoin-from-threats.html" target="_blank">How to Protect Bitcoin from Threats</a> 
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This wallet can be stored in many different places. There are five main ways to keep a wallet. 
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Bitcoin-Qt: The Real Deal</div>
 

The first option is the original option. This is the computer program (called a client) that the core of developers working on Bitcoin release every so often, with updates to make the system better. 
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This client downloads the entire blockchain onto your computer. Since this is the record of every Bitcoin transaction ever made, there is a lot of data to store. As of June 2013, the blockchain was about 8Gbs in size. 
 

This standalone program has its advantages. 
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<li>When you are running the program, you are a node in the network, so you are helping the blockchain stay healthy by verifying transactions.</li>
<li>You are not trusting a third party with your private keys, they are stored locally on your hard drive.</li>
<li>The code is the most reviewed and most secure.</li>
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There are some disadvantages as well. 
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<li>Downloading the entire blockchain takes a very long time (hours or even days depending on your internet connection), and significant hard drive space.</li>
<li>It requires time to sync with the network if you haven’t run the program in a while.</li>
<li>If you encrypt your wallet, then forget your passphrase, your coins cannot be retrieved.</li>
<li>You are connected to the internet, increasing the chance that someone could steal your private keys.</li>
<li>You can only access your coins from the computer that has the client.</li>
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While Bitcoin-Qt is a solid choice to use as your wallet, I would not recommend it for the first time Bitcoin user. There are better choices. If you do want to use the main client, <a href="http://bitcoin.org/en/download" rel="nofollow" target="_blank">visit here.</a>

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The Modified Clients</div>
 

There are some clients that are also standalone programs, but have some different features from the main Bitcoin-Qt client. Here are a few of the more popular modified clients. 
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Multibit. This is considered a ‘lightweight’ client, since it doesn’t require downloading the entire blockchain and uses fewer system resources. Setting up and syncing the client is much easier and faster than using Bitcoin-Qt. For first-time users who want a standalone program as their wallet, I recommend Multibit. 
 

Electrum. This client doesn’t download any of the blockchain at all, it connects to a remote server. As such, it is very fast. It also allows users to create a ‘secret seed’ when they first set up the wallet. If your computer ever crashed, you could recover your coins using this system, unlike with the other clients I mention. 
 

Armory. This client is very secure and very feature-rich. There are many neat options for users, such as creating a “cold-storage” wallet for extra security.  
 

However, this client has more features than a new user will ever need.

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Accessible Anywhere: Online Wallets</div>
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You don’t need to have a standalone program on your computer to use Bitcoin, you can use an online wallet. This is exactly what it sounds like: a website that offers to hold your Bitcoins in an easily-accessible online wallet. This has its advantages. 
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<li>No syncing necessary, your Bitcoin are instantly available.</li>
<li>It can be accessed in more places than just your computer; all you need is an internet browser.</li>
<li>You can use browser plugins to make using Bitcoin online very simple.</li>
<li>Your coins aren’t stored on your hard drive, so if your computer crashes your coins will still be safe online.</li>
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However, there are some significant drawbacks to using an online wallet. 
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<li>You trust a third party with your money. While several online wallets have an excellent reputation, it is still a significant risk to let another party hold your private keys.</li>
<li>As I’ll explain soon, if you are connected to the internet you are already vulnerable to malicious attackers who could try to steal your coins. Using an online wallet can make that attack even easier.</li>
<li>The online wallet services themselves can be—and have been—attacked. Several have been shut down because of these attacks.</li>
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So should you use an online wallet? I do, for small amounts. It’s a simple way to keep a small amount of coins available if I’m going out of town and want to make sure I can access some coins easily. But I would never recommend using an online wallet for large amounts of coins. 
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Which wallet to use? Mt. Gox and Coinbase have wallets built into their services, and both are fine to use, but my recommendation is Blockchain. This is the most widely used online wallet, and for good reason, it is simple but has an excellent reputation. 
 
 
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Bitcoin on the Go: <a href="http://webitcoin.blogspot.com/2015/08/your-bitcoin-wallet-and-how-to-use.html" target="_blank">Mobile Wallets</a> 
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You don’t need a computer to use Bitcoin at all—most smartphones are capable of using a wallet app. They aren’t able to download much of the blockchain at all, and aren’t particularly secure either. 
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Android has many different wallets available. Check the reviews first to make sure they are legitimate. I use an app simply titled “Bitcoin Wallet.” The iPhone is a little bit trickier—they unfortunately don’t allow their apps to use Bitcoin. However, you can get a limited function wallet for download through their iTunes store.</div>
 

Should you use a mobile wallet? I would definitely use one, but with the same warning as the online wallet: only in small amounts. It’s neat to carry Bitcoin with you wherever you go, and if you ever do happen upon a business that advertises they accept Bitcoin, consider buying something small as a show of support! 
 
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Paper wallet</div>
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Not only do you not need computers to use Bitcoin, you don’t need smartphones either. In fact, you can keep Bitcoin on nothing but paper. First of all, why would you even want to keep your coins on paper? Well, that’s simple—paper wallets are, by far, the safest way to store your Bitcoin. If you have large amounts of coins, or you don’t want to spend the coins but just save them, then you should consider using a paper wallet. 
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It doesn’t seem to make sense that Bitcoin, a digital currency, would be able to be stored on paper. But remember, the beauty of Bitcoin is in public-key cryptography, and the public ledger (or blockchain). To create a paper wallet, all you need to do is create a new public address and private key, put some Bitcoin in the public address, then print off the private key and store it somewhere safe. To use your Bitcoin later, you can input the private key. Often paper wallet generators create a QR code so that you can simply scan the private key. 
 

While the process is simple enough, it gets more complicated to create a paper wallet in a totally secure way. I’ll walk you through creating a secure paper wallet later, but first you need to understand why proper storage is so important. 
 
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<a href="http://webitcoin.blogspot.com/2016/03/how-bitcoin-is-really-future-of-money.html">Read Next: How Bitcoin is Really Future Of Money?</a></div>
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How to Store and Secure Your Bitcoin

Now you know what Bitcoin are, and how to obtain them. There is only one more thing you need to know before you can begin using Bitcoin: st...

03:14

How Does Bitcoin Work?

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Bitcoin is more correctly described as the first decentralized digital currency. It is the largest of its kind in terms of total market value. Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into a public ledger. 
 
 
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Public-key <a href="http://webitcoin.blogspot.com/2016/03/bitcoin-as-cryptocurrency.html" target="_blank">Cryptography</a>: To understand Bitcoin, you need to understand the principle of public-key cryptography. While the details are complicated, it essentially means that each user that wishes to communicate with another user has two keys (groups of numbers). One key is public; everyone can see this series of numbers. Another is private; only the individual user has this key. 
 
Here’s an example of how public-key cryptography is used. To send a secret letter, Alice would encrypt the letter using the public key of Betty. Alice then sends this letter along. Betty receives the letter, and then decrypts it using her private key. 
 
The reason public-key cryptography is powerful is because it doesn’t matter if someone else – let’s say Charlie – intercepts the letter. Without the private key that only Betty has, he can’t decrypt it. This technology allows everyone to see the encrypted letter, but only the intended recipient can actually read it. 
 
Millions of Deposit Boxes: How does Bitcoin use public-key cryptography? Earlier I mentioned the blockchain – a public record of all Bitcoin transactions. Think of the blockchain as having millions of safety deposit boxes, made out of bulletproof glass. The boxes have varying amounts of Bitcoin inside them, but are securely locked. Even though everyone can see what each box contains, only the owners can unlock them. 
 
These deposit boxes are called the public keys – everyone can see the numbers (also called an address), and the amount within the boxes. The owners of each deposit box access their Bitcoin using their private key. While everyone can see the deposit boxes, and the amount of Bitcoin inside, only the owners of the private key can use the money. 
 
In our earlier example, Alice sent Betty a message that only Betty could read. Bitcoin works the same way, except we aren’t sending letters but instead information telling your deposit box to give some of your Bitcoin to another deposit box.  
 
To use the example again, here’s how it works. Alice wants to send 1 BTC to Betty, so she sends out a message to the entire network. This message includes Betty’s public address (the location of her deposit box), the amount of Bitcoin she wants to send to Betty, and a digital signature that verifies she is the owner of the private key to her own deposit box. 
 
When Alice sends this message to the network, other network users verify that this message is accurate. If all the numbers match up, then the transaction gets put into a block (a collection of other transactions), and this block eventually gets published in the blockchain. Once that occurs, the rest of the network recognizes that Alice’s deposit box is 1.0 BTC smaller than before, and Betty’s deposit box has grown by 1.0 BTC. Since the blockchain is a public ledger that extends all the way back to the first Bitcoin transaction, it knows the exact amount of Bitcoin in every deposit box that exists. 
 
<a href="http://webitcoin.blogspot.com/2016/03/make-money-with-mining-bitcoin.html" target="_blank">Mining for Coins</a>: Now you understand how transactions take place, but you might be wondering where Bitcoins even come from in the first place. Remember how I mentioned some network users verify the transactions are accurate, and then include them in a block to be published to the entire network? This process requires significant computing power, so why would other users be willing to do this? Because they are rewarded with Bitcoin! 
 
Devoting your computer to processing transactions is called mining. Miners verify transactions, and as they are doing so they are looking for the solution to a mathematical problem. If they are the first to find the answer, the code allows them to publish the block of transactions to the rest of the network.  
 
Whoever publishes the block gets a reward, currently set at 25 BTC. This reward halves every few years, so that the amount of Bitcoin never grows too quickly. Also, as more people devote more computing power to the network in order to increase the chance of getting a block reward, the difficulty of mining increases. The code automatically adjusts the difficulty of the mathematical problem so that a new block is mined approximately every 10 minutes. 
 
A Chain of Blocks: One more important thing to mention about the blocks – they are built on each other in a chain (hence the term blockchain). It is imperative to have a continuous and chronological record of all transactions; this ensures the amounts of each and every deposit box have been accounted for. In order to do this, each block has two additional elements apart from the transactions. One is a much-shortened snapshot of all previous blocks, called a hash.  
 
This hash ensures that the blockchain is building on the previous blocks, all the way back to the original block (called the genesis block). The second aspect is the answer to the complicated math problem the miners need to solve. The next block cannot be mined until the problem has been solved, ensuring that blocks are created in chronological order. As of June 2013, there have been more than 238,000 blocks published in the blockchain. 
 
In this way, the Bitcoin ecosystem keeps evolving. Transactions get compiled into new blocks, the blocks are published to the rest of the network in a continuous chain, miners get rewards for their work, and those new Bitcoins are used for transactions, starting the cycle over again. 
 
Network Verification: How is this system kept in check? After all, Alice could send a message saying that she has 5.0 BTC to send to Betty, even though her deposit box only has 2.0 BTC. There are many ways that dishonest users could attempt to trick the system, but fortunately it’s virtually impossible.  
 
This is because Bitcoin is a decentralized system where all transactions are public, and require verification from the rest of the network. If Alice tried to send more coins than she had, the recipient would immediately check the balance of the account, recognize this, and reject the transaction. It would never make its way into the block, and the rest of the network would never even see the false transaction. This verification is done in the code of the Bitcoin program itself, so it is nearly instant. 
 
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<a href="http://webitcoin.blogspot.com/2016/03/advantages-and-disadvantages-of-bitcoin.html">Read Next: Advantages and Disadvantages of Bitcoin</a></div>
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How Does Bitcoin Work?

Bitcoin is more correctly described as the first decentralized digital currency. It is the largest of its kind in terms of total market val...

10:37

How Bitcoin is a Successful Cryptocurrency

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Ecosystem</div>
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There is always the first-mover advantage and Bitcoin has certainly emerged as the leading cryptocurrency with an estimated 6 million electronic wallets, 70,000 merchants, and a market capitalization of USD5 billion. For the 6 months leading to October 2014, there were 50-80k transactions daily, and approximately <a href="http://webitcoin.blogspot.com/2015/08/a-brief-history-of-bitcoin.html" target="_blank">USD50 million </a><a href="http://webitcoin.blogspot.com/2015/08/a-brief-history-of-bitcoin.html" target="_blank">(equivalent to over 110,000 bitcoins in 2014)</a> are traded daily. 
 
 
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The number of wallets is small given that we have more than 7 billion people in the world. Bitcoin has been successful so far and an ecosystem is up to support its existence. Even though the network effect is kicking in, there is still a long way to go. A successful digital currency must be able to ride on its initial success and leverage on the network effect. The more people use the coin, the more valuable it will become.  
 
As it becomes more valuable, the reward for mining will increase, and more miners will join in the competitive accounting exercise. Bitcoin is subject to the same problems we mentioned earlier. 
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Incentives</div>
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As the mining costs go up because equipment becomes more expensive, mining pools will be formed as miners are usually risk averse and want better odds in winning the race. This increases the possibility of an attack or the emergence of a gold finger that determines to cause problems. There are slightly over 13.4 million bitcoins in circulation as of October 2014.  
 
Twenty-five bitcoins are created approximately every 10min from 2013 to 2016 and the number of new coins created will halve every 4 years. As soon as the full supply of 21 million bitcoins are issued by the year 2040, which is still very distant, the risk of miners dropping out may increase.  
 
If the only reward is transaction fees and if fees become too high, the merchants are likely to drop out. Of course, there are technical solutions to all these and some cryptocurrencies have come up with the idea of proof of stake reducing the probability that any single person can use a quantum computer to overwrite the whole system. There are also attempts to lower the cost of mining so as to reduce the so-called 51% attack or gold finger problem. However, there is still no fool proof solution to the gold finger issue that if anyone with enough financial strength wishes to mess up the record, he or she can theoretically do it. 
 
 
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Identification</div>
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There are also <a href="http://webitcoin.blogspot.com/2016/03/bitcoin-as-cryptocurrency.html" target="_blank">cryptocurrencies</a> that are looking into proof of identity to reduce the possibility of using the currency for money laundering or terrorism activities. If that problem can be resolved, cryptocurrency has a very real potential to be very popular. If a particular cryptocurrency is able to accept that the government is part of the ecosystem and its community engages with the government meaningfully in creating the ecosystem, that cryptocurrency is likely to become more widely accepted.  
 
Given that most of the welfare improvement comes from the bottom of the wealth pyramid, emerging markets have the upper hand in harnessing the low-hanging fruits of cryptocurrency via a decentralized but not necessary distributed system. A cryptocurrency that addresses those issues mentioned will have a bright future. 
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<a href="http://webitcoin.blogspot.com/2016/03/history-of-bitcoin.html" target="_blank"> </a>
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<a href="http://webitcoin.blogspot.com/2016/03/history-of-bitcoin.html" target="_blank">Read Next: History of Bitcoin</a></div>
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How Bitcoin is a Successful Cryptocurrency

Ecosystem There is always the first-mover advantage and Bitcoin has certainly emerged as the leading cryptocurrency with an estimated 6...

06:29

Big Advantages of Bitcoin

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Network and digital currency</div>
 
Bitcoin is a decentralized network and a digital currency that uses a peer-to-peer system to verify and process transactions. Instead of relying on trusted third parties, like banks and card processors, to process payments, the Bitcoin technology uses cryptographic proof in its computer software to process transactions and to verify the legitimacy of Bitcoins (Nakamoto, 2008) and spreads the processing work among the network. We make a clear distinction between the Bitcoin system where a capital B is used for the word Bitcoin and that of a Bitcoin, which is a unit of the currency or a digital address created by the Bitcoin system.  
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<img alt="Big Advantages of Bitcoin" border="0" height="202" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj094z_6NsN5zbi3cdHVFAUgNTI-1JimBacAhcNyv2SD-ksg3fxCWfziAS8jd3w7A3xFYd9kK2P7mu1xVXWzRI_BcBUsEPODKWT8btB_blZ3shw1LB5fw24s4Zy6g9XkcuRIz1MhGDXVKk/s400/Big+Advantages+of+Bitcoin.jpg" title="Big Advantages of Bitcoin" width="400" /></div>
 
With the invention of Bitcoin, payments can be made over the Internet without the control and costs of a central authority (Bitcoin Project) for the first time. Prior to the invention, transactions carried out online always required a third party as a trusted intermediary to verify transactions (Brito and Castillo, 2013). For example, when Alice wants to send $10 to Bob, she would have to use a third-party service like a credit card network or PayPal.  
 
The function of the third-party service is to provide an assurance that the sender, Alice, has the funds to transfer and that the recipient, Bob, has successfully received the funds. This is possible because these intermediaries help maintain a record, or ledger, of balances for their account holders. Here, when Alice sends Bob the $10, an intermediary like PayPal would deduct the amount from her account and accordingly add it to Bob's account, subject to a transaction fee.  
 
However, the currency unit used in payments on the Bitcoin network is Bitcoins, not a fiat currency. Therefore, bitcoins in itself is also a digital currency, in the sense that it exists "digitally" and, for most intents and purposes, satisfies the economic definition of money: it is a medium of exchange, unit of account, and store of value. Conventionally, the uppercase "Bitcoin" refers to the network and technology, while the lowercase "bitcoin(s)" refers to units of the currency. The currency is also commonly abbreviated to "BTC," although some exchanges use "XBT," a proposed currency code that is compatible with ISO 4217 (Matonis, 2013). 
 
 
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Genesis and decentralized control</div>
 
The first bitcoin was mined, or created, in 2009, following the online publication of a paper by a Satoshi Nakamoto describing the proof of concept for a currency that uses cryptography, rather than trust in a central authority (Nakamoto, 2008), to manage its creation and transactions. Nakamoto left the project in 2010 and his identity largely remains unknown.  
 
However, with the open-source nature of the Bitcoin software protocol, other developers have continued working on it and the Bitcoin community flourishes today. At the same time, although Nakamoto remains anonymous, users need not be concerned that he, or anyone, secretly has full control of Bitcoin. The open-source nature of Bitcoin means that the source code is fully disclosed. This disclosure allows any software developer to examine the protocol and create their own versions of the software for testing or further development, and so far, no red flag has been raised as to the presence of Nakamoto or any other party with secret control.  
 
Furthermore, Bitcoin is designed to operate only with full consensus of all network users. This ensures that software developers who modify the Bitcoin source code in their own versions of the software cannot force a nefarious change in the Bitcoin protocol without breaking compatibility with the rest of the network. The power to change the Bitcoin protocol requires full agreement among Bitcoin users and developers. 
 
 
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<a href="http://webitcoin.blogspot.com/2016/03/how-does-bitcoin-work.html" target="_blank">How Bitcoin works</a></div>
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To a layperson, bitcoin is a digital currency that is created and held electronically. These bitcoins are sent and received using a mobile app, computer software, or service provider that provides a bitcoin wallet. The wallet generates an address, akin to a bank account number, except that a Bitcoin address is a unique alphanumeric sequence of characters where the user can start to receive payments.  
 
Usually, bitcoins may be obtained by buying them at a Bitcoin exchange or vending machine or as payment for goods and services. However, Bitcoin is revolutionary because the double-spending problem can be solved without needing a third party. In computer science, the double-spending problem refers to the problem that digital money could be easily spent more than once. Consider the situation where digital money is merely a computer file, just like a digital document. Alice could send $10 to Bob by sending a money file to him and can easily do so by e-mail.  
 
However, remember that sending a file actually sends a copy of the file and does not delete the original file from the computer. When Alice attaches a money file in an e-mail to Bob, she still retains a copy of the money file even after she has sent and therefore spent it. Without a trusted third-party intermediary to ensure otherwise, Alice could easily send the same $10 to another person, Charlie.  
 
Bitcoin solves the double-spending problem by maintaining a ledger of balances, but instead of relying on a single trusted third party to manage this ledger, Bitcoin decentralizes this responsibility to the entire network. Behind the scenes, the Bitcoin network constantly keeps track of bitcoin balances in a public ledger called the blockchain. 
 
The blockchain is a publicly accessible authoritative record of all transactions ever processed, allowing anyone to use Bitcoin software to verify the validity of a transaction. Transfers of bitcoins, or transactions, are broadcast to the entire network and are included onto the blockchain upon successful verification, so that spent bitcoins cannot be spent again. New transactions are checked against the blockchain to make sure that the bitcoins have not been already spent, thus solving the double-spending problem. Bitcoin extensively uses public-key cryptography to solve the double-spending problem. In public-key cryptography, each transaction has a digital signature and contains a hash that allows for easy tamper detection. 
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Example of a raw transaction data.</div>
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<img alt="Bitcoin Hash" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQgje28cEAZ29-s2H7Y1i2KM6EBjW2NhSqTUej75fYvT0FouIVRwmUqkfSaTn_Z-YQdamB9IBMUiYxJaBAeK9__38_TJWdzjm8hdI1YQxx6wSYuMzWRqNZucoFFLxZsc2GBAbvmmDAViQ/s1600/bitcoin+hash.jpg" title="Bitcoin Hash" /></div>
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Explanation for the transaction.</div>
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<img alt="Bitcoin Hash Explained" border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-bm3kBLWWt81uiMnjwu46HzqgOsG07kVhgVqYclEwNs5xlK1sYlk78yMIL-4O3SfwRyDR5bRyLSlHb0hcTsBucSDeYZWfoNvhauh7BrRnF7zIFUiMHJUgaGQpduPWfPiqeE1IfX309AY/s1600/bitcoin+hash+graph.jpg" title="Bitcoin Hash Explained" /></div>
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Buying and storing Bitcoins</div>
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Against this technical backdrop, bitcoins are often used simply as payment in exchange for goods and services (Kaplanov, 2012). While the numbers of brick-and-mortar merchants who accept payments in bitcoins remain low, there are many more online merchants who accept bitcoins for both digital and physical goods and services. The price of these goods and services is usually based on the exchange rate between Bitcoin and a real-world currency, which can be found easily online (XE).  
 
Typically, a user who wishes to spend bitcoins obtains it by exchanging real-world currency  for bitcoins. This can be achieved by purchasing bitcoins from a vending machine, from an exchange, or simply from another person. Bitcoin vending machines, often called "ATMs," are the most convenient way to buy bitcoins, because one can easily insert cash into a machine to obtain bitcoins instantly (Ulm, 2014).  
 
Bitcoin exchanges are also a popular means to obtain bitcoins, but users often face a time delay while waiting for bank transfers to clear (Ulm, 2014). Trading real-world cash for bitcoins is also a possibility but it is inconvenient if bitcoins are needed on the spot. However, marketplace websites like LocalBitcoins have sprouted up to connect people interested in buying and selling bitcoins to enable them to do so privately, whether in person or online (LocalBitcoins).  
 
This option is more likely to be used in countries with restricted or no access to Bitcoin vending machines or exchanges. Bitcoins are typically stored in a wallet, so a user needs to have a wallet available to buy and sell bitcoins. Specifically, it is the private keys that are stored in a wallet (CoinDesk, 2014).  
 
These keys are used to access the Bitcoin addresses and sign transactions and therefore must be kept securely. There are various types of Bitcoin wallets, including desktop, mobile, webs, and hardware wallets.  
 
Users who choose to install a desktop wallet on their computer can create and keep wallets on their computer. The original Bitcoin client software, known as Bitcoin Core, which is still in use today, includes the functionality of creating a bitcoin address to send and receive bitcoins and to store the corresponding private key for that address. There are various other wallet software in which users may elect to install on their computer, like the cross-platform MultiBit and the security-conscious Armory (Bitcoin.org).  
 
The different wallet software have varying additional features, although the most basic function of a wallet in storing the private keys for corresponding bitcoin addresses remains the same. While the user maintains control of his desktop wallet at all times, such wallets, like any other computer file, are vulnerable to theft by malicious users or software. Desktop wallets are not the be-all and end-all of wallets, even if they were the first. 
 
When transacting  at a physical store, a mobile wallet is often the most convenient way to spend some bitcoins. Mobile wallets are simply an application that provides for Bitcoin wallet functionality in a mobile phone. There are apps like Bitcoin Wallet and Mycelium that only exist on the mobile platform, while some desktop wallets like Blockchain.info also have mobile versions (Bitcoin.org). 
 
However, in the early 2014, Apple removed Bitcoin Wallet apps like Blockchain.info from its App Store (Southurst, 2014), although unofficial versions and mobile browser-based wallets continue to exist. Another convenient type of wallet is the online wallet, which is generally accessible from anywhere through a browser with an Internet connection, regardless of the device used (CoinDesk, 2014).  
 
The private keys for a user's Bitcoin addresses are kept and stored by the service provider of the online wallet, which may present a risk of the service provider or a third party absconding with the bitcoins, if security was not implemented properly. Blockchain.info also has a popular web-based online wallet and some online wallets offer extra encryption and two-factor authentication for additional security.  
 
Finally, there is small but growing interest in hardware wallets, which are specialized devices that can hold keys electronically and are also able to send and receive bitcoins. An example of a dedicated Bitcoin device is the Trezor, a single-purpose token-sized device for making secure Bitcoin transactions (SatoshiLabs). 
 
 
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<a href="http://webitcoin.blogspot.com/2015/08/how-to-become-bitcoin-miner-and-earn.html" target="_blank">Mining to create new bitcoins</a> and process transactions</div>
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Bitcoin is designed with a hard limit of 21 million bitcoins, which are expected to be created by 2040 (Figure 1.3). For now, these bitcoins are generated through mining, during which miners, who are Bitcoin users running software on specialized hardware, process transactions and are rewarded with new bitcoins for contributing their computer power to maintain the network. Mining is important not only for new bitcoins to be issued but also because it is a necessary process for transactions to be added onto the blockchain and be subsequently confirmed.  
 
The verification process is a computationally intensive process that ensures that only legitimate transactions are verified and recorded onto the blockchain. It is the network that provides the computing power for the transactions to take place and for the transactions to be recorded. What happens during mining is actually a mathematical process. A real-life analogy to bitcoin mining would be the search for prime numbers: while it was easy to find the small ones, it became increasingly more difficult to find the larger numbers, leading researchers to use special high-performance computers to find them. 
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<img alt="Bitcoin Rise Graph" border="0" height="252" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjDsNAHyNcXvjYcwYe3MXQVcWC8rBwDsasjsqUSTLKjHDRbJCxxey5579BkCaB-YTelzPG3IZT3A_ZVdJIc5BKE5248J9zwoFHHFhnPsyQ6zjCR-hQenPeEMK0BEIpV-ii9QsvigxcC0s/s400/bitcoin+rise+graph.jpg" title="Bitcoin Rise Graph" width="400" /></div>
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Mining is a computationally intensive task that requires miners to find the solution to a predetermined mathematical problem in order to create a new block. This is the mathematical proof of work. Mining is difficult because besides ensuring that the transactions are valid, miners have to fit the data in a particular manner in order to add it to the blockchain. Miners have to guess and search for a sequence of data that produces a required pattern. The difficulty of the problem is automatically adjusted so that a new block can only be created every 10 min on average.  
 
The Bitcoin protocol is designed to generate new bitcoins progressively, at a predictable but decreasing rate. To ensure a progressive growth in new bitcoins, the reward for solving a block is halved automatically every 4 years, and the difficulty of solving increases over time. These two effects work together to produce an effect that over time, the rate at which bitcoins are produced will be similar to the production rate of a commodity like gold 
 
There will be a point in the future when the hard limit of bitcoins will be reached and the incentive for miners will instead be transaction fees. The arbitrary number chosen to be the limit in number of bitcoins is 21 million. Once the very last bitcoin, or to be specific, the very last satoshi-- 0.00000001 of a bitcoin--is produced through mining, miners who continue to contribute their computing power to verify transactions will instead be rewarded with transaction fees.  
 
This may be a less desirable situation for people and businesses relying on bitcoin payments, which will have to pay a transaction fee, but it ensures that miners will still have an incentive to keep the network up and running even after the last bitcoin is mined. Every new block that is successfully added onto the blockchain references the previous block, making it exponentially difficult to reverse previous transactions in previous blocks. Because changing a block on the blockchain will require recalculation of the proofs of work of all subsequent blocks (Bitcoin Project), it becomes more and more infeasible for an adversary to manipulate a block after more blocks have been added after it, and the Bitcoin protocol is accordingly designed to prefer longer chains.  
 
Miners therefore perform a vital task as they verify transactions and ensure that the blockchain cannot be tampered with. While bitcoin transfers are broadcast instantaneously over the network, there is, in practice, a 10 min delay for a transaction to be confirmed. This is the result of the 10 min delay for a block to be created and added onto the blockchain. Having a confirmation ensures that the network (of miners) has verified that the bitcoins are valid and have not been already spent.  
 
Typically, most users wait for six confirmations, that is, an hour, before considering a transaction to be "confirmed," but each user has the freedom to decide how long they wish to wait before they consider their transaction confirmed. 
 
 
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Security and Cryptography</div>
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The security of the technology used is supported using secure hash algorithms and has a good track record. The Bitcoin protocol is an open-source and is continuously improved by the developer community subject to consensus among all network users. The hash function mainly used in Bitcoin is SHA-256 (Pacia, 2013), which was incidentally originally designed by the NSA in the United States.  
 
There is no need for suspicion against the NSA because the SHA algorithm is part of the public domain and has been extensively analyzed to be secure (Pacia, 2013). SHA-256 is an upgrade from the SHA-1 series and is presently used in Bitcoin for the digital signatures that secure the transactions and blockchain and it forms the basis of the proof-of-work mathematical problem.  
 
Central to Bitcoin technology is public-key cryptography, which with the SHA-256 hash function is used to generate Bitcoin addresses, sign transactions, and verify payments. Public-key cryptography is a technique of reliably determining the authenticity of Bitcoin transactions using digital signatures. It uses an asymmetrical algorithm that generates two separate but asymmetrically linked keys: a public key and a private key.  
 
The keys are asymmetrical in the sense that the public key is derived from the private key but it is computationally impossible to obtain a private key from a public key. In such a system, the public key is used to verify digital signatures in transactions while the private key is used to sign transactions to produce those very digital signatures. The public key is publicly accessible; in Bitcoin, it is used as the Bitcoin address to and from which payments are sent.  
 
The private key, on the other hand, must be kept secret and safely. The beauty of such a system is that transactions can be easily verified using the public key without sharing the private key used to sign the transactions. 
 
 
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Pseudoanonymity</div>
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As seen from Figures 1.1 and 1.2, a Bitcoin address is an alphanumeric sequence of characters. There is no other information that can identify the sender and recipient of the bitcoins. However, it is a common misconception to say that bitcoin is an anonymous currency. This misconception often arises from a lack of understanding of the technology (Brito and Castillo, 2013). Prior to Bitcoin, online transactions have not been anywhere close to anonymous because they have to go through third-party intermediaries, who have interests in knowing who their customers are, for risk assessment purposes and compliance with the relevant laws and regulations.  
 
For example, when Alice makes a transfer of $10 using PayPal to Bob, PayPal will have a record of the transfer. In addition, their PayPal accounts are likely to be linked to their respective credit cards or bank accounts, which will provide information as to their identities. On the other hand, if Alice gives Bob $10 in cash in person, there is neither an intermediary nor a record of the transaction. If the two of them do not know each other, then the transaction can be said to be completely anonymous.  
 
Bitcoin is somewhere in between these two extremes. Bitcoins can be said to be like cash in the sense that when Alice gives bitcoins to Bob, she no longer has them, while Bob does. Since there is no third-party intermediary, nobody knows their identities as well. However, unlike cash, the transaction is recorded on the blockchain.  
 
Some ofthe information recorded includes the public keys of the sender and recipient, the amount, and a time stamp. Every transaction in the history of bitcoin has been recorded and will be recorded on the blockchain and is publicly viewable. While there is some privacy, the blockchain is a public record of all transactions and it may be possible for anyone to identify the parties behind them, especially if a person's identity is linked to a public key. While bitcoins may be anonymous like cash in the sense that parties can transact without disclosing their identities, it is also unlike cash because transactions to and from any Bitcoin address can be traced.  
 
Therefore, Bitcoin is pseudonymous, not anonymous. It is not particularly difficult for anyone with the right tools and access to join the dots between a pseudonymous Bitcoin address and a real-world identity. Some personally identifiable information is often captured during a transaction on a website, like an IP address. To make it more difficult to connect an identity to a Bitcoin address, one would have to use software methods that obfuscate or shield such personally identifiable information from being tied to Bitcoin addresses.  
 
Early studies have already shown some potential analyses that could erode the pseudonymity of Bitcoin. For those who are persistent in connecting Bitcoin addresses to realworld identities, their work should begin with the blockchain. In a simulated experiment, a study found that up to 40% of Bitcoin users within the experiment could be personally identified using behavior-based clustering methods (Androulaki et al., 2012). The statistical properties of the transaction graph could also, with the relevant analysis, reveal the activity and identity of Bitcoin users (Reid and Harrigan, 2013).  
 
Even the use of multiple public keys may not defend against such transaction graph analysis (Ober et al., 2013), as an observer may gradually be able discern patterns in user behavior to link the public keys together, using a process called entity merging (Brito and Castillo, 2013). Besides the technical aspects of Bitcoin, it is important to also consider the pressures faced by Bitcoin intermediaries from regulators.  
 
Bitcoin regulation is evolving, and should Bitcoin intermediaries become regulated, it is expected that anonymity will become less guaranteed (Brito and Castillo, 2013), often with KYC and reporting requirements requiring these intermediaries to collect personally identifiable information from their customers. 
 
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<a href="http://webitcoin.blogspot.com/2016/03/bitcoin-as-cryptocurrency.html">Read Next: Bitcoin As Cryptocurrency</a></div>
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Big Advantages of Bitcoin

Network and digital currency Bitcoin is a decentralized network and a digital currency that uses a peer-to-peer system to verify and pro...

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