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Introduction to Bitcoin (Part 1)

 

Tech Talker introduces you to the world’s largest digital currency, Bitcoin.

By
Eric Escobar,
January 9, 2013
Episode #060

 

I was cruising the internet one day to buy a few gifts and I came across an interesting payment option I had never considered of before called Bitcoin. I was curious and started researching this payment option which opened my eyes to a whole new world! So in today’s episode I’m going to be covering the basics of Bitcoin and how it works. In next week’s episode I’ll be going over how to get started with your own Bitcoin wallet and some of the nitty gritty details.

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What Is Bitcoin?

Bitcoin is a digital currency that was created in 2009. It is a currency just like the Dollar, Euro, or Peso. However, what makes this currency very special is that it is not controlled by any central organization or government. This means that there is no one entity that controls Bitcoins.

When you buy something using Bitcoins, it does not have to go through a bank or central organization. Payments are made person to person over the Bitcoin network. Your Bitcoins are kept in a digital wallet which allows you to send or receive Bitcoin currency. This network is made up of other Bitcoin users from all over the world, which is why it’s known as a peer-to-peer network.

What is fascinating about this currency is that since there is no government or organization to produce or “print” more Bitcoins, the users of Bitcoin are also the ones who create it. Bitcoins can be created by anyone for free using an open source program called a “miner.” This program uses your computer’s processor to perform a calculation which takes time and processing power. Once your computer finds a solution to the calculation, you are rewarded with Bitcoins.

As more people mine Bitcoins, the calculation becomes harder and harder for your computer to solve. This ensures that Bitcoins are released on a regular schedule at about 1 block every 10 minutes (1 block contains 25 Bitcoins). This is set according to a geometric series, which will increase difficulty over a length of time. Bitcoins will be generated until the year 2140, with a total number of 21 million Bitcoins on the market.

Okay that’s great, but why use this digital currency?

Why Should I Use Bitcoins?

Bitcoin has a number of advantages over standard currencies. First and foremost, since there’s no central institution that controls it, there are no transaction fees, no way to produce counterfeit coins, and no way to freeze a Bitcoin account.

If you’ve ever sold something online, then I’m sure you’re aware of the fees taken out by services such as PayPal. You won’t have that problem with Bitcoin. There are even exchanges where you can convert your Bitcoins into any other currency of your choosing, just as if you were converting Dollars to Euros.

Bitcoin isn’t perfect and there are a few flaws. The first is that since Bitcoin isn’t a well-known currency, it isn’t universally accepted like the Dollar. It is also subject to high market volatility because of the relatively small acceptance when compared to other currencies. For the record, I am not saying you should exchange all of your money for Bitcoins. As always, the information in this podcast is to be used purely for informational purposes.

How Do I Get Bitcoins?

With that said, let’s get dig into how Bitcoins are mined (pun intended). As I mentioned before, Bitcoins are generated when your computer completes a calculation. This calculation can be solved (or mined) with a free program which tries to solve a problem by using your computer’s processor. However, the network automatically adjusts the difficulty of the problem based upon how many people are trying to solve it so that the amount of coins released stays constant.

Due to the fact that there are so many people trying to do this, the calculation is very, very difficult. It’s actually almost impossible for a single person to solve the problem by themselves now without extremely special hardware. However, groups have formed all over the globe in which everyone in the group lends computing power to the calculation in order to arrive at a solution. Then everyone splits the coins that they helped to mine.

This is very similar to donating your computer’s unused processing power for a good cause, like I described in my episode on how to Put Your Computer to Work While You’re Away. This is pretty much how all coins are mined now due to the extreme difficulty across the network. These pools are free to join, because the more people in the pool, the greater the chance of finding a solution and getting a reward of Bitcoins.

With that, here are your Quick and Dirty Tips about Bitcoin:

  1. Bitcoin is a decentralized peer-to-peer currency.

  2. Bitcoins can be “mined” or exchanged like traditional currencies.

  3. A Bitcoin wallet cannot be frozen or copied.

  4. Bitcoins are riskier to use because of their volatility and limited use.

Resources

http://www.weusecoins.com/

http://www.youtube.com/watch?v=mrlgw5KpkXM

Well, that’s it for today! Be sure to check out all my earlier episodes at techtalker.quickanddirtytips.com. And if you have further questions about this podcast or want to make a suggestion for a future episode, post your comments on the Tech Talker Facebook page.

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Until next time, I’m the Tech Talker, keeping technology simple!

Bitcoin image from Shutterstock

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