It’s not always easy for a layperson to find reliable information on Bitcoin, so we’re jumping into the conversation and offering some practical information for the new Bitcoin user. We’re calling it Bitcoin 101 – a sort of beginner’s class on cryptocurrency. Even if you’re just starting out or just plain curious, our series of posts on Bitcoin should get you up to speed so you can feel more comfortable talking the talk while learning the ropes.
What exactly is a Bitcoin?
Bitcoin is a digital currency. That means, instead of physical coins or paper bills, money presents as a long string of numbers and letters. Because Bitcoins are not physical they can be instantly transferred to anyone/anywhere in the world.
What’s the big deal? Can’t PayPal or a credit card do the same thing?
The brilliant and revolutionary part about Bitcoin is that there is no central authority—no bank or government—controlling the process. Instead, transactions are verified through a huge peer-to-peer network of ordinary people who donate computing power to help verify transactions. If I want to send you one Bitcoin, that request goes out to the entire Bitcoin network and individual, independent computers in the network will weigh in to say “Yes, that Bitcoin really is yours to transfer” or “No, it is not.” The transfer happens only when a consensus is reached that this, in fact, my Bitcoin.
So what’s so great about bitcoin?
There are a lot of reasons why people love Bitcoin but they generally have to do with the idea that Bitcoin shifts control from governments and banks to ordinary citizens. You can have a pretty heated debate about the role of government in the money supply and whether or not government intervention helps or hurts the average family. But it’s hard to make a case that the banks and credit card companies who make lots of money by charging extra fees have our best interests in mind.
Some of these fees are hidden, like the roughly 3% cost to process credit card transactions. You may not even be aware you’re paying this 3%, but it makes everything we buy more expensive. Bitcoin reduces—and in some cases eliminates entirely—these fees. That’s really promising.
How do you get Bitcoin?
There are three ways you can obtain Bitcoin. You can buy them with dollars (or another traditional currency) using one of many Bitcoin processors like Coinbase; you can accept them as payment for goods and services; or you can “mine” the currency as well.
How can I become a Bitcoin “miner”?
The system was set up initially so that any basic home computer setup would be able to mine for new Bitcoin. By now, however, you’re a little late to the party. You need a really fast computer and a properly tricked out mining computer will set you back around $12,000-15,000. That’s a pretty hefty investment, but there’s an alternative . If you don’t have particularly deep pockets but want to get into the mining game, you can join a pool of users working together to mine. This option allows you to receive much smaller percentages of Bitcoins when you add your computer to the pool, but it has a much lower cost of entry.
Who started Bitcoin?
No one knows for sure. Credit is given to someone named “Satoshi Nakamoto” but that’s really just a pseudonym for the mystery inventor of Bitcoin.
What do we know about him? Well, not much other than he chose an extremely common male Japanese name as his identity. Speculation abounds. Nakamoto may be a woman. He may, in fact, be a group of intrepid programmers, banded together for ease of communication. He might be a cyborg. Well, maybe that last one is a bit of a stretch.
Nakamoto started blogging and sharing ideas about his solution to the financial crisis. His remedy was this: create money out of numbers. That’s basically it! While your banking may be done online, the banking system uses electronic representations of physical currency. Nakamoto focused on creating software in which the individual user would hold a tiny piece of the overall ledger. NOT the currency itself, but a record of every transaction in the block chain (we’ll tell you what that is later).
What is a Bitcoin wallet?
A Bitcoin wallet is a long string of code (an address) that has a corresponding password (key). Online and app-based wallets are great for short term storage, but can be susceptible to hacking, so large amounts of Bitcoin are better off stored in paper wallets (what users call cold storage). There are many different wallet options out there, and we will delve into the options in another post. Baby steps.
How do bitcoin payments work?
Just like in the offline world, a wallet holds the key to making payments. It’s actually easier and faster to make a payment with Bitcoin than any traditional credit card or PayPal transaction online. You get a web or app based wallet, key in the recipients address, enter payment amount and press send. The fees are much lower and you can send Bitcoin any time of day or night without 3rd party assistance. Easy-peasy.
To understand the technology behind this exchange, you first have to know what a “block chain” is. The block chain is the decentralized ledger that runs independently of any interference from government entities or private business. Every user holds a tiny piece in the block chain, which is constantly being copied and re-saved. Why is this brilliant? It eliminates the possibility of fraud. If nothing about Bitcoin is “central,” you cannot game the system. If a fraudulent transaction is run through the block chain, it is immediately identified and thrown out because there are millions of moving parts that all must sync up exactly right in order to recognize the transaction. It’s an elegant solution, really. And for the first time in world history – a truly public exchange system.
If you want to send Bitcoin to another user, in very simple terms, you simply transmit the message that you need to transfer a certain number of Bitcoin from your ledger to another user’s ledger (in Bitcoin parlance, a “node.”). A node is just another word for your computer. The block chain recognizes the code, makes the adjustments to their ledgers and verifies the transaction. There is no need to trust anyone in the system to “protect” your money because the entire system is completely trackable while still being “anonymous.”
Every Bitcoin transaction requires a kind of digital signature, based on math (a complex algorithm) rather than handwriting. When a new account number is created, it also generates a private key that is linked mathematically to that account number and stored in your wallet. The wallet holds keys to every transaction and each signature is unique to each transaction.
Ok, I think I get it. But isn’t Bitcoin volatile and speculative? Could it become worthless at some point?
Well, yes. Bitcoin is still a very young currency and it’s subject to all of the fluctuations in value and relevance that you would expect with a young currency. At this point, the most exciting elements of Bitcoin are in its potential for economic and (some would even say) social reform. It’s an emerging technology. But there are clear benefits to using the currency even now.
Why did CheapAir decide to become the first online travel agency to accept Bitcoin?
The simple answer is if we have customers who have Bitcoin and want to pay with it, why wouldn’t we want to accommodate them? The idea actually came from one such customer who asked one of our Travel Advisors about it. The question made its way through the company, we did some research, and found it would be pretty easy to start accepting it.
At a higher level, though, we are happy to do whatever we can to increase the awareness and the usability of Bitcoin. We love the technology. We think the online legacy payment systems are ridiculously unwieldy – customers must fill out long forms, sharing personal information like their address and credit card security codes just to make a simple purchase and all of this complexity does not eliminate fraud. A Bitcoin purchase, on the other hand, has no form to fill out, requires just one click, and is virtually fraud-free. It’s a much better experience all around.
We also believe the fees charged by banks and other financial institutions to process payments and exchange currencies are crazy excessive in this day and age, and bear no relation to the true costs of processing those transactions. Bitcoin poses a very serious and very viable challenge to the status quo – and it’s much needed.
Please feel free to comment below or tweet to us @CheapAir. We’re interested in profiling Bitcoin users from all walks of life. If you know someone with an interesting Bitcoin story, we’d love to hear from you. You can email us at [email protected].
We don’t purport to have all of the answers to Bitcoin questions but we do want to continue to foster community and education around this amazing new technology. We write about Bitcoin to provide simple, clear information to the Bitcoin novice. It’s not the easiest concept to wrap your head around. Take it from Satoshi who said it best:
Sorry to be a wet blanket. But writing a description of Bitcoin for general audiences is bloody hard. There’s nothing to relate it to. –Satoshi Nakamoto, 2009