Bitcoin 101

Hello fine ladies and gentlemen of TS,

In this thread I will explain the basics of bitcoin as best as I can in plain English. I am not perfect 9and English is not my main language) so if you see something that is wrong (spelling errors etc.) or have some feedback feel free to post it below. It is always welcome and I will update the thread accordingly. If something is not clear or you have any questions after reading the thread feel free to ask them below and I will do my best to answer them. So let’s get down to business.

 

What are bitcoins:

Bitcoin is an experimental digital currency, you can use it to pay for things just like any other currency. What makes bitcoin different is how you can use it. I found that the best way to give people an idea of what bitcoins are is to show an example.

So let’s say I want some bitcoins, how do I get them? I can either buy bitcoins that already exist but that’s boring so we won’t do that for now, the other way to get bitcoins is to mine them. So how does “mining” bitcoins work? Basically when you mine bitcoins you are making your PC do some really complicated math called hashes, GPUs are much better at doing that math then a CPU is.

 

Bitcoin mining:

So what is this math? Basically by mining bitcoins you are securing the bitcoin network, making sure that no fake bitcoins are being transferred, and of course creating new bitcoins. But you don’t simply find bitcoins while doing the math, instead you find blocks. One block is 25 BTC (bitcoin) so when mining bitcoins you have to find a block before you get anything in return for all your effort. This wasn’t a problem at first when mining blocks took a few days when doing it all alone but nowadays it has become so hard that few people still mine on their own (solo mining).

It would take you way over 2 years to mine a single block assuming you mined 24/7 and used a 7970 for mining. So people started mining in groups (mining pools) these groups would share all the bitcoins among the people who were mining. This went on for a few years and now groups have become so large that people are being paid by “shares”, the more shares you complete the more bitcoins you get you don’t have to mine 24/7 or wait until a block is completed. You can claim your bitcoins as soon as you want (although most pools have a minimum of 0.01 BTC)

 

Difficulty and amount of bitcoins:

So we now have a lot of people mining in groups time to answer some questions. Is there a limit on how many bitcoins are released every year? What if in a few years from now it will be much easier to mine bitcoins won’t they get devalued?

There is actually a limit on how many bitcoins are released every year. From day 1 all bitcoins that will ever be released were planned, there is a limit on how many bitcoins will be released in one year, there is a limit to how many bitcoins there will ever be however there is no limit on how difficult it can become to mine a block.

So in order to deal with growing computing power bitcoins will become harder to mine this is called the difficulty. So maybe right now your 7970 will be a fast miner however in a few months from now in theory it might only mine half as many bitcoins as before while still doing the same amount of math. Every year only X-amount of bitcoins are released, this amount will decrease every year until all blocks are mined and no new bitcoins will be added to the market.

 

Bitcoin payments:

So let’s say we have mined some bitcoins, we need a place to put them this is called a Bitcoin address, it consists of a public and private key (read email address and password) for example when someone wants to send you some bitcoins you will give him your public key (just like you’d give someone your email address) but they won’t be able to read your emails unless they have the private key as well (ie password) this private key is usually stored somewhere for you.

You will most likely be using wallet software to keep track of your public and private keys so that you only need to remember one username and password in order to access all your bitcoin addresses. There are different kinds of wallets, you can store bitcoins offline (print them on paper or on a file on your hard drive/flash drive), you can use a wallet application (going back to the email example compare this to outlook or thunderbird) or a webapp (email comparison: gmail)

All you have to do in order to send someone your hard earned bitcoins is ask them for their public key, login into your wallet select the amount you want to pay them and paste their address in there and voila. However bitcoin payments are not instand before any payment is accepted it is checked by the network in order to make sure that the bitcoins are real.

Just like email, you can have as many bitcoin addresses as you want. This is why bitcoins can be used completely anonymously, you could make an address and use it only once to receive/send bitcoins and then throw it away. As you might expect this means that bitcoins are an ideal currency for the black market to use and bitcoins to this day are used to sell drugs, weapons and other illegal merchandise.

Very good overview, covers many of the points people new to mining may wish to know. +12 Internetz

Great thread Forte, I'm sure a lot of newcomers will find this helpful.