What is Bitcoin?

Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.

It’s the first example of a growing category of money known as cryptocurrency.

What makes it different from normal currencies?

Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.

However, bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that it is decentralized. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money.

Who created it?

A software developer called Satoshi Nakamoto proposed bitcoin, which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.

Who prints it?

No one. This currency isn’t physically printed in the shadows by a central bank, unaccountable to the population, and making its own rules. Those banks can simply produce more money to cover the national debt, thus devaluing their currency.

Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network.

This network also processes transactions made with the virtual currency, effectively making bitcoin its own payment network.

So you can’t churn out unlimited bitcoins?

That’s right. The bitcoin protocol – the rules that make bitcoin work – say that only 21 million bitcoins can ever be created by miners. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after the founder of bitcoin).

What is bitcoin based on?

Conventional currency has been based on gold or silver. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (although this didn’t actually work in practice). But bitcoin isn’t based on gold; it’s based onmathematics.

Around the world, people are using software programs that follow a mathematical formula to produce bitcoins. The mathematical formula is freely available, so that anyone can check it.

The software is also open source, meaning that anyone can look at it to make sure that it does what it is supposed to.

What are its characteristics?

Bitcoin has several important features that set it apart from government-backed currencies.

1. It's decentralized

The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.

2. It's easy to set up

Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another Kafkaesque task, beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable.

3. It's anonymous

Well, kind of. Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. However…

4. It's completely transparent

…bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. The blockchain tells all.

If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours.

There are measures that people can take to make their activities more opaque on the bitcoin network, though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address.

5. Transaction fees are miniscule

Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t.

6. It’s fast

You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment.

7. It’s non-repudiable

When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.

So, bitcoin has a lot going for it, in theory. But how does it work, in practice? Read more to find out how bitcoins are mined, what happens when a bitcoin transaction occurs, and how the network keeps track of everything.

Where to Buy and Sell Bitcoin

Exchange	About	Based
	Coinbase operates one of the most popular wallets and is an simple way to buy bitcoin. $5 bonus on sign up.	USA	BUY BITCOIN
	Localbitcoins matches buyers and sellers online and in-person, locally worldwide.	Finland	BUY BITCOIN
	BitQuick claims to be one of the fastest ways you can buy bitcoin.	USA	BUY BITCOIN
	CoinCorner allow purchases with credit and debit cards for verified users.	Isle of Man	BUY BITCOIN
	Bitbargain has a vast range of different payment options for UK buyers.	UK	BUY BITCOIN
	Xapo is Known for it's ease of use and bitcoin cold-storage vault.	USA	BUY BITCOIN

Why Use Bitcoin?

Bitcoin is a relatively new form of currency that is just beginning to hit the mainstream, but many people still don't understand why they should make the effort to use it.

Why use bitcoin? Here are 10 good reasons why it’s worth taking the time to get involved in this virtual currency.

It’s fast

When you pay a cheque from another bank into your bank, the bank will often hold that money for several days, because it can’t trust that the funds are really available. Similarly, international wire transfers can take a relatively long time. Bitcoin transactions, however, are generally far faster.

Transactions can be instantaneous if they are “zero-confirmation” transactions, meaning that the merchant takes on the risk of accepting a transaction that hasn’t yet beenconfirmed by the bitcoin blockchain. Or, they can take around 10 minutes if a merchant requires the transaction to be confirmed. That is far faster than any inter-bank transfer.

It’s cheap

What’s that you say? Your credit card transactions are instantaneous too? Well, that’s true. But your merchant (and possibly you) pay for that privilege. Some merchants will charge a fee for debit card transactions too, as they have to pay a ‘swipe fee’ for fulfilling them. Bitcoin transaction fees are minimal, or in some cases free.

Central governments can’t take it away

Remember what happened in Cyprus in March 2013? The Central Bank wanted to take back uninsured deposits larger than $100,000 to help recapitalize itself, causing huge unrest in the local population. It originally wanted to take a percentage of deposits below that figure, eating directly into family savings. That can’t happen with bitcoin. Because the currency is decentralized, you own it. No central authority has control, and so a bank can’t take it away from you. For those who find their trust in the traditional banking system unravelling, that’s a big benefit.

There are no chargebacks

Once bitcoins have been sent, they’re gone. A person who has sent bitcoins cannot try to retrieve them without the recipient’s consent. This makes it difficult to commit the kind of fraud that we often see with credit cards, in which people make a purchase and then contact the credit card company to make a chargeback, effectively reversing the transaction.

People can’t steal your payment information from merchants

This is a big one. Most online purchases today are made via credit cards, but in the 1920s and ’30s, when the first precursors to credit cards appeared, the Internet hadn’t yet been conceived. Credit cards were never supposed to be used online and are insecure. Online forms require you to enter all your secret information (the credit card number, expiry date, and CSV number) into a web form. It’s hard to think of a less secure way to do online business. This is why credit card numbers keep being stolen.

Bitcoin transactions, however, don’t require you to give up any secret information. Instead, they use two keys: a public key, and a private one. Anyone can see the public key (which is actually your bitcoin address), but your private key is secret. When you send a bitcoin, you ‘sign’ the transaction by combining your public and private keys together, and applying a mathematical function to them. This creates a certificate that proves the transaction came from you. As long as you don’t do anything silly like publishing your private key for everyone to see, you’re safe.

It isn’t inflationary

The problem with regular fiat currency is that governments can print as much of it as they like, and they frequently do. If there are not enough US dollars to pay off the national debt, then the Federal Reserve can simply print more. If the economy is sputtering, then the government can take newly created money and inject it into the economy, via a much-publicised process known as quantitative easing. This causes the value of a currency to decrease.

If you suddenly double the number of dollars in circulation, then that means there are two dollars where before there was only one. Someone who had been selling a chocolate bar for a dollar will have to double the price to make it worth the same as it was before, because a dollar suddenly has only half its value. This is called inflation, and it causes the price of goods and services to increase. Inflation can be difficult to control, and can decrease people’s buying power. Bitcoin was designed to have a maximum number of coins. Only 21 million will ever be created under the original specification. This means that after that, the number of bitcoins won’t grow, so inflation won’t be a problem. In fact, deflation – where the price of goods and services falls – is more likely in the bitcoin world.

It’s as private as you want it to be

Sometimes, we don’t want people knowing what we have purchased. Bitcoin is a relatively private currency. On the one hand, it is transparent – thanks to the blockchain, everyone knows how much a particular bitcoin address holds in transactions. They know where those transactions came from, and where they’re sent. On the other hand, unlike conventional bank accounts, no one knows who holds a particular bitcoin address. It’s like having a clear plastic wallet with no visible owner. Everyone can look inside it, but no one knows whose it is. However, it’s worth pointing out that people who use bitcoin unwisely (such as always using the same bitcoin address, or combining coins from multiple addresses into a single address) risk making it easier to identify them online.

You don’t need to trust anyone else

In a conventional banking system, you have to trust people to handle your money properly along the way. You have to trust the bank, for example. You might have to trust a third-party payment processor. You’ll often have to trust the merchant too. These organizations demand important, sensitive pieces of information from you. Because bitcoin is entirely decentralized, you need trust no one when using it. When you send a transaction, it is digitally signed, and secure. An unknown miner will verify it, and then the transaction is completed. The merchant need not even know who you are, unless you’ve arranged to tell them.

You own it

There is no other electronic cash system in which your account isn't owned by someone else. Take PayPal, for example: if the company decides for some reason that your account has been misused, it has the power to freeze all of the assets held in the account, without consulting you. It is then up to you to jump through whatever hoops are necessary to get it cleared, so that you can access your funds. With bitcoin, you own the private key and the corresponding public key that makes up a bitcoin address. No one can take that away from you (unless you lose it yourself, or host it with a web-based wallet service that loses it for you).

You can create your own money

In spite of the amazing advances in home office colour printing technology, most national governments take a fairly dim view of you producing your own money. With bitcoin, however, it is encouraged. You can certainly buy bitcoins on the open market, but you can also mine your own if you have enough computing power. After covering your initial investment in equipment and electricity, mining bitcoins is simply a case of leaving the machine switched on, and the software running. And who wouldn't like their computer to earn them money while they sleep?

How Can I Buy Bitcoins?

OK, so you've learned the basics about bitcoin, the next step is to get some bitcoins. But how? This guide will tell you what you need to know.

You can buy bitcoins from either exchanges, or directly from other people via marketplaces.

You can pay for them in a variety of ways, ranging from hard cash to credit and debit cards to wire transfers, or even with other cryptocurrencies, depending on who you are buying them from and where you live.

Surprisingly, it's still not easy to buy bitcoins with your credit card or PayPal, depending on your jurisdiction.

This is because such transactions can easily be reversed with a phone call to the card company (ie 'chargebacks'). Since it's hard to prove any goods changed hands in a transfer of bitcoins, exchanges avoid this payment method and so do most private sellers.

However, the options have recently grown for consumers in some countries.

In the US, Coinbase, and Circle offer purchases with credit cards. Bittylicious,CoinCorner and Coinbase offer this service in the UK, accepting 3D Secure-enabled credit and debit cards on the Visa and MasterCard networks.

Underbanked consumers in the US can turn to expresscoin, which recently launched to serve this market, accepting money orders, personal checks and wire transfers.

First, get yourself a bitcoin wallet

Next, you will need a place to store your new bitcoins. In the bitcoin world, they're called a 'wallet' but it might be best to think of them as a kind of bank account.

Depending on the security levels you want, different wallets will provide different levels of security. Some act like everyday spending accounts and are comparable to a traditional leather wallet, while others tout military-grade protections.

The main options are: (1) a software wallet stored on the hard drive of your computer, (2) an online, web-based service or (3) a 'vault' service that keeps your bitcoins protected offline or multisig wallet that uses a number of keys to protect the account.

Most have their vulnerabilities: if you store bitcoins locally on your computer, make sure you back up your wallet regularly in case the drive becomes corrupted; and online web wallets employ varying degrees of security against hackers, from quite good (multi-factor authentication) to quite poor (ID and password).

For more on storing bitcoins, see our guide on the subject.

Exchanges and Online Wallets

Bitcoin newcomers will find a variety of exchanges and wallets competing for their business.

Some are full-blown exchanges for institutional traders, while others are simpler wallet services with a more limited buying and selling capabilities.

Most exchanges and wallets will store amounts of digital and/or fiat currency for you, much like a regular bank account.

Exchanges and wallets are the best option if you want to engage in regular trading and speculation, don't need total anonymity and don't mind lengthy bureaucratic setup procedures that usually involve proof of identity and supplying detailed contact information.

This is the law in most countries and no regulated exchange can get around it, as any company interfacing with the current financial system must meet 'know your customer' (KYC) and anti-money laundering (AML) requirements.

The best exchange option also depends where you're located.

For more information, you can check out this list of major bitcoin exchanges/wallets around the world, and the payment options they allow.

See our guide: How to buy bitcoins in the UK

At this time, the largest full trading exchanges by volume are Bitfinex (Hong Kong), Bitstamp (US), BTC-e (unknown), Kraken (US), Huobi (China and Hong Kong),OKCoin (China) and BTCC (China).

Coinbase is a popular wallet and exchange service that will also trade US dollars and euros for bitcoins. The company has web and mobile apps. Originally a US-only service, Coinbase has recently opened up to a large number of European countries.

Circle offers users worldwide the chance to store, send, receive and exchange bitcoins. Currently only US citizens are able to link bank accounts to deposit funds, but credit and debit cards are also an option. Apps for iOS and Android are now available.

Wallet and bitcoin debit card provider Xapo has also recently entered the fray, offering deposits in fiat currency that are converted to bitcoin in your account.

Coinjar, an exchange and wallet provider, is the market leader in Australia. The Melbourne-based startup raised $500k AUD in venture funding and won an award atFinovate Europe 2015 for their user experience. The company released a debit card service, 'Coinjar Swipe' in February 2015.

The 'Coinjar Swipe' allows Australians to spend from Coinjar bitcoin accounts.

Unocoin is an exchange aimed at the Indian market, allowing users to buy, sell and store bitcoin. Deposits can be made via any national online bank or through NEFT/RTGS. Registration with a PAN card is necessary to use the site's services.

Once you've set up your account, you'll probably need to link an existing bank account and arrange to move funds between it and your new exchange account via wire transfer. This usually entails a fee. Some exchanges allow you to make a deposit in person to their bank account (that is, via a human teller, not an ATM).

While people in most countries can transfer money to overseas accounts, fees are much higher and you may face more long delays changing your bitcoins back into fiat currency (should you still wish to do that).

If you are required to link a bank account to use the exchange, it may only admit banks from that country.

Exchange	About	Based
	Coinbase operates one of the most popular wallets and is an simple way to buy bitcoin. $5 bonus on sign up.	USA	BUY BITCOIN
	Localbitcoins matches buyers and sellers online and in-person, locally worldwide.	Finland	BUY BITCOIN
	BitQuick claims to be one of the fastest ways you can buy bitcoin.	USA	BUY BITCOIN
	Bitbargain has a vast range of different payment options for UK buyers.	UK	BUY BITCOIN
	CoinCorner allow purchases with credit and debit cards for verified users.	Isle of Man	BUY BITCOIN
	A peer-to-peer platform for individuals to buy, sell or trade bitcoin and altcoins	UK	BUY BITCOIN
	Bitfinex is a trading platform for Bitcoin, Litecoin. It allows margin trading and margin funding.	USA	SIGN UP
	Xapo is Known for it's ease of use and bitcoin cold-storage vault.	USA	BUY BITCOIN

The table above is an advertising unit

Warnings about exchanges, wallets and banks

Despite the proof of identity requirements, remember exchanges and wallets don't provide the same protections banks do.

For example, there is often no or limited insurance for your account if the exchange goes out of business or is robbed by hackers, such as was the case with the infamous failed exchange Mt Gox.

Bitcoin does not have legal status as a currency in most of the world, and authorities usually do not know how best to approach thefts. Some larger exchanges have replaced customer funds after a theft from the exchange itself, but at this stage they are not legally obliged to do so.

Further, if a theft from your personal wallet occurs due to a security or password lapse on your part, you do not have any guaranteed way to recover your funds.

Some existing banks see digital currency refuse to work with funds that were the result of digital currency transactions, citing regulatory uncertainty.

Check the list below first to see if your bank may have taken action against users in the past, and for your protection, open an account with a bank known to be more bitcoin-friendly.

Here are some banks known to discriminate against bitcoin.

Personal Hardware Wallets to Store Your Bitcoin Offline

Product	Review	Price
Ledger Nano	Ledger Review	€34.80	BUY ONLINE
SatoshiLabs Trezor	Trezor Review	$99	BUY ONLNE
KeepKey	KeepKey Launch	$239	BUY ONLNE

For more options, please see our guide to storing bitcoin.

Face-to-face, or 'over-the-counter' (OTC) trades

If you live in a city, prefer anonymity or don't want bank hassles, the easiest option to acquire bitcoin is to make a face-to-face trade with a local seller.

LocalBitcoins is the primary site where such transactions are arranged and prices negotiated. The site also provides an escrow service as an added layer of protection for both parties.

There are security considerations for both buyers and sellers, especially if the trade is a sizeable one. Always meet in a busy public place, don't meet in private homes and take all the precautions you'd usually taken when walking around with large amounts of cash.

Remember, if you're meeting face-to-face somewhere, you'll need to have access to your bitcoin wallet. Whether it's a smartphone, tablet or laptop, you'll also need live Internet access to confirm the transaction.

If one-on-one trades aren't your thing, check out Meetup.com to see if your area has a bitcoin meetup group, where you can do it all in a group setting and learn a lot from the other members in the process.

London held its first Satoshi Square event on Saturday 18th January 2014

Depending on the seller, you may pay a premium of around 5-10% over the exchange price for a face-to-face trade, for convenience and privacy. A reputable trader will negotiate the price before a meeting, but many won't want to wait too long in case bitcoin's value takes a dramatic shift.

Some sellers may let you use a PayPal account to pay, though most prefer non-reversible cash for the reasons described earlier.

It's also wise to check first if such trades are legal in your local area. There is also a slight danger you'll arouse police suspicion by exchanging cash in a public place, if they think you're trading something more illicit.

A word or two about 'mining'

What about this mining thing? I've heard you can make your own bitcoins.

You might've heard about 'mining' your own bitcoins with your PC or a powerful graphics card. That was possible until not so long ago, but time and the increasing popularity of bitcoin have brought more and more powerful, mining-specific devices (called ASICs) onto the network, increasing the difficulty and energy required to mine worthwhile amounts of bitcoin.

Added to that, the number of bitcoins remaining to be mined diminishes sharply as time progresses. All this means mining as an individual isn't as cost-effective as it was just a year ago. Many end up paying more for hardware and electricity than they ever make back in bitcoin.

Most mining these days is the domain of large mining groups called 'pools', and companies set up specifically to mine. You may choose to buy shares in such a pool or company, but mining is definitely not the hobbyist pursuit it once was. If you want to get into mining, our guide to that is here.

Anyone who claims you can mine bitcoins with an ordinary PC or even a graphics card array in 2014 either has out-of-date information, or may be trying to sell you outdated equipment. Beware.

Another relatively new option is 'cloud mining', where to mine bitcoins without investing in expensive and fast-dating equipment, a person pays to use a company's data centres to mine on their behalf. For more, see our guide to cloud mining.

An investment trust

If you don’t like the idea of having to buy and safely store a large quantity of bitcoins, you can turn to an investment trust, such as the Bitcoin Investment Trust (BIT) or The Winklevoss ETF.

This trust invests exclusively in bitcoins and uses a state-of-the-art protocol to store them safely on behalf of its shareholders. So far, the fund has been exclusively for serious (i.e.: very rich) investors, but is to open to all, hopefully by the fourth quarter of 2014.

The Bitcoin Superfund is a new option soon to launch in the UK.

Bitcoin ATMs

Though a relatively new concept, bitcoin ATMs are growing in number.

More are on the way, from a number of different vendors including BitAccess,CoinOutlet, Genesis Coin, Lamassu and Robocoin.

Like a face-to-face exchange but with a machine, you insert your cash and either scan your mobile wallet QR code or receive a paper receipt with the codes necessary to load the bitcoins onto your wallet.

Exchange rates vary, and may be anything from 3% to 8% on top of a standard exchange price.

Keep up with the latest bitcoin ATM news and also view the locations worldwide on ourbitcoin ATM map.

Conclusion

Buying bitcoins is not always as easy as newcomers expect. The good news is the number of options is increasing, and it is getting easier all the time.

Some may not even necessarily require a wallet or Internet access. Other ideas have included bitcoin debit cards, physical bitcoin 'coins' with a wallet value pre-loaded, and stored-value cards.