Q. How does bitcoin work?

Bitcoin is a peer-to-peer network, a set of protocols (standards for

interoperability), client interfaces (called wallets) and a currency

that operates on top of all of those technologies. The bitcoin system

allows any person to send or receive a fraction of a bitcoin (the

currency unit) to another person, anywhere in the world. The bitcoin

system operates on the Internet without the need for banks or bank

accounts and allows people to send money like they send email.

To start using bitcoin, you need a bitcoin client, or "wallet"

application. The bitcoin client allows you to use the bitcoin network,

just like a web browser allows you to use the web. There are many different types

and makers of bitcoin wallets, for desktop and mobile operating

systems and also available as web applications. To receive bitcoin, you

need a bitcoin "address", which is a bit like an email address or bank

account number. If someone knows your bitcoin address, they can send you

money, but cannot do anything more, not even identify who you are or

where you are. Therefore, you can freely share your bitcoin addresses

with anyone without fear or security risk. Once you have a "wallet," it

can create any number of bitcoin addresses for you, even one per

transaction. Give those addresses to anyone you want to send you

bitcoin. Tip: bitcoin addresses are created by your wallet and do not

need to be registered with anyone, or linked to your identity or email

address. They can be used immediately to receive money from anyone and

become part of the network once they have some bitcoin sent to them.

Bitcoin addresses always start with the number "1" and they look like a

long string of number. One of my bitcoin addresses is

"1andreas3batLhQa2FawWjeyjCqyBzypd". This is known as a vanity address,

because it has my name in the beginning, but it works just the same as

if it was a long string of random letters and numbers. I use it to

receive tips and donations from people all around the world.

Your wallet also allows you to send bitcoin to another bitcoin

address. If a friend of yours has a bitcoin address, you can ask them to

email it to you, or they can show it to you in the form of a barcode (QR

code) that your mobile bitcoin wallet can easily scan with its camera.

Once you have an address to send bitcoins, you can then use your wallet

to create a "transaction", which is like writing a check. You tell your

wallet which address should receive the bitcoin (your friend's address)

and how much bitcoin you want to send. You can send a whole bitcoin

(about $660 at this time), but that's usually too much! Instead, you can

send a small fraction of a bitcoin, for example 0.001, which is 50

cents. When you send bitcoin, your wallet will also calculate a small

fee that is paid to the bitcoin network in order to process your

transaction, usually half a cent ($0.005 US dollars). Hit send, and your

friend will see their wallet receiving 50 cents, in a matter of seconds.

Within 10 minutes the transaction will "confirm" (like a check

"clearing" in your bank) and your friend can then spend it.

Bitcoin transactions are "push" transactions, meaning that you are

always in control of your wallet. No one can "deduct" bitcoin from your

wallet, you have to explicitly sign a transaction to send it out. This

makes bitcoin much safer than credit cards when shopping online, as your

transaction only authorizes a single payment and never reveals your

private identity.

Q. I don't own any bitcoin. How do I get some?

Now that you have a wallet, how to get some bitcoin? Well, the

easiest way is to sell a product or service for bitcoin. You can start

accepting bitcoin, by adding a bitcoin address for payments on your

invoices, your shop window or lemonade stand! Most merchants use a

service like bitpay to facilitate

this, acting as a payment processor. Their service can create a new

bitcoin address for each transaction, keep accounts, handle refunds and

even convert bitcoin to USD or your local currency instantly, shielding

you from exchange rate fluctuations. They also offer plugins for many

popular online store applications, for easy integration. If you plan on

using bitcoin for many transactions it might be best to use such a

service. Services like Shopify, Square and Stripe also offer bitcoin as

a payment option for their online merchants, so that might be a good

option.

If you don't want to trade products or services for bitcoin, you can

buy some instead. To buy bitcoin, you have to convert your local

currency into bitcoin, at the current exchange rate (see

bitcoinaverage.com for the current rate). For this purpose you can use a

broker or exchange that facilitates a market for buyers and sellers of

bitcoin: Coinbase (US), Bitstamp (Europe), BTCChina (China) and others.

If you use these services to buy bitcoin it is prudent to transfer your

bitcoin once purchase into your own wallet. That way you control the

bitcoin and do not have to trust them not to lose it.

Another way to buy bitcoin is using a local trader. You can find

local traders using localbitcoins.com and your city or

zip code. Localbitcoins can help you arrange a meeting with someone in a

public space (like a cafe) and will handle the escrow of bitcoins to

protect you from fraud. It is the fastest and easiest way to purchase

small amounts of bitcoin (eg. $100-$500 USD worth)

Q. Where do I keep my bitcoin?

Keeping your bitcoin keys out of the hands of hackers is not easy.

Your bitcoin wallet contains the keys that unlock the bitcoin you own.

The actual bitcoins are stored on the network in a public ledger of

accounts. Protecting your keys (your wallet) is therefore critical to

protecting your bitcoin. If your keys are stolen, then your bitcoin can

be easily stolen and you will have no way of getting it back. You should

also be extremely careful with any services that hold your bitcoin

wallet on your behalf. Custodial accounts of this sort can be hacked or

have the funds stolen by insiders.

I personally keep a small amount of bitcoin on the web-wallet service

blockchain.info (Disclosure: I am

the Chief Security Officer of Blockchain). This service uses software

that operates a wallet entirely in your web browser, doing all the key

management and transaction signing in your browser. That means the web

service never sees your keys or has access to your funds. Combined with

two-factor-authentication (2FA), this provides an excellent level of

protection for small amounts (< $1000). You can also have a mobile

wallet linked to your account to use your bitcoin on-the-go.

For larger amounts, it is best to combine to keep bitcoin offline in

"cold storage". This can be achieved with an dekstop wallet on an old

laptop that is kept offline or using "paper wallets" which are bitcoin

keys printed on paper and stored in safe or safety deposit box.

Q. How do I spend bitcoin?

You can spend bitcoin at thousands of merchants that accept bitcoin

directly, as well as using intermediaries such as gift cards (Gyft.com) or travel agents (CheapAir.com) that allow you to use

bitcoins with merchants who are not yet accepting them directly. To find

companies that take bitcoin, you can use a number of online maps and

directories, such as coinmap.com, spendbitcoins.com, or

bitpay.com/directory. Several large merchants now accept bitcoin too:

Overstock.com, Tigerdirect.com, Square Market (squareup.com/market) and

others. Every week more and more merchants start accepting bitcoin. Next

time you are shopping in a store, ask "Do you take bitcoin, yet?"

Bitcoin is not just about shopping, though. Use bitcoin to support

your favorite charity or to send money to victims of disasters. Many

charities are beginning to accept bitcoin, including some of the

charities that pioneered bitcoin: Seansoutpost.com, Bitgive.com,

Fr33aid.com and others. Bitcoin can also be used to hire contractors and

service professionals from around the world, making payments easy,

secure, instant and much much less expensive than Paypal or Western

Union. Bitcoin crosses borders as easily as email or Skype and can allow

you to connect with the world in a way that was never possible before.

Licensed as CC-BY-SA, by Andreas M. Antonopoulos (Twitter:@aantonop,

http://antonopoulos.com/)