A beginner's guide to bitcoin

Bitcoin is a digital currency that is being used increasingly all over the world.
Find out more about how it works and how you can use it with our straightforward guides.
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 lots of people 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 is bitcoin, and how does it differ to other forms of digital cash?

zcopley / Flickr

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

But 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 the currency.
Instead, bitcoin is created digitally, by a community of people that anyone could join. Bitcoins are ‘mined‘, using computing power in a distributed network. This network also processes transactions made with bitcoins, effectively making bitcoin its own payment network.

Does that mean that 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 it based on?

Conventional currency used to be 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). Bitcoin isn’t based on gold; it’s based on mathematics.
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.

1. It’s decentralized

The network isn’t controlled by one central authority. Every machine that mines bitcoins 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. You can set up a bitcoin address in seconds, no questions asked, and no fees.

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 block chain. The block chain 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, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoins 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, after 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 sends them to you. They’re spent.
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.

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 ten 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 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 been confirmed by the block chain. Or, they can take around ten minutes if a merchant requires the transaction to be confirmed. That’s 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 bitcoins. 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 important information from merchants

This is a big one. Most online purchases today are made via credit cards, but in the twenties and thirties, when the first precursors to credit cards appeared, the Internet hadn’t been conceived. Credit cards were never supposed to be used online. They 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 would be more difficult to think of a less secure way to do business. This is why credit card numbers keep being stolen.
Bitcoin transactions 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 this new 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 ot 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 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 ‘mine’ bitcoins yourself

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?

Now you’ve realized bitcoin is the way of the future, the next step is to get some bitcoins. But how? This guide will help you.
You can buy bitcoins from: regulated exchanges, or directly from other people selling them. You can pay for them in a variety of ways, ranging from hard cash to wire transfers, depending on who you are buying them from and where you live.
Surprisingly, it’s nearly impossible to buy bitcoins with your credit card or PayPal. This is because such transactions can easily be reversed with a phone call to the card company (ie: ‘chargebacks’, one of the problems bitcoin is here to solve). Since it’s hard to prove any goods changed hands in a transfer of bits, exchanges avoid this payment method and so do most private sellers.

First: Get yourself a ‘wallet’

You will need a place to store your new bitcoins. In the bitcoin world they’re called ‘wallets’ but you could also think of them as like a bank account. The two main options are: (1) A software wallet stored on the hard drive of your computer, or (2) an online, web-based service. Both have their vulnerabilities: if you store it all locally on your computer make sure you back up your hard drive regularly in case it crashes; and online web wallets employ varying degrees of security, from quite good to quite poor. It’s up to you which one you trust the most.
The popular CoinBase is a wallet service that will also trade your dollars for bitcoins, and has web and mobile (Android) apps. Blockchain.info is another popular online wallet option that does not exchange fiat, but has the only mobile solution available for both Android and iOS. For more on storing bitcoins, see our guide on the subject.

Exchanges/Online Wallets

The range of options here seems to grow by the week, with new businesses coming online to cater to new markets. Some are full-blown exchanges for trades between paper fiat currencies and multiple other digital currencies, while others are simpler wallet services with a more limited range of trading options. Many will store amounts of digital and/or fiat currency for you, much like a regular bank account.
Exchanges/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. Check this list of major bitcoin exchanges/wallets around the world, and the payment options they allow.
Article: How to buy bitcoins in the UK
At this time, the largest full trading exchanges accessible to everyone are Mt. Gox (Japan), Bitstamp (US), BTC-e (Bulgaria), and Kraken (US). The world’s largest bitcoin exchange, BTC China, exchanges bitcoin for Chinese yuan/renminbi only.
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 (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 (eg: CoinBase allows only US bank accounts).

Warnings about exchanges, wallets and banks

Despite the proof of identity requirements, remember exchanges and wallets are not regulated as banks otherwise. There is no insurance for your account if the exchange goes out of business or is robbed by hackers. Bitcoin does not (as yet) have legal status as a currency in most of the world, and authorities usually do not know how 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 obligated to do so. And 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 as a threat to their business model and have been known to discriminate against anything related to bitcoin. Their responses have ranged from refusing transfers to specific exchanges, to unilaterally closing accounts of anyone mentioning bitcoin, without explanation. Check this list first to see if your bank is one of them 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.

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 main site where these 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 big 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. These meetups flourished in the latter half of 2013. Some big cities even have open-air events called ‘Satoshi Squares‘ where you can just walk up, buy some bitcoin, and walk away. Given their group settings these latter two options are usually more secure, though obviously less anonymous.
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 has another 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 about ‘mining’

What about this mining thing? I’ve heard you can make your own bitcoins.
You might’ve heard or seen an advertisement about ‘mining’ your own bitcoins with your PC or a powerful graphics card. That was true 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 ‘guilds’, and companies set up specifically to mine. You may choose to buy shares in such a guild or company, but mining is definitely not the hobbyist pursuit it once was.
If you know what you’re doing and 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.

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).
This trust invests exclusively in bitcoins and uses a state-of-the-art protocol to store them safely on behalf of its shareholders.

Bitcoin ATMs

These are a new concept and very few exist, but the ones that do have proven extremely popular and are easy to use. More are supposedly on the way, from a number of different vendors. Like a face to face exchange but with a machine, you insert your cash and receive a paper receipt with the codes necessary to load the bitcoins onto your wallet. Once again, you’ll need to already have a bitcoin wallet (locally stored or online) to use the ATM.
As of November 2013, there is an operational Robocoin bitcoin ATM in Vancouver, Canada. At a Turkish airpost you can convert foreign currency into bitcoin using a machine by Traveler’s Box and Lamassu has shipped bitcoin ATM’s to locations around the world.

Conclusion

So, buying bitcoins is not always as easy as newcomers expect. The good news is the number of options is increasing all the time, and there’s plenty of incentive for creative entrepreneurs to invent more convenient ones. Some may not even necessarily require a wallet or internet access. Other ideas have included bitcoin gift cards (coming soon), physical bitcoin ‘coins’ with a wallet value pre-loaded, and stored-value cards.

How to store your bitcoins

Bitcoin wallets store the private keys that you need to access a bitcoin address and spend your funds. They come in different forms, designed for different types of device. You can even use paper storage. It is important to secure and back up your bitcoin wallet.
Bitcoins are a modern equivalent of cash, and every day, another merchant accepts them as payment. We know how they are generated, and how a bitcoin transaction works, but how are they stored? We store cash in a wallet, and bitcoin works in a similar way.

zcopley / Flickr

Although you don’t technically store bitcoins anywhere. What you store are the secure digital keys to access your public bitcoin addresses and sign transactions. This information is stored in a bitcoin wallet.
Bitcoin wallets come in a variety of forms. There are three main types of wallet: desktop, mobile, and web. Here’s how they work.

Desktop bitcoin wallets

If you have already installed the original bitcoin client (Bitcoin-Qt), then you are running a wallet, but may not even know it. In addition to relaying transactions on the network, this software also enables you to create a bitcoin address for sending and receiving the virtual currency, and to store the private key for it. There are other desktop wallets, too, all with different features. Multibit runs on Windows, Mac OSX, and Linux. Hive is an OSX-based wallet with some unique features, including an app store that connects directly to bitcoin services, although at the time of writing, this wallet is still in beta testing. Some desktop wallets are tailored for security. Armory falls into this category. Others focus on anonymity. DarkWallet – a product still in development – will focus on anonymity, using a lightweight browser plug-in to provide services including coin ‘mixing’ in which users’ coins are exchanged for others’, to prevent people tracking them.

On your mobile phone

Desktop-based wallets are all very well, but they aren’t very useful if you are out on the street, trying to pay for something in a physical store. This is where a mobile wallet comes in handy. Running as an app on your smartphone, the wallet can store the private keys for your bitcoin addresses, and enable you to pay for things directly with your phone. In some cases, a bitcoin wallet will even take advantage of a smartphone’s near field communication (NFC) feature, enabling you to tap the phone against a reader, and pay with bitcoins without having to enter any information at all.
One common feature of mobile wallets is that they are not full bitcoin clients. A full bitcoin client has to download the entire bitcoin block chain, which is always growing and is multiple gigabytes in size. That could get you into a heap of trouble with your mobile service provider, who will be only too happy to send you a hefty bill for downloading over a cellular link. Many phones wouldn’t be able to hold the block chain in their memory, in any case.
Instead, these mobile clients are often designed with simplified payment verification (SPV) in mind. They download a very small subset of the block chain, and rely on other, trusted nodes in the bitcoin network to ensure that they have the right information.
Examples of mobile wallets include the Android-based Bitcoin wallet, Mycelium, and Blockchain (which keeps your bitcoins encrypted on your phone, and backed up on a web-based server). Some have special features unique to them. Kipochi, for example, lets people use their phone numbers as their bitcoin addresses. Apple is notoriously paranoid about bitcoin wallets. Blockchain says that its iOS wallet version has restricted features, and Coinbase had its mobile wallet app pulled from the app store altogether.

Online bitcoin wallets

Web-based wallets store your private keys online, on a computer controlled by someone else and connected to the Internet. Several such online services are available, and some of them link to mobile and desktop wallets, replicating your addresses between different devices that you own.
One advantage of a web-based wallet is that you can access it from anywhere, regardless of which device you are using. However, it also has a major disadvantage: unless implemented correctly, it can put the organisation running the website in charge of your private keys, essentially taking your bitcoins out of your control. That’s a scary thought, especially if you begin accruing lots of bitcoins. Coinbase, an integrated wallet/bitcoin seller operates its online wallet worldwide but only allows people to buy bitcoins in the US. Blockchain also hosts a web-based wallet, and Strongcoin offers what it calls a hybrid wallet, which lets you encrypt your private address keys before sending them to its servers, by encrypting it in the browser.

Are bitcoin wallets safe?

It depends how you manage them. The private keys stored in your wallet are the only way to access the transaction data stored in a bitcoin address. If you lose them, you lose your bitcoins. So, they are only safe insofar as no one else can access them, and they don’t get lost.

So how can I secure my wallet?

There are several ways to make your bitcoin wallet more secure:

Encrypt it

One way to protect your wallet from prying eyes is to encrypt it with a strong password. This makes it difficult to access your wallet, but not impossible. If your computer is compromised by malware, thieves could log your keystrokes to find your password.

Back it up

If you only have your private keys stored in one wallet, then if you lose that wallet or it gets corrupted, then you’ve lost your keys. Backing up your wallet makes a copy of your private keys, but it’s important to back up your whole wallet. Some addresses are used to store change from transactions, and may not be shown to you by default. Back the whole thing up in several different places, and keep them safe from prying eyes.

Take it offline

If you are too nervous to store your bitcoin keys digitally, for fear that they may be stolen by hackers, there is another option: cold storage. Cold storage wallets store private bitcoin keys offline, so that they can’t be stolen by someone else on the Internet.
It’s a good idea to use cold storage for the bulk of your bitcoin fortune, and transfer just a little to separate bitcoin addresses in a ‘hot’ wallet with an Internet connection, making it easy to spend. That way, even if your mobile phone is lost, or the hot wallet on your notebook PC is erased during a hard drive crash, only a small amount of bitcoin cash is at risk.
Many software bitcoin wallets feature a cold storage option. Or, you could go completely analog, and simply use paper for offline storage in the form of a paper wallet.
There are several sites offering paper bitcoin wallet services. They will generate a bitcoin address for you and create an image containing two QR codes: one is the public address that you can use to receive bitcoins. The other is the private key, which you can use to spend bitcoins stored at that address.

The future of bitcoin storage

Some people are developing hardware wallets which are designed to hold private keys electronically and facilitate payments. Trezor and Mycelium are two key players. However, as of November 2013 neither of them had delivered products..

What can you buy with bitcoins?

More merchants are beginning to accept bitcoins in exchange for goods and services, although the best place to find these merchants are marketplaces and aggregator sites that gather large numbers of supporting establishments together at once.

Spending your bitcoins

We’ve told you how to mine bitcoin, and how to buy it. However you choose to acquire your digital currency, at some point you’re going to want to spend it. But where can you go to exchange your bitcoins for goods and services?
There are several different types of places – online and off – that you can go to spend your bitcoin. Read on for a description. What can you buy with bitcoins? Find out with this guide.

Bitcoin gambling sites

One of the biggest destinations for people’s bitcoin is online gambling. It’s fast, with an immediate return (or loss) and bets can start relatively small. When done properly, it’s also easy to prove that bets are fair – either by tracking payouts in the block chain, or by using external proof.
SatoshiDice has been the most popular online gambling site. Users mail money to one of a set of addresses, and in return they get a payout based on the probability of winning. Others include PeerBet, which accepts cryptocurrencies other than bitcoin, plus Just-Dice, BetCoin Dice and Satoshi Circle.

Physical goods that can be bought with bitcoin

Although bitcoin is well-suited to purchasing services online, that doesn’t mean it can’t be used for physical goods too. There are various sites that sell physical products for bitcoin, although they mostly accept payments over the Internet.
Some of the directories available online provide a long list of merchants that accept bitcoin. However, after further investigation you may discover that these sites have tested bitcoin as a payment option at one point, but no longer use it. Likewise, they may be selling a very limited range of goods in a particular geographical area.
Of the sites that are left, the pickings are rather hit-and-miss. You may sometimes feel like you are looking for a place that accepts your bitcoins just for the sake of spending them. Ideally, you would look for a product first and expect the merchant to accept the currency as a matter of course. We are a long way from that utopia yet.
That said, there are options for people who don’t wish to pick their way through hundreds of listings just to find products vaguely approximating those they want. There are some more general e-commerce sites selling multiple products in a particular category and offering cross-category sales.
Bitcoinshop.us, for example, offers products from air-conditioners to watches, all priced in bitcoin, for those wanting to make a purchase. The catch: it only ships to people in the continental US.
BitcoinStore.com sells electronics and ships internationally, but you should check its shipping rates for your country before ordering.
Memory Dealers carries a range of networking hardware equipment and computer memory. It has been a ‘bitcoin believer’ from the beginning.
CoinDesk frequently discovers interesting local sellers: Keystone Pet Place will handle all your pet’s needs, The Java Nomad will ship you fresh coffee beans from Bali and Persian Shoes will sell you handmade shoes and bags from Iran. Several local, niche merchants accept bitcoin only and will not/cannot accept fiat currency.
The good news is that there are hundreds of small retailers accepting bitcoin too. Coinmap, Spendbitcoins.com and UseBitcoins.info keep up-to-date databases of these shopping destinations.

Bitcoin gift cards

If you can’t find any physical stores that accept bitcoin directly, the easiest way to turn your digital currency into ‘real-world’ goods and services is via gift cards. Plenty of gift card businesses accept bitcoins and these cards can be used at a surprising number of major retailers like Walmart, Target and Nike. For US customers, companies like Gyft, eGifter, iTradeBTC and GiftCardZen have the widest range of options, and there are also store-specific card sellers like GiftcardBTC (for Amazon.com gift cards).
Note: many gift cards are only valid in their country of issue, which is usually the United States (although overseas shoppers may still make purchases with gift cards from US retailers in many cases). Other countries have their own options, e.g. Australians can see what’s available at Bitcoin Gift Cards. You will usually pay a little more to trade your bitcoins for gift cards (around 5-10% is normal) but on the upside, you don’t need to deal with exchanges or transfers.
Some sites, like Europe’s BitCC, will exchange bitcoins for disposable prepaid debit cards.

Physical establishments who accept bitcoin

Source: Facebook

Bars and restaurants that accept bitcoin remain the exception, rather than the rule. Luckily they’re usually great places to go. If you’re determined to spend your digital currency on a plate of fish and chips or a cold beer, there are easy ways to find out where you can go.
Bitcoin.Travel is a respected site, offering a mappable list of accommodation, apartments, attractions, bars, and beauty salons around the world. Coinmap also maintains a worldwide database of establishments. 

If you’re in London in the UK, the Pembury Tavern is well known, as is the Old Fitzroy pub if you’re in Sydney, Australia. If you make it to bitcoin’s ‘spiritual home’ of Tokyo, you’ll find local bitcoiners hanging out and dining out on bitcoin at The Pink Cow.
When it comes to food and drink, there are other ways to spend bitcoins, even if a restaurant doesn’t directly accept them.
Foodler, a site enabling you to browse and order delivery and take-out meals from restaurants across the globe, has over 13,000 restaurants in 3,150 cities on its books. You can use bitcoins to pay for ‘Foodler credits’, which can be used at any of the restaurants.
Interestingly, we are starting to see nascent clusters of bitcoin-friendly establishments. For example, the Bitcoin-Kiez in Berlin is persuading local establishments in small numbers along the Graefekiez there to support bitcoin.

Online bitcoin marketplaces and auctions

Online marketplaces are another way to spend bitcoins. They are effectively clearing houses that enable anyone to sell products to anyone else.
It all started with Silk Road, an underground marketplace that enabled people to sell illicit goods and services using bitcoin. The site, only accessible via the Tor anonymous browsing system, capitalized on the currency’s ability to facilitate anonymous trades (if you know what you’re doing).
Silk Road got shut down in October 2013 and promptly ‘returned’ a month later. If that’s not your game, there are more legitimate bitcoin marketplaces where you can spend your coins. Most of them are still in the fledgling stage and have a limited range of goods to offer, though.
Bitcoin Market and Cryptothrift are two category-driven sites, albeit sparsely populated. Flibbr allows you to search listed products by name. Reddit offers a subthread called Bitmarket, that allows people to list their goods as Reddit posts.
There are other, specialist sites popping up. BitPremier will sell your high-end luxury items for bitcoins, using an escrow service. It has an impressive selection of high-end listings including luxury cars, yachts, condos, antiques, and artworks. There is even an island for sale.

Online bitcoin services

Perhaps not surprisingly for a movement that requires a fair bit of technical know-how, bitcoin has garnered a lot of support from the online services community. Hosting companies in particular are willing to give your website or server a home on the Internet in exchange for bitcoin.
The bitcoin wiki has a good list. WordPress is among the most visible and popular sites, and will offer you a blogging presence online for payment in cryptocurrency. You can also go to BitcoinCodes to buy credits for Steam, Spotify, XBoxLive, PlayStation Network and AirVPN. Namecheap accepts bitcoin directly as payment for domain services. If you want a little more privacy online, several VPN (virtual private network) providers now accept only bitcoin after being blocked by credit card companies and PayPal.

Tipping, or donating bitcoin to a cause

Feel like giving your bitcoins away to a good cause, or to reward an interesting comment? Here’s The Sri Lanka Campaign for Peace and Justice, a London-based NGO that campaigns for “justice, human rights and reconciliation” in Sri Lanka, and Sean’s Outpost – a homeless shelter in Pensacola, Florida.
You can also tip people for comments in Reddit (see the guide here). And here is also a list of sites taking donations in bitcoin.

Is bitcoin legal?

Bitcoin is of interest to law enforcement, tax authorities, and legal regulators, all of which are trying to understand how it fits into existing frameworks. The legality of your bitcoin activities will depend on who you are and what you are doing with it.
Bitcoin has proven to be a contentious issue for regulators and law enforcers, both of which have targeted the virtual currency in an attempt to control its use. We are still early on in the game, and many legal authorities are still struggling to understand the cryptocurrency, let alone make laws around it. Amid all this uncertainty, one question stands out: is bitcoin legal?
The answer is yes, depending on what you’re doing with it. Read on for our guide to the complex legal landscape surrounding bitcoin. Most of the discussion concerns the US, where many of the legal dramas are currently playing out.

What are the concerns about bitcoin?

Government agencies are increasingly worried about the implications of bitcoin, as it has the ability to be used anonymously, and is therefore a potential instrument for money laundering. In particular, law enforcers seem to be concerned about the decentralized nature of the currency.
As early as April 2012, the FBI published a document highlighting its fears around bitcoin specifically, drawing a distinction between it and centralized digital currencies such as eGold and WebMoney. It voiced concerns that while US-based exchanges are regulated, offshore services may not be, and could be a haven for criminals to use bitcoin for illicit activities without being traced.
Bitcoin was the only a form of currency when trading on Silk Road, an anonymous marketplace that was only accessible over the TOR anonymous browsing network, and which was closed by the FBI in October 2013. Silk Road was commonly used to sell goods that are legal in many countries, including narcotics. This prompted US Senator Charles Schumer to call for the site to be shut down, explicitly linking it to bitcoin, which he called a “surrogate currency”.  The US Drug Enforcement Administration seized bitcoins from a US resident for purchasing a controlled substance in June 2013.

Who regulates it?

Regulators will vary on a per-country basis, but you can expect to see national financial regulators interested in bitcoin and other virtual currencies, potentially along with regional regulators at a sub-country level.

FinCEN

In the US, the Financial Crimes Enforcement Network (FinCEN), which is an agency within the US Treasury Department, took the initiative. It published guidelines about the use of virtual currencies. FinCEN’s March 18, 2013 guidance defined the circumstances under which virtual currency users could be categorized as money services businesses (also commonly known as money transmitting business or MTBs). MTBs must enforce Anti-Money Laundering (AML) and Know Your Client (KYC) measures, identifying the people that they’re doing business with.

CFTC

The US Commodity Futures Trading Commission (CTFC), which looks after financial derivatives, hasn’t announced regulation yet, but has made it clear that it could if it wanted to.

SEC

The US Securities and Exchange Commission (SEC) hasn’t issued solid regulations on virtual currencies, but its Office of Investor Education and Advocacy published an investor alert to warn people about fraudulent investment schemes involving bitcoin. In particular, it warned of Ponzi schemes, after charging Texas resident Trendon T Shavers, aka ‘pirateat40’, founder and operator of Bitcoin Savings and Trust, with allegedly raising 700,000 bitcoins by promising investors up to 7% weekly interest.

Legislative branch

The SEC case has forced the legislative branch of government to consider bitcoin’s legal status. Shavers had claimed that he could not be prosecuted for securities fraud, as bitcoin wasn’t money. However, Judge Amos Mazzant issued a memorandum arguing that bitcoin can be used as money.
In August 2013, the US Senate wrote to several law enforcement agencies, inquiring about the threats and risks relating to virtual currency. The letters included this one to the Department Of Homeland Security, fretting about the lack of a paper trail for regulators and enforcement agencies to follow for virtual currency transactions. It requested policies and guidance related to the treatment of virtual currencies, and information about any ongoing strategic efforts in the area.
November saw responses from the various agencies. The Department of Homeland Security was the most worried about the criminal threat from illicit use of bitcoin, while the Department of Justice, the Federal Reserve and the Department of Justice all acknowledged the legitimate uses of virtual currencies. The SEC argued that “any interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies” were considered securities and thus fell under its remit.

US states

Each US state has their own financial regulators and laws, and each approaches bitcoin differently. California and New York have been particularly aggressive in their pursuit of bitcoin-related organizations, for example, while others, such as New Mexico, South Carolina, and Montana, don’t regulate money transmitting businesses. There is a list of state approaches to money transmitter laws here.
In May 2013, California’s state financial regulator issued a letter to the Bitcoin Foundation, a nonprofit organization designed to promote bitcoin, warning it that it may be a money transmission business, and threatening people there with potential fines and jail time.
Then, in August 2013, the New York Department of Financial Services issued subpoenas to 22 bitcoin-related companies, although these letters were more conciliatory, asking for a dialogue to develop appropriate regulatory guidelines for the digital currency industry. Since then, New York has proposed issuing “BitLicenses” – licenses for bitcoin-based businesses – and will be holding hearings on the subject.

Private sector companies (banks)

Several banks have stopped accounts owned by people operating bitcoin exchanges. In at least one case, this was because the bank was unhappy that the company involved did not have a money transmitting business (MTB) account.
The US Senate addressed the issue of banking and federal regulation in a set of hearings, held in November. The hearings were exploratory in nature and may not lead to legislation, but feedback from agencies included acknowledgements that there were legitimate uses for the coin.

What this means to you

The legality of bitcoin depends on who you are, and what you’re doing with it. There are three main categories of bitcoin stakeholder. Someone may fall under more than one of these categories, and each category has its own legal considerations.

Users

These are individuals that obtain bitcoins, and either hoard them or spend them. Under the FinCEN guidance, users who simply exchange bitcoins for goods and services are using it legally.
FinCEN: “A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter.”

Miners

According to the FinCEN guidance, people creating bitcoins and exchanging them for fiat currency are not safe.
FinCEN: “By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.”
Miners seem to fall into this category, which could theoretically make them liable for MTB classification. This is a bone of contention for bitcoin miners, who have asked for clarification. This issue has not to our knowledge been tested in court.

Exchanges

Exchanges are defined as MTBs.
FinCEN: “In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”

Taxation

In 2009, the US Internal Revenue Service (IRS) posted information about the tax applications of using virtual currencies inside virtual economies, arguing that taxpayers can receive income from a virtual economy and could be required to report it as taxable income. However, it based this largely on guidance related to bartering, gambling, business, and hobby income.
However, the IRS has not yet posted guidance on ‘open flow’ virtual currencies that can be used outside of virtual economies. In a 27-page report [PDF] published in May 2013, the US General Accounting Office (GAO) called for more guidance from the IRS on this issue.
The IRS responded that its guidance could now be taken to cover virtual currencies as used outside of virtual economies. It added that it was also looking at the potential tax compliance risks posed by anonymous electronic payment systems, and was working with other federal agencies on the topic.
In June 2013, the director of an IRS unit that investigates cyber threats also told the Financial Times that the use of “cyber-based currency and payment systems” to hide unreported income from the IRS is a threat that it was “vigorously responding to”. And at Senate hearings in November, FinCEN director Jennifer Shasky Calvery confirmed that the IRS would be releasing more guidance on virtual currencies. In short, don’t expect to evade taxes by earning bitcoins instead of fiat currency.

What is the industry doing?

The industry has responded to growing regulator concerns in several ways.

• Several companies created a committee to form a self-regulatory body called DATA, designed to encourage open conversation with regulators.
• The Bitcoin Foundation formed committees to offer legal guidance, steer policy, and liaise with regulators.
• Exchanges have been attempting to secure MTB licenses at the state and federal levels, and some have avoided doing business with US customers until this is resolved.

Other countries

United Kingdom

Meetings with policymakers in the UK in September suggested that bitcoin-based businesses would not have to register with regulators, at least for the time being, while they consider their regulatory position. The most recent message from the UK suggests that bitcoins won’t be treated as money, but will instead be classified as single-purpose vouchers, which could carry a value-added tax (sales tax) liability on any bitcoins that are sold.

Germany

Germany is perhaps the most advanced country when it comes to regulating bitcoin and virtual currencies. Although some issues remain unresolved, the German government has exempted bitcoin transactions held for over one year from 25% capital gains tax. It also categorized bitcoin as a form of private money.
Finland
Finland issued a regulatory guide to bitcoin in September, which imposed capital gains tax on bitcoins, and taxes bitcoins produced by mining as earned income.
Sweden
Sweden’s Finansinspektionen financial regulator now considers bitcoin as a means of payment, following guidance issued last year. Exchanges must register with it and meet the requirements faced by other financial institutions.
Israel
The Israeli Tax Authority is said to be considering a tax on bitcoin, but no statements have been made at the time of writing. However, the Israel Bar Association considers the virtual currency an appropriate form of payment for attorneys.

Thailand

In July 2013, reports suggested that Thailand had banned bitcoin. In fact, as some suggested, some of the exchanges were still trading, and the Bank of Thailand, which was the entity that was supposed to have banned bitcoin, doesn’t have the legal power to do so. As of August 2013, the Bank of Thailand was simply considering whether to give the exchange in question a license.
“Because they have not been granted a license this does not automatically mean that an individual in Thailand selling or buying bitcoins with a bitcoin exchange in another country, e.g. Mt. Gox, is breaking the law,” said Bank of Thailand Governor Prasarn Trairatvoraku.

India

India’s central bank is said to be “watching” bitcoin. It is gathering information in an attempt to understand the virtual currency, but has said that it is not interested in regulating it at present.

Canada

Canada has announced that it will tax bitcoins in two ways. Transactions made for goods or services will be treated under its barter transaction rules, while its Transactions in Securities document says that profits made on commodity transactions could be income or capital. It confirmed these rules in November 2013.

How do bitcoin transactions work?

Bitcoin transactions are sent from and to electronic bitcoin wallets, and are digitally signed for security. Everyone on the network knows about a transaction, and the history of a transaction can be traced back to the point where the bitcoins were produced.
Holding onto bitcoins is great if you’re a speculator waiting for the price to go up, but the whole point of this currency is to spend it. When spending bitcoins, how do transactions work?

There are no bitcoins, only records of bitcoin transactions

Here’s the funny thing about bitcoins: they don’t exist anywhere, even on a hard drive. We talk about someone having bitcoins, but when you look at a particular bitcoin address, there are no digital bitcoins held in it, in the same way that you might hold pounds or dollars in a bank account. You cannot point to a physical object, or even a digital file, and say “this is a bitcoin”.
Instead, there are only records of transactions between different addresses, with balances that increase and decrease. Every transaction that ever took place is stored in a vast general ledger called the block chain. If you want to work out the balance of any bitcoin address, the information isn’t held at that address; you must reconstruct it by looking at the block chain.

What does a transaction look like?

If Alice sends some bitcoins to Bob, that transaction will have three pieces of information:

• An input. This is a record of which bitcoin address was used to send the bitcoins to Alice in the first place (she received them from her friend, Eve).
• An amount. This is the amount of bitcoins that Alice is sending to Bob.
• An output. This is Bob’s bitcoin address.

How is it sent?

To send bitcoins, you need two things: a bitcoin address, and a private key. A bitcoin address isn’t like a bank account; you don’t need mountains of paperwork and ID to set one up. In fact, they are generated randomly, and are simply sequences of letters and numbers. The private key is another sequence of letters and numbers, but unlike your bitcoin address, this is kept secret.
Think of your bitcoin address as a safe deposit box with a glass front. Everyone knows what is in it, but only the private key can unlock it to take things out or put things in.
When Alice wants to send bitcoins to Bob, she uses her private key to sign a message with the input, amount, and output (Bob’s address).
She then sends it from her bitcoin wallet out to the wider bitcoin network. From there, bitcoin miners verify the transaction, putting it into a transaction block and eventually solving it.

Why must I sometimes wait for my transaction to clear?

Because your transaction must be verified by miners, you are sometimes forced to wait until they have finished mining. The bitcoin protocol is set so that each block takes roughly 10 minutes to mine. Some merchants may make you wait until this block has been confirmed, meaning that you can make a cup of coffee and come back again in a while before you can download the digital goods or take advantage of the service that you paid for.
On the other hand, some merchants won’t make you wait until the transaction has been confirmed. They effectively take a chance on you, assuming that you won’t try and spend the same bitcoins somewhere else before the transaction confirms. This often happens for low value transactions, where the risk of fraud isn’t as great.

What if the input and output amounts don’t match?

Because bitcoins exist only as records of transactions, you can end up with many different transactions tied to a particular bitcoin address. Perhaps Jane sent Alice two bitcoins, Philip sent her three bitcoins, and Eve sent her a single bitcoin, all as separate transactions at separate times. These are not automatically combined in Alice’s wallet to make one file containing six bitcoins. They simply sit there as different transaction records.
When Alice wants to send bitcoins to Bob, her wallet will try to use transaction records with different amounts that add up to the number of bitcoins that she wants to send Bob.
The chances are that when Alice wants to send bitcoins to Bob, she won’t have exactly the right number of bitcoins from other transaction. Perhaps she only wants to send 1.5 bitcoins to Bob. None of the transactions that she has in her bitcoin address are for that amount, and none of them add up to that amount when combined. Alice can’t just split a transaction into smaller amounts. You can only spend the whole output of a transaction, rather than breaking it up into smaller amounts.
Instead, she will have to send one of the incoming transactions, and then the rest of the bitcoins will be returned to her as change.
Alice sends the two bitcoins that she got from Jane to Bob. Jane is the input, and Bob is the output. But the amount is only 1.5 bitcoins, because that is all she wants to send. So, her wallet automatically creates two outputs for her transaction: 1.5 bitcoins to Bob, and 0.5 bitcoins to a new address, which it created for Alice to hold her change from Bob.

Are there any transaction fees?

Sometimes, but not all the time. Transaction fees are calculated using various factors. Some wallets let you set transaction fees manually. Any portion of a transaction that isn’t picked up by the recipient or returned as change is considered a fee. This then goes to the miner lucky enough to solve the transaction block as an extra reward.
Right now, many miners process transactions for no fees. As the block reward for bitcoins decreases, this will be less likely.
One of the frustrating things about transaction fees in the past is that the calculation of those fees has been complex and arcane. It has been the result of several updates to the protocol, and has developed organically. Updates to the core software handling bitcoin transactions will see it change the way that it handles transaction fees, instead estimating the lowest fee that will be accepted.

Can I get a receipt?

Bitcoin wasn’t really meant for receipts. Although there are changes coming in version 0.9 that will alter the way payments work, making them far more user-friendly and mature. Payment processors like BitPay also provide the advanced features that you wouldn’t normally get with a native bitcoin transaction, such as receipts and order confirmation web pages.

What if I only want to send part of a bitcoin?

Bitcoin transactions are divisible. A satoshi is one millionth of a bitcoin, and it is possible to send a transaction as small as 5430 satoshis on the bitcoin network.

How bitcoin mining works

In traditional fiat money systems, governments simply print more money when they need to. But in bitcoin, money isn’t printed at all – it is discovered. Computers around the world “mine” for coins by competing with each other.

So, how does mining happen?

People are sending bitcoins to each other over the bitcoin network all the time, but unless someone keeps a record of all these transactions, no-one would be able to keep track of who had paid what. The bitcoin network deals with this by collecting all of the transactions made during a set period into a list, called a block. It’s the miners’ job to confirm those transactions, and write them into a general ledger.

Making a hash of it

This general ledger is a long list of blocks, known as the block chain. It can be used to explore any transaction made between any bitcoin addresses, at any point on the network. Whenever a new block of transactions is created, it is added to the block chain, creating an increasingly lengthy list of all the transactions that ever took place on the bitcoin network. A constantly updated copy of the block is given to everyone who participates, so that they know what is going on.
But a general ledger has to be trusted, and all of this is held digitally. How can we be sure that the block chain stays intact, and is never tampered with? This is where the miners come in.
When a block of transactions is created, miners put it through a process. They take the information in the block, and apply a mathematical formula to it, turning it into something else. That something else is a far shorter, seemingly random sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the block chain.
Hashes have some interesting properties. It’s easy to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work out what the data was just by looking at the hash. And while it is very easy to produce a hash from a large amount of data, each hash is unique. If you change just one character in a bitcoin block, its hash will change completely.
Miners don’t just use the transactions in a block to generate a hash. Some other pieces of data are used too. One of these pieces of data is the hash of the last block stored in the block chain.
Because each block’s hash is produced using the hash of the block before it, it becomes a digital version of a wax seal. It confirms that this block – and every block after it – is legitimate, because if you tampered with it, everyone would know.
If you tried to fake a transaction by changing a block that had already been stored in the block chain, this would change that block’s hash. If someone checked the block’s authenticity by running the hashing function on it, they’d find that the hash was different from the one already stored along with that block in the block chain. The block would be fake!
Because each block’s hash is used to help produce the hash of the next block in the chain, tampering with a block would also change the next block’s hash. So tampering with a block would make the subsequent block’s hash wrong, too. That would continue all the way down the chain, throwing everything out of whack.

Competing for coins

So, that’s how miners ‘seal off’ a block. They all compete with each other to do this, using software written specifically to mine blocks. Every time someone successfully creates a hash, they get a reward of 25 bitcoins, the block chain is updated, and everyone on the network hears about it. That’s the incentive to keep mining, and keep the transactions working.
The problem is that it’s very easy to produce a hash from a collection of data. Computers are really good at this. The bitcoin network has to make it more difficult, otherwise everyone would be hashing hundreds of transaction blocks each second, and all of the bitcoins would be mined in minutes. The Bitcoin protocol deliberately makes it more difficult, by introducing something called a ‘proof of work’.
The Bitcoin protocol won’t just accept any old hash. It demands that a block’s hash has to look a certain way; it must have a certain number of zeroes at the start. There’s no way of telling what a hash is going to look like before you produce it, and as soon as you include a new piece of data in the mix, the hash will be totally different.
Miners aren’t supposed to meddle with the transaction data in a block, but they must change the data they’re using to create a different hash. They do this using another, random piece of data called a nonce. This is used with the transaction data to create a hash. If the hash doesn’t fit the required format, the nonce is changed, and the whole thing is hashed again. It can take many attempts to find a nonce that works, and all the miners in the network are trying to do it at the same time. That’s how miners earn their bitcoins.

How to set up a bitcoin miner

There are three main categories of bitcoin mining hardware, each more expensive and more powerful than the last. This guide to setting up a bitcoin miner explains each of them, and talks about how to make them work.
By this stage, you will understand how bitcoin works, and what mining means. But we need to get from theory to practice. How can you set up a bitcoin mining hardware and start generating some digital cash? The first thing you’re going to need to do is decide on your hardware, and there are two main things to think about when choosing it:

Hash rate

This is the number of calculations that your hardware can perform every second as it tries to crack the mathematical problem we described in our mining section. Hash rates are measured in megahashes, gigahashes, and terahashes per second (MH/sec, GH/sec, and TH/sec. The higher your hash rate (compared to the current average hash rate), the more likely you are to solve a transaction block. The bitcoin wiki’s mining hardware comparison page is a good place to go for rough information on hash rates for different hardware.

Energy consumption

All this computing power chews up electricity, and that costs money. It’s worth looking at your hardware’s energy consumption in watts, when making your choice. You want to make sure that you don’t end up spending all of your money on electricity to mine coins that won’t be worth what you paid.
Use these two factors to work out how many hashes you’re getting for every watt of electricity that you use. To do this, divide the hash count by the number of watts.
For example, if you have a 500 GH/sec device, and it’s taking 400 watts of power, then you’re getting 1.25 GH/sec per watt. You can check your power bill or use an electricity price calculator online to find out how much that means in hard cash.
However, there’s a caveat here. In some cases, you’ll be using your computer to run the mining hardware. Your computer has its own electricity draw on top of the mining hardware, and you’ll need to factor that into your calculation.

Bitcoin Mining Hardware

There are three main hardware categories for bitcoin miners: GPUs, FPGAs, and ASICs. We’ll explore them in depth below.

CPU/GPU Bitcoin Mining

The least powerful category of bitcoin mining hardware is your computer itself. Theoretically, you could use your computer’s CPU to mine for bitcoins, but in practice, this is so slow by today’s standards that there isn’t any point.
You can enhance your bitcoin hash rate by adding graphics hardware to your desktop computer. Graphics cards feature graphical processing units (GPUs). These are designed for heavy mathematical lifting so they can calculate all the complex polygons needed in high-end video games. This makes them particularly good at the SHA hashing mathematics necessary to solve transaction blocks.
You can buy GPUs from two main vendors: ATI and Nvidia. High-end cards can cost hundreds of dollars, but also give you a significant advantage over CPU hashing. For example, an ATI 5970 graphics card can give you over 800 MH/sec compared with a CPU, which will generally give you less than 10 MH/sec.
One of the nice things about GPUs is that they also leave your options open. Unlike other options discussed later, these units can be used with cryptocurrencies other than bitcoin. Litecoin, for example, uses a different proof of work algorithm to bitcoin, called Scrypt. This has been optimized to be friendly to CPUs and GPUs, making them a good option for GPU miners who want to switch between different currencies.
GPU mining is largely dead these days. Bitcoin mining difficulty has accelerated so much with the release of ASIC mining power that graphics cards can’t compete. If you do want to use them, you’d best equip yourself with a motherboard that can take multiple boards, to save on running separate PSUs for different boards.

FPGA Bitcoin Mining

A Field Programmable Gate Array is an integrated circuit designed to be configured after being built. This enables a mining hardware manufacturer to buy the chips in volume, and then customize them for bitcoin mining before putting them into their own equipment. Because they are customized for mining, they offer performance improvements over CPUs and GPUs. Single-chip FPGAs have been seen operating at around 750 Megahashes/sec, although that’s at the high end. It is of course possible to put more than one chip in a box.

ASIC Bitcoin Miners

This is where the action’s really at. Application Specific Integrated Circuits (ASICs) are specifically designed to do just one thing: mine bitcoins at mind-crushing speeds, with relatively low power consumption. Because these chips have to be designed specifically for that task and then fabricated, they are expensive and time-consuming to produce – but the speeds are stunning. At the time of writing, units are selling with speeds anywhere from 5-500 Gigahashes/sec (although actually getting some of them to them to ship has been a problem). Vendors are already promising ASIC devices with far more power, stretching up into the 2 Terahashes/sec range.

• Avalon
• Butterfly Labs
• CoinTerra
• KnCMiner

Calculate mining profitability

Before making your purchase, calculate the projected profitability of your miner, using the excellent mining profitability calculator from The Genesis Block or this one. You can input parameters such as equipment cost, hash rate, power consumption, and the current bitcoin price to see how long it will take to pay back your investment.
One of the other key parameters here is network difficulty. This metric determines how hard it is to solve transaction blocks, and it varies according to the network hash rate. Difficulty is likely to increase substantially as ASIC devices come on the market, so it might be worth increasing this metric in the calculator to see what your return on investment will be like as more people join the game.
Once you have chosen your hardware, you’ll need to do several other things:

Download the software

Depending on which equipment you choose, you will need to run software to make use of it. Typically when using GPUs and FPGAs, you will need a host computer running two things: the standard bitcoin client, and the mining software.

Standard bitcoin client

This software connects your computer to the network and enables it to interact with the bitcoin clients, forwarding transactions and keeping track of the block chain. It will take some time for it to download the entire bitcoin block chain so that it can begin. The bitcoin client effectively relays information between your miner and the bitcoin network.

Bitcoin mining software

The bitcoin mining software is what instructs the hardware to do the hard work, passing through transaction blocks for it to solve. There are a variety of these available, depending on your operating system. They are available for Windows, Mac OS X, and others.
You may well need mining software for your ASIC miner, too, although some newer models promise to ship with everything pre-configured, including a bitcoin address, so that all you need to do is plug it in the wall.
One smart developer even produced a mining operating system designed to run on the Raspberry Pi, a low-cost credit card-sized Linux computer designed to consume very small amounts of power. This could be used to power a USB-connected ASIC miner.

Join a pool

Now, you’re all set up. Good for you. I bet you thought you were going to be mining more bitcoins than the Federal Reserve prints dollars, didn’t you? Sadly not. You will stand little chance of success mining bitcoins unless you work with other people. You can find out more about that in our upcoming guide on how to join a mining pool.

Who is Satoshi Nakamoto?

No one knows who Satoshi Nakamoto was – or at least, if they do, they’re not saying. Whoever he is, he stopped working on the project around the end of 2010, and is worth a lot of money thanks to his early mining. There are several theories about who he is.

Who is Satoshi Nakamoto?

While we may not know who he was, we know what he did. He was the inventor of the Bitcoin protocol, publishing a paper via the Cryptography Mailing List in November 2008. He then released the first version of the bitcoin software client in 2009, and participated with others on the project via mailing lists, until he finally began to fade from the community toward the end of 2010. He worked with people on the open source team, but took care never to reveal anything personal about himself, and the last anyone heard from him was in the spring of 2011, when he said that he had “moved on to other things”.

But he was Japanese, right?

Best not to judge a book by its cover. Or in fact, maybe we should. “Satoshi” means “clear thinking, quick witted; wise”. “Naka” can mean “medium, inside, or relationship”. “Moto” can mean “origin”, or “foundation”. Those things would all apply to the person who founded a movement by designing a clever algorithm. The problem, of course, is that each word has multiple possible meanings.
We can’t know for sure whether he was Japanese or not. In fact, it’s rather presumptuous to assume that he was actually a ‘he’. We’re just using that as a figure of speech, but allowing for the fact that this could have been a pseudonym, ‘he’ could have been a ‘she’, or even a ‘they’.

Does anyone know who he really was?

No, but the detective techniques that people use when guessing are sometimes even more intriguing than the answer. The New Yorker’s Joshua Davis believed that it was Michael Clear, a graduate cryptography student at Dublin’s Trinity College. He arrived at this conclusion by analyzing 80,000 words of Nakamoto’s online writings, and searching for linguistic clues. He also suspected Finnish economic sociologist and former games developer Vili Lehdonvirta. Both have denied it.

Adam Penenberg at FastCompany disputed that claim, arguing instead that Nakamoto may actually have been three people: Neal King, Vladimir Oksman, and Charles Bry. He figured this out by typing unique phrases from Nakamoto’s bitcoin paper into Google, to see if they were used anywhere else. One of them, “computationally impractical to reverse,” turned up in a patent application made by these three for updating and distributing encryption keys. The bitcoin.org domain name originally used by Satoshi to publish the paper had been registered three days after the patent application was filed. It was registered in Finland, and one of the patent authors had traveled there six months before the domain was registered. All of them deny it. Michael Clear also publicly denied it at the 2013 Web Summit.
In any case, when bitcoin.org was registered on August 18 2008, the registrant actually used a Japanese anonymous registration service, and hosted it using a Japanese ISP. The registration for the site was only transferred to Finland on May 18 2011, which weakens the Finland theory.
Others think that it was Martii Malmi, a developer living in Finland who has been involved with bitcoin since the beginning, and developed its user interface.
Other suggestions: Jed McCaleb, a lover of Japanese culture and resident of Japan, who created incumbent bitcoin exchange Mt. Gox and co-founded Ripple. He also created P2P file sharing network eDonkey in 2000.
Another theory suggests that computer scientists Donal O’Mahony and Michael Peirce are Satoshi, based on a paper that they authored to do with digital payments, along with Hitesh Tewari, based on a book that they published together. O’Mahony and Tewari have studied at Trinity College, where Michael Clear studied.
More recently, Israeli scholars Dorit Ron and Adi Shamir of the Weizmann Institute retracted allegations made in a paper suggesting a link between Satoshi and Silk Road, the black market web site that was taken down by the FBI in October 2013. They had suggested a link between an address allegedly owned by Satoshi, and the site. Security researcher Dustin D. Trammell owned the address, and disputed claims that he was Satoshi.

So what do we know about him?

One thing we know, based on interviews with people that were involved with him at an early stage in the development of bitcoin, is that he thought the system out very thoroughly. His coding wasn’t conventional, according to core developer Jeff Garzik, in that he didn’t apply the same rigorous testing that you’d expect from a classic software engineer.

How rich is he?

zcopley / Flickr

An analysis by Sergio Lerner, an authority on bitcoin and cryptography, suggests that Satoshi mined many of the early blocks in the bitcoin network, and that his fortune in unspent coins was equivalent to at least $100 million. That hoard of a million bitcoins would be worth a billion dollars at November 2013′s exchange rate of $1000.

What is he doing now?

No one knows what Satoshi is up to, but one of the last emails he sent to a software developer, dated April 23 2011, said “I’ve moved on to other things. It’s in good hands with Gavin and everyone.”

Did he work for the government?

There are rumors, of course. People have interpreted his name as meaning “central intelligence”, but of course, people will see whatever they want to see. Such is the nature of conspiracies. The obvious question would be why one of the three-letter agencies would be interested in creating a cryptocurrency that would subsequently be used as an anonymous trading mechanism, causing Senators and the FBI alike to wring their hands about potential terrorism and other criminal endeavours. No doubt conspiracy theorists will have their views on that, too.
Perhaps it doesn’t matter. Core developer Jeff Garzik puts it succinctly. “Satoshi published an open source system for the purpose that you didn’t have to know who he was, and trust who he was, or care about his knowledge,” he points out. Open source code makes it impossible to hide secrets. “The source code spoke for itself.”
Moreover, it was smart to use a pseudonym, he argues, because it forced people to focus on the technology itself rather than on the personality behind it. At the end of the day, bitcoin is now far bigger than Satoshi Nakamoto.

Bitcoin glossary

Confused by some of the terms used on CoinDesk? Here you will find a complete bitcoin 101 that will help you to understand digital currency by explaining commonly used terms and their meanings.

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51% attack

A condition in which more than half the computing power on a cryptocurrency network is controlled by a single miner or group of miners. That amount of power theoretically makes them the authority on the network. This means that every client on the network believes the attacker’s hashed transaction block. This gives them control over the network, including the power to:

• Issue a transaction that conflicts with someone else’s.
• Stop someone else’s transaction from being confirmed.
• Spend the same coins multiple times.
• Prevent other miners from mining valid blocks.

Address

A bitcoin address is used to receive and send transactions on the bitcoin network. It contains a string of alphanumeric characters, but can also be represented as a scannable QR code. A bitcoin address is also the public key in the pair of keys used by bitcoin holders to digitally sign transactions (see Public key).

Altcoin

The collective name for cryptocurrencies offered as alternatives to bitcoin. Litecoin, Feathercoin and PPcoin are all altcoins.

AML

Anti-Money Laundering techniques are used to stop people converting illegally obtained funds, to appear as though they have been earned legally. AML mechanisms can be legal or technical in nature. Regulators frequently apply AML techniques to bitcoin exchanges.

ASIC

An Application Specific Integrated Circuit is a silicon chip specifically designed to do a single task. In the case of bitcoin, they are designed to process SHA-256 hashing problems to mine new bitcoins.

ASIC miner

A piece of equipment containing an ASIC chip, configured to mine for bitcoins. They can come in the form of boards that plug into a backplane, devices with a USB connector, or standalone devices including all of the necessary software, that connect to a network via a wireless link or ethernet cable.

Bitcoin Investment Trust

This private, open-ended trust invests exclusively in bitcoins and uses a state-of-the-art protocol to store them safely on behalf of its shareholders.
It provides a way for people to invest in bitcoin without having to purchase and safely store the digital currency themselves.

Bitcoin Price Index (BPI)

The CoinDesk Bitcoin Price Index represents an average of bitcoin prices across leading global exchanges that meet criteria specified by the BPI. There is also an API for developers to use.

BitPay

A payment processor for bitcoins, which works with merchants, enabling them to take bitcoins as payment.

BitStamp

An exchange for bitcoins that has been gaining in popularity. Read the latest Bitstamp news.

Block chain

The full list of blocks that have been mined since the beginning of the bitcoin cryptocurrency. The block chain is designed so that each block contains a hash drawing on the blocks that came before it. This is designed to make it more tamperproof.

Block reward

The reward given to a miner which has successfully hashed a transaction block. This can be a mixture of coins and transaction fees, depending on the policy used by the cryptocurrency in question, and whether all of the coins have already been successfully mined. Bitcoin currently awards 25 bitcoins for each block. The block reward halves when a certain number of blocks have been mined. In bitcoin’s case, the threshold is every 210,000 blocks.

BTC

The short currency abbreviation for bitcoins.

Buttonwood

A project founded by bitcoin enthusiast Josh Rossi, to form a public outcry bitcoin exchange in New York’s Union Square. Named after the Buttonwood agreement, which formed the basis for the New York Stock Exchange in 1792.

Client

A software program running on a desktop or laptop computer, or mobile device. It connects to the bitcoin network and forwards transactions. It may also include a bitcoin wallet (see node).

Confirmation

The act of hashing a bitcoin transaction successfully into a transaction block, and cementing its validity. A single confirmation will take around 10 minutes, which is the average length of time for a transaction block to be hashed. However, some more sensitive or larger transactions may require multiple confirmations, meaning that more blocks must be hashed and added to the block chain after the transaction’s block has been hashed. Each time another block is added to the block chain after the transaction’s block, the transaction is confirmed again.

Colored coins

A proposed add-on function for bitcoin that would enable bitcoin users to give them additional attributes. These attributes could be user-defined, enabling you to mark a bitcoin as a share of stock, or a physical asset. This would enable bitcoins to be traded as tokens for other property.

CPU

Central Processing Unit – the ‘brain’ of a computer. In the early days, these were used to hash bitcoin transactions, but are now no longer powerful enough. They are still sometimes used to hash transactions for altcoins.

Coinbase

Another name for the input used in a bitcoin’s generation transaction. When a bitcoin is mined, it doesn’t come from another bitcoin user, but is generated as a reward for the miner. That reward is recorded as a transaction, but instead of another user’s bitcoin address, some arbitrary data is used as the input.
Coinbase is also the name of a bitcoin wallet service that also offers payment processing services for merchants and acts as an intermediary for purchasing bitcoins from exchanges.

Coin age

The age of a coin, defined as the currency amount multiplied by the holding period.

Cryptocurrency

A form of currency based on mathematics alone. Instead of fiat currency, which is printed, cryptocurrency is produced by solving mathematical problems based on cryptography.

Cryptography

The use of mathematics to create codes and ciphers that can be used to conceal information. Used as the basis for the mathematical problems used to verify and secure bitcoin transactions.

DDoS

A distributed denial of service attack uses large numbers of computers under an attacker’s control to drain the resources of a central target. They often send small amounts of network traffic across the Internet to tie up computing and bandwidth resources at the target, which prevents it from providing services to legitimate users. Bitcoin exchanges have sometimes been hit with DDoS attacks.

Deflation

The reduction of prices in an economy over time. It happens when the supply of a good or service increases faster than the supply of money, or when the supply of money is finite, and decreases. This leads to more goods or services per unit of currency, meaning that less currency is needed to purchase them. This carries some downsides. When people expect prices to fall, it causes them to stop spending and hoard money, in the hope that their money will go further later. This can depress an economy.

Difficulty

This number determines how difficult it is to hash a new block. It is related to the maximum allowed number in a given numerical portion of a transaction block’s hash. The lower the number, the more difficult it is to produce a hash value that fits it. Difficulty varies based on the amount of computing power used by miners on the bitcoin network. If large numbers of miners leave a network, the difficulty would decrease. Thus far, however, bitcoin’s growing popularity has attracted more computing power to the network, meaning that the difficulty has increased.

Double spending

The act of spending bitcoins twice. It happens when someone makes a transaction using bitcoins, and then makes a second purchase from someone else, using the same bitcoins. They then convince the rest of the network to confirm only one of the transactions by hashing it in a block. Double spending is not easy to do, thanks to the way that the bitcoin network operates, but it is nevertheless a risk run by those accepting zero-confirmation transactions.

Dust transaction

A transaction for an extremely small amount of bitcoins, which offers little financial value, but takes up space in the block chain. The bitcoin developer team has taken efforts to eliminate dust transactions by increasing the minimum transaction amount that will be relayed by the network.

ECDSA

The Elliptic Curve Digital Signature Algorithm is the lightweight cryptographic algorithm used to sign transactions in the Bitcoin protocol.

Escrow

The act of holding funds or assets in a third-party account to protect them during an asynchronous transaction. If Bob wants to send money to Alice in exchange for a file, but they cannot conduct the exchange in person, then how can they trust each other to send the money and file to each other at the same time? Instead, Bob sends the money to Eve, a trusted party who holds the funds until Bob confirms that he has received the file from Alice. She then sends Alice the money.

Exchange

A central resource for exchanging different forms of money and other assets. Bitcoin exchanges are typically used to exchange the cryptocurrency for other, typically fiat, currencies.

Faucet

A technique used when first launching an altcoin. A set number of coins are pre-mined, and given away for free, to encourage people to take interest in the coin and begin mining it themselves.

Feathercoin

An altcoin based on the Scrypt proof of work algorithm.

Fiat currency

A currency, conjured out of thin air, which only has value because people say it does. Constantly under close scrutiny by regulators due to its known application in money laundering and terrorist activities. Not to be confused with bitcoin.

FinCEN

The Financial Crimes Enforcement Network, an agency within the US Treasury Department. FinCEN has thus far been the main organization to impose regulations on exchanges trading in bitcoin.

Fork

The creation of an alternative ongoing version of the block chain, typically because one set of miners begins hashing a different set of transaction blocks from another. It can be caused maliciously, by a group of miners gaining too much control over the network (see 51% attack), accidentally, thanks to a bug in the system, or intentionally, when a core development team decides to introduce substantial new features into a new version of a client. A fork is successful if it becomes the longest version of the block chain, as defined by difficulty.

FPGA

A Field Programmable Gate Array is a processing chip that can be configured with custom functions after it has been fabricated. Think of it as a blank silicon slate on which instructions can be written. Because FPGAs can be produced en masse and configured after fabrication, manufacturers benefit from economies of scale, making them cheaper than ASIC chips. However, they are usually far slower.

Freicoin

A cryptocurrency based on the inflation-free principles outlined by the economist Silvio Gessell.

Genesis block

The very first block in the block chain.

Gigahashes/sec

The number of hashing attempts possible in a given second, measured in billions of hashes (thousands of Megahashes).

GPU

Graphical Processing Unit. A silicon chip specifically designed for the complex mathematical calculations needed to render millions of polygons in modern computer game graphics. They are also well suited to the cryptographic calculations needed in cryptocurrency mining.

Hash

A mathematical process that takes a variable amount of data and produces a shorter, fixed-length output. A hashing function has two important characteristics. Firstly, it is mathematically difficult to work out what the original input was by looking at the output. Secondly, changing even the tiniest part of the input will produce an entirely different output.

Hash rate

The number of hashes that can be performed by a bitcoin miner in a given period of time (usually a second).

Inflation

When the value of money drops over time, causing prices for goods to increase. The result is a drop in purchasing power. Effects include less motivation to hoard money, and more motivation to spend it quickly while the prices of goods are still low.

Input

The part of a bitcoin transaction denoting where the bitcoin payment has come from. Typically, this will be a bitcoin address, unless the transaction is a generation transaction, meaning that the bitcoin has been freshly mined (see Coinbase).

Kilohashes/sec

The number of hashing attempts possible in a given second, measured in thousands of hashes.

KYC

Know Your Client rules force financial institutions to vet the people they are doing business with, ensuring that they are legitimate.

Leverage

In foreign currency trading, leverage multiplies the real funds in your account by a given factor, enabling you to make trades that result in significant profit. By giving leverage to a trader, the trading exchange is effectively lending them money, in the hope that it will earn back more than it loaned in commission. Leverage is also known as a margin requirement.

Liberty Reserve

A centralized digital currency payment processor based in Costa Rica. It was shut down by the US government, after it was found guilty of money laundering.

Litecoin

An altcoin based on the Scrypt proof of work. Read Litecoin news to find out more.

Liquidity

The ability to buy and sell an asset easily, with pricing that stays roughly similar between trades. A suitably large community of buyers and sellers is important for liquidity. The result of an illiquid market is price volatility, and the inability to easily determine the value of an asset.

Margin call

The act of calling in a margin requirement. An exchange will issue a margin call when it feels that a trader does not have sufficient funds to cover a leveraged trading position.

Megahashes/sec

The number of hashing attempts possible in a given second, measured in millions of hashes (thousands of Kilohashes).

Market order

An instruction given to an exchange, asking it to buy or sell an asset at the going market rate. In a bitcoin exchange, you would place a market order if you simply wanted to buy or sell bitcoins immediately, rather than holding them until a set market condition is triggered to try and make a profit.

mBTC

1 thousandth of a bitcoin (0.001 BTC).

Microtransaction

Paying a tiny amount for an asset or service, primarily online. Micro-transactions are difficult to perform under conventional payment systems, because of the heavy commissions involved. It is difficult to pay two cents to read an online article using your credit card, for example.

Mining

The act of generating new bitcoins by solving cryptographic problems using computing hardware.

Mixing service

A service that mixes your bitcoins with someone else’s, sending you back bitcoins with different inputs and outputs from the ones that you sent to it. A mixing service (also known as a tumbler) preserves your privacy because it stops people tracing a particular bitcoin to you. It also has the potential to be used for money laundering.

Mt. Gox

One of the first bitcoin exchanges, and historically the most popular, although it now faces challenges from other exchanges such as BitStamp. Based in Japan, Mt. Gox was started by Jed McCaleb in 2010.

Namecoin

An altcoin designed to provide an alternative to the traditional domain name system (DNS). Users can register .bit domains, accessible via proxy servers, by paying with namecoins.

Node

A computer connected to the bitcoin network using a client that relays transactions to others (see client).

Nonce

A random string of data used as an input when hashing a transaction block. A nonce is used to try and produce a digest that fits the numerical parameters set by the bitcoin difficulty. A different nonce will be used with each hashing attempt, meaning that billions of nonces are generated when attempting to hash each transaction block.

Orphan block

A block which is not a part of the valid block chain, but which was instead part of a fork that was discarded.

OTC exchange

An exchange in which traders make deals with each other directly, rather than relying on a central exchange to mediate between them.

Output

The destination address for a bitcoin transaction. There can be multiple outputs for a single transaction.

P2P

Peer-to-peer. Decentralized interactions that happen between at least two parties in a highly interconnected network. An alternative system to a ‘hub-and-spoke’ arrangement, in which all participants in a transaction deal with each other through a single mediation point.

Paper wallet

A printed sheet containing one or more public bitcoin addresses and their corresponding private keys. Often used to store bitcoins securely, instead of using software wallets, which can be corrupted, or web wallets, which can be hacked or simply disappear. A useful form of cold bitcoin storage.

Pool

A collection of mining clients which collectively mine a block, and then split the reward between them. Mining pools are a useful way to increase your probability of successfully mining a block as the difficulty rises.

PPCoin

AKA Peercoin or P2P coin. An altcoin using the proof of stake mechanism in conjunction with proof of work. Based on a paper produced by Sunny King and Scott Nadal.

Pre-mining

The mining of coins by a cryptocurrency’s founder before that coin has been announced and details released to others who may wish to mine the coin. Pre-mining is a common technique used with scamcoins, although not all pre-mined coins are scamcoins (see Scamcoins).

Primecoin

Developed by Sunny King, Primecoin uses a proof of work system to calculate prime numbers.

Private key

An alphanumeric string kept secret by the user, and designed to sign a digital communication when hashed with a public key. In the case of bitcoin, this string is a private key designed to work with a public key. The public key is a bitcoin address (see Bitcoin address).

PSP

Payment Service Provider. The PSP offers payment processing services for merchants who wish to accept payments online.

Pump and dump

Inflating the value of a financial asset that has been produced or acquired cheaply, using aggressive publicity and often misleading statements. The publicity causes others to acquire the asset, forcing up its value. When the value is high enough, the perpetrator sells their assets, cashing in and flooding the market, which causes the value to crash.

Process node

The size of a transistor in nanometers, produced during a chip fabrication process. Smaller process nodes are more efficient.

Proof of stake

An alternative to proof of work, in which your existing stake in a currency (the amount of that currency that you hold) is used to calculate the amount of that currency that you can mine.

Proof of work

A system that ties mining capability to computational power. Blocks must be hashed, which is in itself an easy computational process, but an additional variable is added to the hashing process to make it more difficult. When a block is successfully hashed, the hashing must have taken some time and computational effort. Thus, a hashed block is considered proof of work.

Public key

An alphanumeric string which is publicly known, and which is hashed with another, privately held string to sign a digital communication. In the case of bitcoin, the public key is a bitcoin address.

QR code

A two-dimensional graphical block containing a monochromatic pattern representing a sequence of data. QR codes are designed to be scanned by cameras, including those found in mobile phones, and are frequently used to encode bitcoin addresses.

Ripple

A payment network that can be used to transfer any currency (including ad hoc currencies that have been created by users). The network consists of payment nodes and gateways operated by authorities. Payments are made using a series of IOUs, and the network is based on trust relationships.

Satoshi

The smallest subdivision of a bitcoin currently available (0.00000001 BTC).

Satoshi Nakamoto

The name used by the original inventor of the Bitcoin protocol, who withdrew from the project at the end of 2010.

Scamcoin

An altcoin produced with the sole purpose of making money for the originator. Scamcoins frequently use pump and dump techniques and pre-mining together.

Scrypt

An alternative proof of work system to SHA-256, designed to be particularly friendly to CPU and GPU miners, while offering little advantage to ASIC miners.

Signature

A digital digest produced by hashing private and public keys together to prove that a bitcoin transaction came from a particular address.

Silk Road

An underground online marketplace, generally used for illicit purchases, often with cryptocurrencies such as bitcoin. Silk Road was shut down in early October 2013 by the FBI after owner Ross Ulbricht was arrested.

SEPA

The Single European Payments Area. A payment integration agreement within the European Union, designed to make it easier to transfer funds between different banks and nations in euros.

SHA-256

The cryptographic function used as the basis for bitcoin’s proof of work system.

SPV

Simplified Payment Verification. A feature of the Bitcoin protocol that enables nodes to verify payments without downloading the full block chain. Instead, they need only download block headers.

Stale

When a bitcoin block is successfully hashed, any others attempting to hash it may as well stop, because it is now ‘stale’. They would simply be repeating work that someone else has already done, for no reward. The term is also used in mining pools to describe a share of a hashing job that has already been completed.

Taint

An analysis of how closely related two addresses are when they have both held a particular bitcoin. A taint analysis could be used to determine how many steps it took for bitcoins to move from an address known for stolen coins, to the current address.

Terahashes/sec

The number of hashing attempts possible in a given second, measured in trillions of hashes (thousands of Gigahashes).

Testnet

An alternative bitcoin block chain, used purely for testing purposes.

TOR

An anonymous routing protocol, used by people wanting to hide their identity online.

Transaction block

A collection of transactions on the bitcoin network, gathered into a block that can then be hashed and added to the block chain.

Transaction fee

A small fee imposed on some transactions sent across the bitcoin network. The transaction fee is awarded to the miner that successfully hashes the block containing the relevant transaction.

uBTC

One microbitcoin (0.000001 BTC)

Vanity address

A bitcoin address with a desirable pattern, such as a name.

Virgin bitcoin

Bitcoins purchased as a reward for mining a block. These have not yet been spent anywhere.

Volatility

The measurement of price movements over time for a traded financial asset (including bitcoin).

Wallet

A method of storing bitcoins for later use. A wallet holds the private keys associated with bitcoin addresses. The block chain is the record of the bitcoin amounts associated with those addresses.

Wire transfer

Electronically transferring money from one person to another. Commonly used to send and retrieve fiat currency from bitcoin exchanges.

Zerocoin

A protocol designed to make cryptocurrency transactions truly anonymous.

Zero-confirmation transaction

A transaction in which the merchant is happy to provide a product or service before the bitcoin’s transmission has been confirmed by a miner and added to the block chain. It can carry a risk of double spending.