Bitcoin is a digital peer-to-peer currency system that provides a decentralized method for performing transactions.
Bitcoins (BTC) are also the name of the unit of currency. The Bitcoin protocol is based off a paper by Satoshi Nakamoto called “Bitcoin: A Peer-to-Peer Electronic Cash System” that is designed to allow monetary transactions between users without a central authority like a bank or services like PayPal.
Avoiding a central authority allows you to be anonymous, can lower the cost of transactions, prevents your account from being frozen, and lowers the entry barrier for new users. Of course, without a central authority, that leaves nobody to make sure users are not counterfeiting or double-spending their money, right? The Bitcoin protocol protects against this using its peer-to-peer technology to verify each transaction and make sure only the authorized users are transferring their own bitcoins. When you make a transaction, it is announced to everyone on the network, so everyone knows your wallet made a transaction to another wallet to prevent double-spending.
New Bitcoins are created using a process called “bitcoin mining” at a constant rate and there is a hard limit on the total number of bitcoins that can exist to prevent inflation.
Get some Coin!
Bitcoins can be acquired by receiving them as payments, purchasing them using another currency, or what is called mining. Your bitcoins are managed with a digital wallet (within the Bitcoin client itself, available at bitcoin.org) that has its own unique key that functions as your address or account number, and you can have as many wallets as you want.
The Bitcoin network itself is a chain of blocks and each block is created by the bitcoin miners. To create a block, bitcoin miners task extremely powerful processors with a complex math problem to solve. The problem is so tough to solve, your CPU isn’t up to the task anymore. The difficulty in creating a block has been pushed so high that only graphics processing units (GPUs) that support OpenCL can perform the calculations fast enough to be worth the time and energy invested. The time it takes to solve these complex math problems is what keeps the rate of bitcoins constant. When a problem is solved, a block is published to the network that shows the correct answer and everyone on the network verifies the result. The “winner” is awarded the bounty of bitcoins and as more blocks are published, the the bounty of bitcoins is reduced. The total number of bitcoins can never exceed 21,000,000, and for every 210,000 blocks created, the bounty is cut in half. In the unlikely event that two identical blocks are solved at once, whoever gets theirs published to the network gets credit for it. The bounty of bitcoins is placed on successfully created blocks because each block contributes to the security of the Bitcoin network while also providing a record of transactions. The work you did creating the block is valuable to the Bitcoin network, therefore you are rewarded for it.
The entire chain of blocks is basically a record of all the transactions that have ever taken place, and since each bitcoin itself contains a record of who owned it and transferred it, everything is verified and authenticated by the mutual computing power of the network users and everyone is anonymously looking over everyone else’s shoulder to prevent conflicts.
More About Mining:
You can mine for bitcoins yourself from the comfort of your own home if you have the right computer hardware. The most important piece of hardware you need, as previously mentioned, is a graphics processing unit with OpenCL support, which is nearlyall ATI Radeon HD 4000 series or NVIDIA GeForce 8000 series graphics processors; look for AMD Stream technology or NVIDIA CUDA technology support. This will be your bitcoin mining engine. A word of caution, however, running a bitcoin mining application will put your GPU under a constant full load, eventually resulting in increased temperatures. If your GPU’s cooling solution is not adequate, you could damage it! Due to the difference in core architecture, ATI/AMD graphics processors are faster miners than their NVIDIA GeForce competitors.
Once you have your GPU secured, you will need the Bitcoin software so you can get yourself a digital wallet. Don’t worry, it’s free and open-source! Then you will download and install a bitcoin mining application. I used a program called GUIMiner. Once your bitcoin mining application is installed and is pointed to your Bitcoin wallet address, you can choose to start mining right away. GUIMiner gives you the option of mining by yourself or joining a Bitcoin mining guild; a coordinated group of bitcoin miners that share the bitcoins they mine amongst themselves. I chose this option to maintain a steady trickle of bitcoins. Depending on the cost of electricity where you live, it is possible to mine enough bitcoins to pay for your investment in the GPU!
The following is a list of online and real world businesses that currently accept Bitcoin: https://en.bitcoin.it/wiki/Trade
For much, much more on Bitcoins, including what to do with them once you have them and how to trade them in for nearly anything, visit http://www.bitcoin.org.
PLEASE READ: Running a bitcoin mining application will put your GPU under a constant full load, eventually resulting in increased temperatures. If your GPU’s cooling solution is not adequate, you could damage it!