BitCoins - Digital Currency

There is an emerging trend in the way we can pay for our goods and services, and earn money for our products and services. While online currency is not a new concept, it has finally hit it's prime-time with what is known as BitCoin. There is one main reason I chose to write an article on BitCoin as opposed to other digital currencies, such as Litecoin (the idea of Litecoin is similar to Bitcoin and is an alternative to the beast of Bitcoin); this reason is the shear force backing BitCoin. BitCoin is the first digital currency to have what it takes to become a standard throughout the world.
A digital currency is pretty much what you expect it to be, the currency is stored on a digital device such as your phone, tablet or computer. You can send BitCoins to individuals and companies, as well as receive your own BitCoins, which is the basic foundation of any monetary system. So what does it take to get into BitCoins these days? Well first off you will need to download a wallet. The basic wallet is BitCoin-Qt, which can be downloaded from http://www.bitcoin.org. There are other wallets that you can use which I will get into later in the article. Once you have your wallet you will need to set up an address where you will receive your coins. So you have set up your address, now how do you get Bitcoins? There are three different ways to do this: Buy them from a Bitcoin exchange such as Mt. Gox, or Virtex in Canada, Provide a product or service in exchange for BitCoins, or Mine your Bitcoins.

Bitcoin 101

Before we go into any more details lets get the 101 on BitCoins. I have outlined what BitCoins are but there are some fundamental questions about the system that need answering. So how do these Bitcoins work? Transactions are at the heart of BitCoin, these transactions take place and are grouped into what we call blocks. These blocks are created in such a way that they are very hard to reproduce. This is done through a cryptographic process which requires an extensive amount of computing horsepower.

Like I mentioned above, you need an address to receive your BitCoins, a single person may essentially have as many addresses as they can use which helps create the anonymity of BitCoins: a strong selling point of the currency. It is possible for any one person to receive each of their transactions to a different address but still have the coins stored in a single wallet. Should a person wish to track multiple transactions they would only know the address of the last transaction and wouldn't be able to find which other transactions are going to the same wallet.

With the knowledge that anonymity can be a commonplace it raises the question: Is this legal? Well currently there is no laws that prohibit the use of BitCoin as this is one of the grey areas. Certainly there are illegal uses that this could help fund, such as drug trade, arms dealing etc. However the turning point of this will be to see if it gets enough public backing by governments and people to be officially considered legal. Until it becomes black or white, keep calm and carry on. With the question legality, someone definitely thought well maybe this would be a way to print money, which raises the question of how BitCoins are created.

So how are these BitCoins created? BitCoins essentially need to be secure, which is why it uses a cryptographic process. But as mentioned above, the coins are computationally expensive to generate which is why people called miners verify that these transactions are real. The network is spread out over many thousands of computers and computational devices to balance the load of processing the transactions.

BitCoin Wallets

The wallet is the main tool used for participating in the use of Bitcoins. There are several different types of wallets that you can use. The reference wallet is BitCoin-QT.

This runs on your own computer. There is a hefty download size for the blockchain, which grows in size everyday as each new transaction occurs. Some of the features that can be used include password protection that can be used to protect your wallet. You can also send a message when you pay someone, so that they know what the transaction was for. It also supports QR codes which is a handy feature for receiving payments While BitCoin does support private key import and export, this is only available VIA command line, which is not very convenient. I have been currently using this wallet and have noticed a few things about it. First the block chain seems to take exponentially longer to download. When I first started downloading the block chain it would move through a thousand blocks every second. Once I reached the end of the block chain it was downloading one block every few seconds. Sometimes even the Blockchain would stall on a block and I would have to start the process all over again. However in my trails of this software I lost my wallet, and the only backup I had of the wallet was from 4 months earlier, needless to say, there were a few coins missing. I recovered my BitCoins using the -rescan feature applied to the properties of a shortcut which pointed to the wallets executable. A very useful feature should you find you have lost your coins. This program has Windows, Mac and Linux compatibility and is available at www.bitcoin.org.

The second wallet, and one I may try and move to is called Armory. This is another desktop based wallet and still requires a download of the blockchain comparable to BitCoin-QT. This is probably one of the hardest wallets to setup out there, but also is likely one of the most feature rich desktop clients. The client includes password protection, message signing, private key import and export (from the GUI), it supports offline wallets and your wallet is recoverable from seed.

The last client you will want to know about is the Multibit Client, it is a desktop client like the others, however the block chain download is considerably smaller with the tradeoff being the increased reliance on a third party for the blockchain. This client does include password protection and minimal private key import support through a GUI.

The other wallets you may want to consider looking at include Electrum, Block Chain and Instawallet. Block Chain and Instawallet include a handy web client should that be what you are looking for.

Bitcoin Mining

Bitcoin mining is an excellent way to make some extra money with very little time spent on managing your operation. Bitcoin mining started on the CPU which was slow, but the difficulty in generating the blocks was low, so you were able to make a good portion of cash on the whole operation. Recognizing the potential a few smart programmers decided to write a client for the GPU which increased the speed well over a hundred fold. With the increase in speed the difficulty in generating a block increased. There were two responses to an increased difficulty, more people were unable to continue mining and the emergence of pools to allow miners to “pool” their resources together to generate the blocks required for the the whole system to function.

There are several different pools that prove to be popular, at any one time, one of the pools may prove to be the leader. These resources can be found on www.bitcoincharts.com (also handy for market value of Bitcoin and Statistics of the Bitcoin Network). The most used pools include Deepbit, BTC Guild (Which I am currently using), slush and 50 BTC. There are several other pools including a large portion of Unknown, which are likely people who are attempting to mine Bitcoins without the aid of a pool. Since bitcoins are paid for each solved block (25 BTC) and these coins are hard to generate, solving your own block rarely makes sense (which makes me wonder who these people are). The main reason most people choose pools is because generating your own block takes a lot of luck, you would probably be grinding away for a few years before you found your first block and with that your first BTC payment.

With some pools you can choose how you decide to get paid. The most popular styles are the concept of a share. You receive a share of each solved block depending on the amount of horsepower that you contribute to the pool. Where as other styles will pay proportionally to the length of time it takes to solve a block and your number of shares of the block. Sometimes the before mentioned will pay more, or less, where the former will pay consistently based on the rate set by the pool.

At the time of the writing of this article there was two different relevant technologies in use for mining Bitcoins graphics cards and FPGA hardware. Both graphics cards and FPGA's were a great way to mine Bitcoins, however they are on their way out. On the Horizon and scheduled for delivery in February 2013 is the Butterfly Labs Jalapeno, Little Single, Single and for the people who want to mine Bitcoins with a punch the Mini-Rig. The speeds are 4.5, 30, 60, and 1500 GHashs a second respectively . The ASIC products mentioned above hold the best value for your dollar and is what you will want to mine Bitcoins. Other ASIC products on the horizon include Ngzhang Avalon, and the Deepbit Reclaimer series.

So now you know how to mine Bitcoins, lets see what you can do calculate the profits of your operation. The calculation to judge if you are making money: (bitcoins earned per day * current value of Bitcoin) – (cost of electricity per kilowatt hour * (watts of electricity consumed/1000)). Should this number come out as negative you are losing money and should shutdown your Bitcoin operation. Should this number come out as positive you are making profit. Keep in mind as the price of Bitcoins goes up or down, profitability will fluctuate dramatically.

Bitcoins are catching on at an ever increasing pace, with some hard work and a little luck you may be able to score a few coins for yourself!

Thanks for the read, should you feel this article has helped you out, please consider even a small donation of Bitcoin to Hobbyware.org at: 13TWohSZdfEq3oDuT6hYx7MNTo689huQKe