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To cut through some of the confusion surrounding bitcoin, we need to separate it into two components. On the one hand, you have bitcoin-the-token, a snippet of code that represents ownership of a digital concept — sort of like a virtual IOU. On the other hand, you have bitcoin-the-protocol, a distributed network that maintains a ledger of balances of bitcoin-the-token. The system enables payments to be sent between users without passing through a central authority, such as a bank or payment gateway. It is created and held electronically. It was the first example of what we today call cryptocurrencies, a growing asset class that shares some characteristics of traditional currencies, with verification based on cryptography. The idea was to produce a means of exchange, independent of any central authority, that could be transferred electronically in a secure, verifiable and immutable way. Bitcoin can be used to pay for things electronically, if both parties are willing. No single institution controls the bitcoin network. It is maintained by a group of volunteer coders , and run by an open network of dedicated computers spread around the world. This attracts individuals and groups that are uncomfortable with the control that banks or government institutions have over their money. In electronic fiat currencies, this function is fulfilled by banks, which gives them control over the traditional system. With bitcoin, the integrity of the transactions is maintained by a distributed and open network, owned by no-one. Fiat currencies dollars, euros, yen, etc. Holders of the currency and especially citizens with little alternative bear the cost. With bitcoin, on the other hand, the supply is tightly controlled by the underlying algorithm. A small number of new bitcoins trickle out every hour, and will continue to do so at a diminishing rate until a maximum of 21 million has been reached. This makes bitcoin more attractive as an asset — in theory, if demand grows and the supply remains the same, the value will increase. While senders of traditional electronic payments are usually identified for verification purposes, and to comply with anti-money laundering and other legislation , users of bitcoin in theory operate in semi-anonymity. When a transaction request is submitted, the protocol checks all previous transactions to confirm that the sender has the necessary bitcoin as well as the authority to send them. The system does not need to know his or her identity. In practice, each user is identified by the address of his or her wallet. Transactions can, with some effort, be tracked this way. Furthermore, most exchanges are required by law to perform identity checks on their customers before they are allowed to buy or sell bitcoin, facilitating another way that bitcoin usage can be tracked. Since the network is transparent, the progress of a particular transaction is visible to all. While this may disquiet some, it does mean that any transaction on the bitcoin network cannot be tampered with. The smallest unit of a bitcoin is called a satoshi. It is one hundred millionth of a bitcoin 0. This could conceivably enable microtransactions that traditional electronic money cannot. Read more to find out how bitcoin transactions are processed and how bitcoins are mined , what it can be used for , as well as how you can buy , sell and store your bitcoin. We also explain a few alternatives to bitcoin , as well as how its underlying technology — the blockchain — works. Authored by Noelle Acheson. Network image via Shutterstock. The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. But how? You can pay for them in a variety of ways, ranging from hard cash to credit and debit cards to wire transfers, or even with other cryptocurrencies, depending on who you are buying them from and where you live. The first step is to set up a wallet to store your bitcoin — you will need one, whatever your preferred method of purchase. This could be an online wallet either part of an exchange platform, or via an independent provider , a desktop wallet, a mobile wallet or an offline one such as a hardware device or a paper wallet. Even within these categories of wallets there is a wide variety of services to choose from, so do some research before deciding on which version best suits your needs. You can find more information on some of the wallets out there, as well as tips on how to use them, here and here. If you lose them, you lose access to the bitcoin stored there. Cryptocurrency exchanges will buy and sell bitcoin on your behalf. As with wallets, it is advisable to do some research before choosing — you may be lucky enough to have several reputable exchanges to choose from, or your access may be limited to one or two, depending on your geographical area. Other high-volume exchanges are Coinbase , Bitstamp and Poloniex , but for small amounts, most reputable exchanges should work well. Note: at time of writing, the surge of interest in bitcoin trading is placing strain on most retail buy and sell operations, so a degree of patience and caution is recommended. With the clampdown on know-your-client KYC and anti-money-laundering AML regulation, many exchanges now require verified identification for account setup. This will usually include a photo of your official ID, and sometimes also a proof of address. Most exchanges accept payment via bank transfer or credit card, and some are willing to work with Paypal transfers. Each exchange has a different procedure for both setup and transaction, and should give you sufficient detail to be able to execute the purchase. If not, consider changing the service provider. Once the exchange has received payment, it will purchase the corresponding amount of bitcoin on your behalf, and deposit them in an automatically generated wallet on the exchange. This can take minutes, or sometimes hours due to network bottlenecks. If you wish recommended , you can then move the funds to your off-exchange wallet. Platforms such as LocalBitcoins will help you to find individuals near you who are willing to exchange bitcoin for cash. Also, LibertyX lists retail outlets across the United States at which you can exchange cash for bitcoin. And WallofCoins , Paxful and BitQuick will direct you to a bank branch near you that will allow you to make a cash deposit and receive bitcoin a few hours later. ATMs are machines that will send bitcoin to your wallet in exchange for cash. Coinatmradar can help you to find a bitcoin ATM near you. Note: specific businesses mentioned here are not the only options available, and should not be taken as a recommendation. Bitcoin image via Shutterstock. Before owning any bitcoin , you need somewhere to store them. If the wallet software is well designed, it will look as if your bitcoins are actually there, which makes using bitcoin more convenient and intuitive. Actually, a wallet usually holds several private keys, and many bitcoin investors have several wallets. Electronic wallets can be downloaded software, or hosted in the cloud. The former is simply a formatted file that lives on your computer or device, that facilitates transactions. Hosted cloud-based wallets tend to have a more user-friendly interface, but you will be trusting a third party with your private keys. Installing a wallet directly on your computer gives you the security that you control your keys. Most have relatively easy configuration, and are free. The disadvantage is that they do require more maintenance in the form of backups. If your computer gets stolen or corrupted and your private keys are not also stored elsewhere, you lose your bitcoin. They also require greater security precautions. If your computer is hacked and the thief gets a hold of your wallet or your private keys, he also gets hold of your bitcoin. The original software wallet is the Bitcoin Core protocol, the program that runs the bitcoin network. As you can guess, this takes up a lot of memory — at time of writing, over GB. Exodus can track multiple assets with a sophisticated user interface. Some such as Jaxx can hold a wide range of digital assets, and some such as Copay offer the possibility of shared accounts. Online or cloud-based wallets offer increased convenience — you can generally access your bitcoin from any device if you have the right passwords. All are easy to set up, come with desktop and mobile apps which make it easy to spend and receive bitcoin, and most are free. The disadvantage is the lower security. Some leading online wallets are attached to exchanges such as Coinbase and Blockchain. Some offer additional security features such as offline storage Coinbase and Xapo. Mobile wallets are available as apps for your smartphone, especially useful if you want to pay for something in bitcoin in a shop, or if you want to buy, sell or send while on the move. All of the online wallets and most of the desktop ones mentioned above have mobile versions, while others — such as Abra , Airbitz and Bread — were created with mobile in mind. Hardware wallets are small devices that occasionally connect to the web to enact bitcoin transactions. They are extremely secure, as they are generally offline and therefore not hackable. They can be stolen or lost, however, along with the bitcoins that belong to the stored private keys. Some large investors keep their hardware wallets in secure locations such as bank vaults. Trezor , Keepkey and Ledger and Case are notable examples. Perhaps the simplest of all the wallets, these are pieces of paper on which the private and public keys of a bitcoin address are printed. They are, however, easier to lose. With services such as WalletGenerator , you can easily create a new address and print the wallet on your printer. Send some bitcoin to that address, and then store it safely or give it away. See our tutorial on paper wallets here. The safest option is a hardware wallet which you keep offline, in a secure place. That way there is no risk that your account can be hacked, your keys stolen and your bitcoin whisked away. The least secure option is an online wallet, since the keys are held by a third party. It also happens to be the easiest to set up and use, presenting you with an all-too-familiar choice: convenience vs safety. Whatever option you go for, please be careful. Back up everything, and only tell your nearest and dearest where your backups are stored. For more information on how to buy bitcoin , see here. And for some examples of what you can spend it on , see here. Wallet image via Shutterstock. The exception is bitcoin ATMs — some do allow you to exchange bitcoin for cash, but not all. Coinatmradar will guide you to bitcoin ATMs in your area. All exchanges allow you to sell as well as buy. What type of exchange you choose to sell your bitcoin will depend on what type of holder you are: small investor, institutional holder or trader? Some platforms such as GDAX and Gemini are aimed more at large orders from institutional investors and traders. Retail clients can sell bitcoin at exchanges such as Coinbase , Kraken , Bitstamp , Poloniex , etc. Each exchange has a different interface, and some offer related services such as secure storage. Some require verified identification for all trades, while others are more relaxed if small amounts are involved. You can, if you wish, exchange your bitcoin for other cryptoassets rather than for cash. Some exchanges such as ShapeShift focus on this service, allowing you to swap between bitcoin and ether, litecoin, XRP, dash and several others. Another alternative is the direct sale. You can register as a seller on platforms such as LocalBitcoins , BitQuick , Bittylicious and BitBargain , and interested parties will contact you if they like your price. Transactions are usually done via deposits or wires to your bank account, after which you are expected to transfer the agreed amount of bitcoin to the specified address. Or, you can sell directly to friends and family once they have a bitcoin wallet set up. Just send the bitcoin, collect the cash or mobile payment, and have a celebratory drink together. Note: it is generally not a good idea to meet up with strangers to exchange bitcoin for cash in person. Be safe. Graph image via Shutterstock. What it does is hold my bitcoin address, which keeps a record of all of my transactions, and therefore of my balance. To do that, I put both my private key and the transaction details how many bitcoins I want to send, and to whom into the bitcoin software on my computer or smartphone. With this information, the program spits out a digital signature, which gets sent out to the network for validation. This is one of the genius parts of bitcoin: if the signature was made with the private key that corresponds to that public key, the program will validate the transaction, without knowing what the private key is. Very clever. This whole article could be reduced to a hash, and unless I change, remove or add anything to the text, the same hash can be produced again and again. This is a very effective way to tell if something has been changed, and is how the blockchain can confirm that a transaction has not been tampered with. Back to our blocks: each block includes, as part of its data, a hash of the previous block. And so on. This is what makes Bitcoin virtually tamper-proof. And if you want to indulge in some mindless fascination, you can sit at your desk and watch bitcoin transactions float by. For more detail on how blocks are processed and on how bitcoin mining works, see this article. The bitcoin protocol stipulates that 21 million bitcoins will exist at some point. They get to do this as a reward for creating blocks of validated transactions and including them in the blockchain. Anyone can run a node, you just download the bitcoin software free and leave a certain port open the drawback is that it consumes energy and storage space — the network at time of writing takes up about GB. Nodes spread bitcoin transactions around the network. One node will send information to a few nodes that it knows, who will relay the information to nodes that they know, etc. That way it ends up getting around the whole network pretty quickly. These group outstanding transactions into blocks and add them to the blockchain. How do they do this? By solving a complex mathematical puzzle that is part of the bitcoin program, and including the answer in the block. The puzzle that needs solving is to find a number that, when combined with the data in the block and passed through a hash function, produces a result that is within a certain range. This is much harder than it sounds. How do they find this number? By guessing at random. The hash function makes it impossible to predict what the output will be. So, miners guess the mystery number and apply the hash function to the combination of that guessed number and the data in the block. The resulting hash has to start with a pre-established number of zeroes. The first miner to get a resulting hash within the desired range announces its victory to the rest of the network. All the other miners immediately stop work on that block and start trying to figure out the mystery number for the next one. As a reward for its work, the victorious miner gets some new bitcoin. At the time of writing, the reward is There are a lot of mining nodes competing for that reward, and it is a question of luck and computing power the more guessing calculations you can perform, the luckier you are. Also, the costs of being a mining node are considerable, not only because of the powerful hardware needed if you have a faster processor than your competitors, you have a better chance of finding the correct number before they do , but also because of the large amounts of electricity that running these processors consumes. And, the number of bitcoins awarded as a reward for solving the puzzle will decrease. The difficulty of the calculation the required number of zeroes at the beginning of the hash string is adjusted frequently, so that it takes on average about 10 minutes to process a block. Why 10 minutes? That is the amount of time that the bitcoin developers think is necessary for a steady and diminishing flow of new coins until the maximum number of 21 million is reached expected some time in There is still so much more to explain about the system, but at least now you have an idea of the broad outline of the genius of the programming and the concept. For the first time we have a system that allows for convenient digital transfers in a decentralized, trust-free and tamper-proof way. The repercussions could be huge. For a system that many claimed could replace fiat payments , this was a big barrier. While Visa handles around 24, transactions a second, bitcoin could process up to 7. Yet while significant progress has been made, a sustainable solution is still far from clear. Since each block takes an average of 10 minutes to process, this works out to a relatively small number of transactions overall. A simple solution initially appeared to be an increase in the block size. Yet that idea turned out to be not simple at all. First, there was no clear agreement as to how much it should be increased by. Also, the number of nodes able to run a much heavier blockchain could decrease, further centralizing a network that depends on decentralization. Second, the method of the change was contentious. How do you execute a system-wide upgrade when participation is decentralized? Should everyone have to update their bitcoin software? And finally, an existential argument emerged. Bitcoin is bitcoin, why mess with it? And even if he were, would he care? Did he not design bitcoin to run itself? In , developer Pieter Wiulle revealed a solution that, at first glance, looked like it could appease all groups. Segregated Witness, or SegWit, increased the capacity of the bitcoin blocks without changing their size limit, by altering how the transaction data was stored. For a more detailed account, see our explainer. SegWit was deployed on the bitcoin network in August , via a soft fork to make it compatible with nodes that did not upgrade. In spite of initial excitement about the benefits, however, uptake has been slow. While many wallets and other bitcoin services are gradually adjusting their software, others are reticent to do so because of the perceived risk and cost. Far from solving the problem, the proposal unleashed a further wave of discord. The manner of its unveiling through a public announcement rather than an upgrade proposal and its lack of replay protection transactions could happen on both versions, potentially leading to double spending rankled many. And the perceived redistribution of power away from developers towards miners and businesses threatened to cause a fundamental split in the community. In the end, the idea was dropped a few months later , just weeks from its target date of implementation. Schnorr signatures offer a way to consolidate signature data, reducing the space it takes up within a bitcoin block and enhancing privacy. Combined with SegWit, this could allow a much greater number of transactions, without changing the block size limit. And work is proceeding on the lightning network , a second layer protocol that runs on top of bitcoin, opening up channels of fast microtransactions that only settle on the bitcoin network when the channel participants are ready. So where are we now? Adoption of the SegWit upgrade is slowly spreading throughout the network, increasing transaction capacity and lowering fees. Progress is accelerating on more advanced solutions such as lightning , with transactions being sent on testnets as well as some using real bitcoin. And the potential of Schnorr signatures is attracting increasing attention , with several proposals working on detailing functionality and integration. Steps image via Shutterstock. Hailed as one of the most potent solutions to cryptocurrency scaling currently under development, the lightning network effectively creates a layer on top of bitcoin, enabling fast and cheap transactions which can net settle to the bitcoin blockchain. Proposed by Thaddeus Dryja and Joseph Poon in a white paper , the idea is based on a network that sits on top of the bitcoin blockchain , and eventually settles on it. Say, for instance, that I wanted to pay you for each minute of video that I watched. We would open up a lightning channel, and as the minutes rolled by, periodic payments would be made from my wallet to yours. And because there are no miners that need incentivizing, transaction fees are low or even non-existent. First, two parties who wish to transact with each other set up a multisig wallet which requires more than one signature to enact a transaction. This wallet holds some amount of bitcoin. The wallet address is then saved to the bitcoin blockchain. This sets up the payment channel. The two parties can now conduct an unlimited number of transactions without ever touching the information stored on the blockchain. With each transaction, both parties sign an updated balance sheet to always reflect how much of the bitcoin stored in the wallet belongs to each. When the two parties have done transacting, they close out the channel, and the resulting balance is registered on the blockchain. In the event of a dispute, both parties can use the most recently signed balance sheet to recover their share of the wallet. It is useful to note that it is not necessary to set up a direct channel to transact on lightning — you can send payments to someone via channels with people that you are connected with. The network automatically finds the shortest route. Development of the technology got a significant boost with the adoption of SegWit on the bitcoin and litecoin networks. Without the security of the blockchain behind it, the lightning network will not be as secure, which implies that it will largely be used for small or even micro transactions which carry a lower risk. Larger transfers that require decentralized security are more likely to be done on the original layer. In December , startups behind the three most active lightning implementations ACINQ, Blockstream and Lightning Labs revealed test results , including live transactions, proving that their software is now interoperable. Furthermore, version 1 of the lightning specifications, which set out the rules of the network, has been published. This will encourage the development of other implementations and applications. However, the network is not yet ready for launch. Engineers have yet to release software with which real users can make transactions. That has not stopped some of those working on projects from testing lightning transactions on the bitcoin network. Given the complexity of the code, and the need for rigorous testing we are talking about payments, after all , developers are urging patience. Lightning image via Shutterstock. There are a multitude of reasons both for and against mining pools. Although a pool has a much larger chance of solving a block and winning the reward, that reward will be split between all the pool members. Therefore, joining a pool creates a steady stream of income, even if each payment is modest compared to the full block reward which currently stands at 25 XBTC. Indeed, pools are a way to encourage small-scale miners to stay involved. This is where blocks solved for bitcoin can be used for other currencies that use the same proof of work algorithm for example, namecoin and devcoin. A useful analogy for merged mining is to think of it like entering the same set of numbers into several lotteries. First-time miners who lack particularly powerful hardware should look at altcoins over bitcoin — especially currencies based on the scrypt algorithm rather than SHA This is because the difficulty of bitcoin calculations is far too high for the processors found in regular PCs. If required, the pool does allow you to fix your hardware on just one altcurrency too. However, Mark from nut2pools. Then all the multipools swing round, push the difficulty through the roof in a few hours, then leave again. It leaves the loyal coin followers having to mine the difficulty back down again at very low profitability. When deciding which mining pool to join, you need to weigh up how each pool shares out its payments and what fees if any it deducts. There are many schemes by which pools can divide payments. Shares are a tricky concept to grasp. Keep two things in mind: firstly, mining is a process of solving cryptographic puzzles; secondly, mining has a difficulty level. Think of it as a measure of quality. There is no use whatsoever for these share blocks, but they are recorded as proof of work to show that miners are trying to solve blocks. They also indicate how much processing power they are contributing to the pool — the better the hardware, the more shares are generated. Pools may or may not prioritise payments for how recently miners have submitted shares: for example, recent shared maximum pay per share RSMPPS. More examples can be found on the bitcoin wiki. The other factor to consider is how much the pool will deduct from your mining payments. However, some pools do not deduct anything. After an initial flurry of interest among merchants in accepting bitcoin in their retail or online stores, interest has largely died down as increasing bitcoin transaction fees and volatile price movements made it less attractive as a means of exchange. At time of writing, however, you can still buy a wide range of goods and services with the cryptocurrency. Among the advantages of doing so are the ease of cross-border transactions, and anonymity unless you want physical delivery, of course. If you want to use bitcoin to buy presents, the most obvious solution is gift cards, via Gyft or eGifter. The recipient will then be able to spend the gift card at one of a wide range of retailers. If your ambitions are loftier, you can pay for space travel with some of your vast holdings, through Virgin Galactic. Microsoft accepts bitcoin in its app stores, where you can download movies, games and app-based services. Some musicians Bjork, Imogen Heep will let you download their music in exchange for cryptocurrency. Need to furnish your house or buy a special present for someone? Fancy some gold? Some legal and accounting firms also accept payment for their services in the cryptocurrency. Of course, you could always buy yourself some happiness by donating to one of the bitcoin-accepting charities or crowdfunding sites, such as BitHope , BitGive or Fidelity Charitable. For a list of offline stores near you that accept bitcoin, check an aggregator such as SpendBitcoins or CoinMap. News Learn Research. More Profit-Taking? Money Reimagined. Casey Apr 10, Bitcoin Halving Latest Opinion Features Video Markets. First Mover. Sign Up. Bitcoin 01 What is Bitcoin? Bitcoin Chapter 01 What is Bitcoin? Aug 20, at UTC. Last updated: 26th January To cut through some of the confusion surrounding bitcoin, we need to separate it into two components. Who created it? To this day, no-one knows who Satoshi Nakamoto really is. In what ways is it different from traditional currencies? This makes bitcoin not an ideal currency for criminals, terrorists or money-launderers. Disclosure Read More The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Bitcoin can be bought on exchanges, or directly from other people via marketplaces. Last updated: 20th January Before owning any bitcoin , you need somewhere to store them. Electronic wallets Electronic wallets can be downloaded software, or hosted in the cloud. Software wallet Installing a wallet directly on your computer gives you the security that you control your keys. Online wallet Online or cloud-based wallets offer increased convenience — you can generally access your bitcoin from any device if you have the right passwords. Mobile wallets Mobile wallets are available as apps for your smartphone, especially useful if you want to pay for something in bitcoin in a shop, or if you want to buy, sell or send while on the move. Hardware wallets Hardware wallets are small devices that occasionally connect to the web to enact bitcoin transactions. Paper wallets Perhaps the simplest of all the wallets, these are pieces of paper on which the private and public keys of a bitcoin address are printed. Are bitcoin wallets safe? That depends on the version and format you have chosen, and how you use them. Chapter 05 How do Bitcoin Transactions Work? Fun And if you want to indulge in some mindless fascination, you can sit at your desk and watch bitcoin transactions float by. Solving the puzzle How do they find this number? Economics At the time of writing, the reward is Difficulty The difficulty of the calculation the required number of zeroes at the beginning of the hash string is adjusted frequently, so that it takes on average about 10 minutes to process a block. Chapter 07 Can Bitcoin Scale? Feb 23, at UTC. I have an idea In , developer Pieter Wiulle revealed a solution that, at first glance, looked like it could appease all groups. And the perceived redistribution of power away from developers towards miners and businesses threatened to cause a fundamental split in the community In the end, the idea was dropped a few months later , just weeks from its target date of implementation Meanwhile… Other technological approaches are being developed as a potential way to increase capacity. Combined with SegWit, this could allow a much greater number of transactions, without changing the block size limit And work is proceeding on the lightning network , a second layer protocol that runs on top of bitcoin, opening up channels of fast microtransactions that only settle on the bitcoin network when the channel participants are ready. Getting closer So where are we now? Last updated: 21 March, Hailed as one of the most potent solutions to cryptocurrency scaling currently under development, the lightning network effectively creates a layer on top of bitcoin, enabling fast and cheap transactions which can net settle to the bitcoin blockchain. How it works First, two parties who wish to transact with each other set up a multisig wallet which requires more than one signature to enact a transaction. Where are we now? Chapter 09 What are Bitcoin Mining Pools? Mar 6, at UTC. What to mine? Sep 25, at UTC.

Bitcoins work

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Bitcoins work

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