Sunday, March 1, 2015

bitcoin: A Very Handy Guide

There are some topics where a simple google search doesn't readily return a convincing answer.  Questions about bitcoin adaptation, security and trend fell in this category for me.

On one hand we hear news like Silk Road bust , mt. gox exchange bankruptcy and bitcoin price crash from $1000 to $250 in less than a year.

And then there are news everyday about new retailers joining the fray including big brand names like Amazon, Expedia, Overstock etc.

So, is it truly a revolutionary product which will eventually dictate the world economy  or it it just a one time internet sensation which is slowly fading away ?

This is what I tried to answer in this post. And while at it, thought of also providing exact steps and recommendations in getting you up and running (vs. listing tons of choices and confusing you even more as are the case in any article on the topic).

What it is and Where it stands now

bitcoin is a cryptocurrency (a fancy term for digital currency). But beware, this is NOT the only digital currency out there and there are other similar sounding cryptocurrencies (e.g. Riple, Litecoin, BitShares, Darkcoin, Dogecoin etc.) but by far bitcoin the most popular one.

What it means is, this currency is never in physical form. It is either on your computer (in a wallet there) or somewhere in a cloud with a provider (e.g. bitcoin exchange).

Is it Legal

With SilkRoad arrests, i know lot of people questioning if bitcoin is even legal.  The reality is bitcoin is completely legal in US (not so in countries like India and China).
Owning, trading, mining or buying products and services through bitcoin is fully legal in United States. The only caveat is, in US, IRS defines bitcoin as an investment and not currency and hence any profits or loss is to be taxed by existing capital gains tax laws.

Is it going to Stay ?

Most probably. If you look at bitcoin architecture and protocol, you will realize this is likely to be much more resilient than any physical currency out there, since this is not regulated by a government or a central authority. And the distributed nature of bitcoin processing proves that this is much more secure in case of any cyber attack and less prone to fraud.

The System itself 

bitcoin system consists of some very simple components:

bitcoin & Bitcoin

Semantic-wise there is a difference bitcoin (with lowercase 'b') and Bitcoin (with uppercase 'B'). bitcoin is the currency while the Bitcoin is the system itself.  The notation of bitcoin (the currency)  is BTC. 
Again, as written in first section, there are other cryptocurrency, so be careful what you are buying.


Exactly like your physical wallet, its sole purpose is to keep bitcoin. Unlike physical currency though, you can't have bitcoin hanging up in the air. It is always in a wallet; either in your computer or in an online exchange.

A wallet is identified by its private key. Who ever has your wallet's private key, has your wallet and hence your money.
A wallet also has a public key, also called bitcoin address.  Actually it can have as many public key as you want. The purpose of these keys is to give it out; so that people can give you the money. Isn't that cool :)
Whenever you want someone to transfer you the bitcoin, you give them your public key or address.


An exchange is a market place, where you buy or sell bitcoin and several other related entities. 

Now, if you want to buy bitcoin, you have to give them dollar, so exchange connects to your banking institute. And since it connects to your banking institute, this also need to confirm your identity etc.So there is some paperwork involved to meet with Federal guidelines about money laundering etc. 
But once that is taken care of, everything else in bitcoin industry is total anonymous. And exchange is not a must have component of bitcoin infrastructure. You can buy and sell bitCoin in person, over the emails etc. 


One of the strength is bitcoin is that it is not paper currency (also called FIAT currency if its not backed by gold etc.) and hence can't be printed at will. This helps maintain stability in its strength. 
Like gold, whose mining is naturally restricted by the nature, bitcoin can be created by computers which take part in maintaining the Bitcoin infrastructure but its mining gets increasingly difficult as the time goes by and it's limited to a certain quantity how much can be generated per day (3600 in 2014) and overall (21million). 
This process of creating bitcoin is called Mining.

Getting Started

To get into bitcoin buying, selling, trading and mining, you have to have bitcoin first. You can get bitcoin two ways: 
  1. Earn your bitcoin - This is done through mining e.g. gold mining. And exactly like gold mining, its very very slow and time consuming process. Out of multiple ways to mine (home computer, Amazon Cloud etc.) I am going to suggest a hosted mining option on . more later
  2. Buy bitcoin  - Alternatively or together with mining, you can also buy a bitcoin in exchange. Out of all available options, I am going to suggest 

Once you have bitcoin, you can transfer it to your wallet or can use the exchange wallet. 
Suggestion: leave it on exchange wallet unless you have a huge amount of bitcoin, in which case, you can use a wallet from  but keep your wallet in a offline Drive (also called cold storage) or even print out the private key on a paper and keep in secure in a locker or something. Because if someone hacks into your computer and gets into your wallet or if you loose or corrupt your hard drive, its lost for ever, unless you have your private key noted down somewhere.


Buying bitcoin

set up your amounts with exchange 
  • remember to enable 2 factor authentication by giving your phone number
  • set up your account with 
  • remember to enable 2 factor authentication by giving your phone number
  • connect your bank account, confirm account connection
  • buy a bitcoin (you can buy as little as one hundredth millionth of a bitcoin).

Mining bitcoin 

  • set up your accounts with  
  • remember to enable 2 factor authentication (2FA) by entering  your phone number & confirming it.
  • Transfer bitcoin from your exchange to buy giving your public wallet key to
  • use the newly transferred bitcoin to buy computer horsepower which in turn will mine the bitcoin for you. These horsepowers is measured in terms of GH/s (Giga Hash per second). iex takes you to its sister site called for managing all of your mining activities.
will update this section with mining experience on Amaozon EC2 shortly. In general, its not cost effective to mine on Amazon.
And its almost never cost effective to mine on home computer machine, so I will be skipping this altogether.

Using bitcoin

Using the same exchange ( ) you can trade bitcoin for dollars when the values goes up like stock.
or you can use bitcoin to buy product and services very similar to how you use your credit card. The merchant site, while choosing method of payment as bitcoin takes you to their settlement site where you pay using your bitcoin.

So  Go ahead !! Buy yourself some bitcoin and then try transferring a portion of it to  1JVuwbYHAzRTw5r9g7DBizoBT2n22fQaNw

to see if it works :)

No comments:

Post a Comment