The Basics You Need to Understand Let's start by looking at the different things you need to get a cryptocurrency working. We'll start with the basics and then move into more specifics about what you'll need to get started.
● The Transaction - The first thing you need to think about with a virtual currency is the transaction - the actual exchange of value from one person to another. While this may sound simple, in many ways it can be easy to forge a transaction to try to cheat the system. With physical currency, transactions are controlled by banking institutions which verify that they're not forged and are unique.
● A Serial Number - To avoid people trying to forge transactions or reuse them with virtual currency, you need a way to tie a unique serial number to each person and each transaction as well. Bitcoin does this by using a private and public encrypted key. These hashes are used to make sure transactions aren't duplicated in the network and there's no way to cheat the system.
● Goodbye Banks - Currently, banks are in place to facilitate a financial transaction between two people. When Bitcoin was being set-up, it was realized that banks could be taken out of the picture entirely if a peer-to-peer network was created to verify the transactions between two entities. This decentralization of financial transactions is one of the biggest reasons so many smart people are getting excited about Bitcoin.
● Bitcoin Mining - Another piece is needed to make Bitcoin work. If it's too easy for transactions to be validated, people could program bots to flood the network with verifications, making it difficult to actually verify the transaction. To combat this, the idea is to make it computationally difficult to verify the transaction. This helps fight against the bad guys while at the same time offering a way to reward people who give up computing power to verify the transaction. The computational puzzle has to be difficult enough to make it impossible to hack while easy enough to still allow people to solve in a reasonable amount of time. So, when you set-up a Bitcoin Wallet - aka a Bitcoin client - you will generate a public and private key that is unique to you. This is used to transfer bitcoins to you as well as allow you to transfer bitcoins to other people in the network
After your Bitcoin Wallet is installed and running, you can create a Bitcoin Address if you want to receive BTC from someone else on the network. At the same time, you can use another Bitcoin address generated in order to pay for goods or services. The next step is a transaction being generated when the actual swapping of BTC occurs between a buyer and seller. This is added to the block chain where others will verify the transaction (by solving the math problem) and then publish details of the transaction publicly
HOW TO OBTAIN BITCOIN Understanding how Bitcoin works may be interesting to some, but you're probably wanting to know how you can acquire some bitcoins of your own. There are actually a few ways you can legally get bitcoins - no matter where you live in the world. As long as you have an Internet connection and the Bitcoin software installed, you're going to be able to begin using this virtual currency. The best news is that it's actually fairly easy to begin to build up your Bitcoin Wallet if you have a little spare time. First, it should be noted that it's really difficult to purchase bitcoins with a credit card or PayPal account. This may seem odd at first, but if you think about it this makes sense. It's really easy to issue a chargeback on a credit card. If someone buys BTC with a credit card and then reverses the charge, it's really tough to prove to the credit card companies that the exchange really happened. Because of this, most major Bitcoin Exchanges do not allow you to purchase BTC with a credit card or PayPal account. Okay, with that aside, let's dive in and look at the exact steps you're going to need to take in order to start amassing BTC of your own. It's important to remember that the value of one BTC is very volatile right now, so you probably don't want to invest everything you have in this virtual currency. At the same time, the popularity of Bitcoin is growing throughout the world and some people are already getting rich by building up large piles of bitcoins virtually via means and method we'll describe below.
Step One: Get a Bitcoin Wallet
The very first thing you're going to need is a Bitcoin Wallet - aka a Bitcoin client. No matter what type of computer you're running, there's going to be an installer program to get you up and running in no time at all. Most people find it takes around 5 to 10 minutes to get a Bitcoin client installed and connected to the network. Be sure you take your time to find a client you're comfortable with using. Most are very similar, but some have some extra bells and whistles that might make it easier for you to get started. The most popular option for Windows, Mac and Linux is currently MultiBit. Bitcoin Wallet for Android OS is also available.
Another option is to use a web based Bitcoin Wallet, although this isn't really recommended. While you may be able to find a service that offers a high level of security, it's not the same level you'd have if you install the software on your own computer where you have complete control. Coinbase is one of the more popular online Bitcoin wallets currently. Whichever you choose, once it's installed the next step is easy. You'll generate a public and private key. This is your Bitcoin address that will allow people to send BTC to your account. After you have your Bitcoin Wallet setup, you have a few different options on how to accrue BTC in your wallet. We're going to go over these - one by one - next.
Bitcoin Exchanges
Bitcoin exchanges weren't around when Bitcoin first came out, but they're now an integral part of how the whole Bitcoin ecosystem works. There are exchanges that include Bitcoin among other virtual currencies online as well as marketplaces that deal exclusively with BTC transactions. It's interesting to note that some of these marketplaces will hold a balance for you - outside of your Bitcoin Wallet - in order to make it easier to conduct trades. Choosing the right Bitcoin Exchange is important if you want to stay safe and not risk losing your BTC balance due to a scam or technical problems. Here's a look at the major factors you need to look at before choosing a Bitcoin Exchange.
● Security – The most important aspect you want to think about is security. If a Bitcoin Exchange is new to the Internet and is missing contact information, this is a good sign that they probably don't care too much about the security of your personal information. It's important to do your homework so that you can determine which Bitcoin Exchange website has the best track record when it comes to security. Luckily, if you spend any amount of time on the many Bitcoin forums and communities online, you'll see which exchanges have problems and which exchanges are recommended
. ● Geography - While Bitcoin is a decentralized network that spreads around the globe, you still need to think about your physical location. For example, some Bitcoin Exchanges will not allow you to withdraw funds to a US bank account. It's a good idea to make sure whatever exchange you're thinking about using has a way for you to convert your BTC to your local currency easily and safely. In 2013, some people began complaining about the amount of time it took MtGox to transfer funds to the US, so it's a good idea to once again hit the forums and try to gauge public opinion about any exchange you're thinking of using.Next, let's take a quick look at some of the major Bitcoin Exchanges currently operating. New ones are appearing all the time, but it's generally a safer bet working with one that has been around for a while and has managed to build up a track record of being reputable and honest.
● CoinBase – This is one of the most popular Bitcoin Exchanges at the moment. They offer the ability to transfer funds to US bank accounts. Having said that, if you live elsewhere in the world, you may not be happy about not being able to transfer funds to your local bank account.
● MtGox – At one time, MtGox was responsible for the majority of Bitcoin transactions in the world. This has changed recently as they've run into some legal problems in different countries around the world, but they're still a very popular Bitcoin Exchange that many people use on a daily basis.
● BTC-E – This website is based in an unknown city in Bulgaria, so you might be cautious about keeping any BTC here. The prices per BTC are generally a lot lower here, but this is because it takes a ridiculous amount of time to confirm a transaction. Still, it's an option you might look at depending on where you live currently.
● Bitstamp – This exchange is similar to CoinBase in a lot of ways. The main difference is that they do routinely work with people in countries other than the United States, making it easy to transfer BTC to foreign currencies. If you're looking for a truly global Bitcoin Exchange, this is a good place to start.
● Cryptsy – This isn't a pure Bitcoin Exchange. By that we mean that you can trade other cryptocurrencies as well. For example, you can exchange your BTC for LTC (LiteCoins) and vice versa. If your virtual currency investments go beyond Bitcoin, you'll want to check out Cryptsy.
● BTer – With slow transaction speeds and limits on the size of transactions, this isn't really recommended, but we thought they deserved a spot on the list because they do serve the needs of some people who use Bitcoin.
● BTC-China – One of the fastest growing Bitcoin exchanges – according to Wired magazine – is BTC-China, which has really ramped up their efforts recently. By some accounts, they've overtaken MtGox as the place where most Bitcoin transactions take place on a daily basis.