How to Get Started with Bitcoins

What nerd doesn't love the idea of virtual currency?<p>But, it seems like all of the exchanges have closed or are temporarily closed to new registrations. This seems problematic, and means the only realistic way in or out is dealing directly with other people and businesses who believe in this particular currency. I spent some time reading the list of people and companies accepting Bitcoin payments, and was extremely underwhelmed. Lots of pyramid schemes, random low-rent affiliate crap like phone cards, etc. No actually useful goods or services. And, a lot of the websites that are talking about this stuff have a definite "get rich quick" vibe about them.<p>Basically, it's all extremely flaky seeming stuff. This brings me to the thing that makes me worry more: Who developed the code for Bitcoins? How do I know it is secure? The people that seem to be most involved in Bitcoin discussions seem to be...well, kinda dumb. I don't trust dumb people to build strong encryption (I don't even trust smart people to build strong encryption, unless they're talking it over with lots of other smart people). Reading the FAQ at Bitcoin.org doesn't do much to alleviate my concerns. There's another FAQ in the wiki that mentions SHA and a few other reassuring things, but I'm not having much luck finding the real meat of the thing, and names of people responsible for the security of the system.<p>In short, if this is a serious virtual currency implementation by people who understand the security implications of such, I'm unable to find strong evidence of that fact. And, so, I worry about dealing with it.

I'm getting sick of hearing about bitcoins already, and I'm pretty sure I'm going to get more sick of hearing about them over the next year or so. (Then, one day, I'll mysteriously never hear about them again.)<p>Why? Because everyone who owns some of this intrinsically worthless asset immediately has an incentive to start working on talking them up. Social news sites are the front line of this battle... write a story about how they're going to be the next big thing and submit it, and you can be guaranteed a bunch of upvotes from everyone <i>else</i> who owns some bitcoins. This story alone probably caused at least a 10% increase in the value of 'em.<p>Personally I'll buy some bitcoins the moment they become exchangeable for pogs.

By my understanding, this system requires <i>every</i> transaction to be published to <i>everyone</i>, and to be remembered <i>forever</i>. That sounds like it inherently can't scale very far.<p>Details:<p>The basic data structure is a hash-chained list of blocks of transactions, with each block including one transaction of XX bitcoins from /dev/null to whoever generated that block. A node trying to calculate a next block include all (valid) transactions it knows. If the list branches, nodes ignore the shorter branch (this makes transactions more secure as they get older, assuming the swarm has more computing power than any troublemakers; so the time for a transaction to "clear" is whenever you trust that there are enough later blocks). In order to know if a transaction is valid, the node needs to have the prior transaction(s) that the involved bitcoins came through last (and any other subsequent transactions of that prior one). That prior transaction could be arbitrarily far back.

I might have considered this a good idea, before I played SecondLife with Linden dollars, or used points on Listia, or got gold on Gaia Online.<p>The problem with these virtual currencies so far is that they're very unstable and they suffer from quick and dramatic deflation and inflation (usually the latter) that makes them absolutely terrible as primary currencies if you don't want to starve to death.<p>This isn't to say that gov't backed currencies don't have this problem; far from it: <a href="http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation" rel="nofollow">http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...</a><p>Keeping currencies stable is very difficult, which means that I'm really nervous about any system that isn't well-established already. It's not a guarantee, but it's better than nothing.

The problem with deflation though is that it encourages people to save them and not spend them. Why would you create a currency which is meant to deflate? In most cases, deflation is worse than inflation.

I'm a reasonably long time HN'er, and also just got back from a business trip with the owner of Mt. Gox, really the only working BitCoin exchange. In fact, I'm in Liberia, Costa Rica right now, checking HN waiting to fly home from my trip, and I saw him this morning.<p>We have, in fact, been discussing a co-founder partnership deal, so I have lots of right-now thoughts... Here's my summary on BitCoins, and what I think the system needs:<p>There are currently four categories of people interested in BitCoins:<p>1) Deflationary Currency wonks / Gold-standard tinfoil hat types<p>2) Crypto and Currency Nerds<p>3) Speculators<p>4) Russians<p>Here is what BitCoin is good for:<p>Semi-anonymous-to-the-rest-of-the-world transactions of bitcoins, accomplished relatively quickly with no regard for global borders.<p>The system is reasonably anonymous, reasonably secure and makes some fundamental innovations in how value is transferred around: Consider if you can think of any other digitally transmitted, no-central-authority, semi-anonymous value systems. I am unable to think of any, and have been thinking for a number of months now.<p>To naysayers like SwellJoe, I have a degree in Theoretical Math and a background in Cryptography, and I have read, fairly thoroughly, the process and mechanisms used, and would say that the system does a reasonably good job delivering what it promises. Of course, it's open source, so go crazy and come back with an alternate viewpoint.<p>So, to my mind, there's clearly a place for BitCoins on the internet. I believe they will be useful in four possible scenarios:<p>1. For digital goods that one wishes to purchase privately.<p>2. For international value transfers<p>3. For activities like 'tipping' others on the Internet<p>4. In a credits-type system where the developer cannot or will not produce their own system, either because users do not trust the developer, or it's just easier to use an existing one.<p>I don't believe BitCoins will ever be useful in a currency-for-hard-goods situation, for a few reasons, one of which is that labor is unlikely to accept it (except possibly in Russia, or places where the government currency is seriously broken), the second -- extreme currency fluctuation against USD is likely to continue for some time.<p>There are roughly a thousand users of BitCoin right now, maybe 2k. The coins are released, 50 per 10 minutes, regardless of number of users. Consider -- what will happen when 10,000 or 100,000 new users enter the system? If the currency tips at all, or multiple times, it is highly likely that demand will push cost of BitCoins very high. So, this makes it an appealing thing to speculate in right now, of course. And, might make you wish to participate in an online exchange as a founder.<p>To counterbalance, the issue of running an exchange for BitCoins has a few major hurdles. A quick scan of my listed usage scenarios indicates that Bitcoins are best for money laundering russian mafia and porn sites. Combine that with the fact that an exchange is allowing people to trade a fungible currency derivative semi-anonymously, and you have a LARGE raft of legal items and compliance issues to take care of. I've had three separate estimates run in the roughly $1mm to do filing and compliance, US only. Ouch!<p>To counter-counter-balance, if I ideate properly, a well-run BitCoin exchange could conceivably be a sort of Paypal/Visa competitor -- providing merchant services and easy payment transfers to a wide range of people who really need it. That's appealing.<p>I hope this has been interesting, I enjoyed getting my thoughts down on HN paper.

I wonder if it's possible to pool computing resources and share the resulting bitcoins. Having to wait one year for a block (50 coins) is a real turn-off.<p>Consider using up 0.2kW continuously for a year (a typical mid-end PC at full load), with the local price of 13 cents per kW-hour, it works out to about $228 worth of electricity for 50 coins (note the computer itself would depreciate in this time). That means $4 per bitcoin minimum costs, far above the 20 cents at which it is trading now.<p>What are your costs where you live? Calculate:<p><pre><code> cost_per_coin = 0.2 * 8765 (hours in a year) * your_kWH_price / 50 or cost_per_coin = 30.56 * your_kWH_price</code></pre>

According to the FAQ it takes about a year to generate 50 bitcoins, and at the current exchange rate they'll be worth about $12.50 USD. That's very little value for a year's worth of computation, and they're still quite rare. As more are created the exchange rate is going to drop unless they become very widely accepted, but there probably won't be enough of them to support a large economy.

Bitcoins sound interesting, however I don't like the fixed 21 million limit, which the bitcoin community seem to promote. A fixed limit means all the people who got started early and have thousands of bitcoins will then be very rich and wealthy in this new currency.<p>Sounds like bitcoin community has a lot of the "inflation is bad, back to the gold standard" pseudoeconomists

Very interesting. I've always been interested in virtual currencies (and virtual countries, anyone remembe freedonia?) but as the author mentions they've mostly fallen prey to money launderers. I think it's an interesting experiment to limit the money supply, it gives you an incentive to get involved _right now_. I'll be trying it out, anyone else?

21 million bitcoins seems like a low limit to set. According to <a href="http://newlibertystandard.wetpaint.com/page/Exchange+Rate" rel="nofollow">http://newlibertystandard.wetpaint.com/page/Exchange+Rate</a> the exchange rate is currently 221 Bitcoins per USD, so the total value of all possible bitcoins is only 95000USD.