How to start using Bitcoins
Post date: Jun 07, 2011 3:22:15 PM
It's the hot new internet collectible coin: Bitcoin!
Only ~21million will ever be manufactured. Transactions are enforced by a peer to peer network of computers that is manufacturing new Bitcoins. When someone trades Bitcoins to you, the network remembers the transaction between "Bitcoin addresses". Your private "Bitcoin wallet" has the private keys to the public addresses you use for trades. Each address is used once, which makes the trades anonymous. Without the "Bitcoin wallet" files, there is no authorization to access those Bitcoins.
In June 2011, Bitcoins are currently appreciating rapidly, doubling their value every few days. However, there are very few ways to spend them. The majority of transactions are the buying and selling for "real money", and not using Bitcoin as a currency itself. Other uses include lotteries and gambling, which shift the currency around but don't provide tangible products or services. At some point the speculative bubble will end, but what happens after that is uncertain. Buyer beware!
A few weeks later, the bubble did indeed burst, and the market faced reality. As of August 2011, they've slowly deflated to about $9. Presumably, the dollar value will slowly decay until the number of uses for bitcoins increases.
My predicted "value of a Bitcoin" was the cost of "mining" one. This cost will rise over time, until all Bitcoins are mined. At that point, the market should start facing reality :) I've sinced learned this is one of the Bitcoin Myths. If the value goes below the cost to produce, people will stop producing them. The less production there is, the "easier" it becomes to mine bitcoins.
Sign up for Dwolla
If you're interested in buying Bitcoins as soon as possible, sign up for a Dwolla account right away. It takes a few days to get to the point where you can acquire Bitcoins for cash.
Security
The "weak point" to the Bitcoin system is the wallet. With an unencrypted copy of your wallet, an attacker can transfer your Bitcoins to their own addresses. There are several things to consider for Bitcoin wallet security:
Is your backup outside of your control, could it be misused or deleted?
What if your computer is stolen / lost / seized / reformatted?
How do you avoid having out-of-date copies?
I've decided on 3 rules for Bitcoin wallets:
There should be an encrypted copy at your physical location.
There should be an encrypted copy outside of your physical location.
Update the encrypted copies at both places after transactions.
I'll provide instructions for how to follow these rules, but feel free to make your own rules and procedures.
Installing Bitcoin client for Windows
Go to the bitcoin website: http://www.bitcoin.org/
Click the link for "Windows (exe)".
Save the executable, it will be downloaded from SourceForge as bitcoin-0.3.22-win32-setup.exe (or later).
Run the binary installer.
Click "Next >".
Choose a destination folder, then click "Next >".
Choose a "Start menu" folder, then click "Install".
Click "Next >".
Uncheck the box to "Run Bitcoin", then click "Finish".
Upon startup, Bitcoin client will try to establish connections to the Bitcoin network. If you are in a strict network environment, this will fail! This can be worked around by using a SOCKS proxy for connections.
Bitcoin keeps it's data in "%APPDATA%/Bitcoin/" directory on Windows. Read the debugging information in debug.log. By default, it will try to connect to many peers on port 8333. It will also try to establish an IRC connection to locate more peers.
Buy Bitcoins
To buy at a popular exchange website, use Mt.Gox . Buying on an exchange does not store Bitcoins there, but it does require depositing dollars. For that, the easiest method is to make a Dwolla account. This is similar to PayPal, but without the reputation for chargebacks. The danger with using PayPal for sellers of Bitcoins is when a buyer reports fraud to Paypal, even though they've received their Bitcoins.
Mt.Gox
The largest exchange. The site can be slow, and is sometimes targets of denial-of-service attacks. It's also possible the US Government will take action against them, as they are a LLC registered in Delaware. Mt.Gox acts as an escrow between people trading Bitcoins for dollars. https://mtgox.com/. There are several payment options, such as mailing a check, using a wire transfer, or paying from Dwolla. Fun fact: MtGOX originally stood for "Magic the Gathering Online Exchange".
Their reputation took a big hit after their internal site was hacked, and a large number of "fake" bitcoins were generated in their database. Mt.Gox's "actual" bitcoin values are independent of their counts for each user's coins, so nobody was actually robbed except for Mt. Gox when the hacker cashed in his Mt. Gox account for "actual" bitcoins. There was a week of downtime, and all passwords were reset.
To add funds to Mt.Gox:
I used Firefox, because Chrome wasn't displaying radio buttons! Remember to allow scripts on this page.
Create an account.
Login to Mt.Gox: https://mtgox.com/users/login .
Click the link to "Add Funds"
Under "Add $ US Dollars", select "Dwolla" and click the link to send to account #812-649-1010.
Select an Action: Send Money
Memo: It will be something like MTGOX#33333X, this probably relates to your Mt.Gox account.
Amount: The number of dollars to transfer. Dwolla will charge 25 cents for the transaction, no percent.
Scheduling: Single Occurrence
Account Info: Your Dwolla user email, password, and PIN
Click "Next Step".
"Funding" should show your Dwolla balance. If you have multiple accounts, you might make a choice here.
Click "Next Step".
Are you sure you want to send $XX.00 from your balance to Mutum Sigillum LLC? Click "Confirm".
You should see "Congratulations. You have successfully sent $XX.00 to Mutum Sigillum LLC".
You can review the transaction in "Money Out" section on Dwolla, and see Mutum Sigillum's contact information.
Click "Logout".
Adding funds is not instant. My transfer took 6 hours, it may take up to 12 hours.
Trading dollars for Bitcoins:
Check the amount of buy and sell orders using this link: http://bitcoincharts.com/charts/mtgoxUSD/accumulated_orderbook.png
Log in to Mt.Gox
Click "Trade Data" on the sidebar. "Last 48 Hours" shows recent prices, "Depth of Market" shows outstanding "Bid" and "Ask" prices. Use this information to plan your bid price.
Click "Trade" at mtgox.com (it is the default page after login).
The lowest priced trade available at this moment is listed.
The longer you are willing to wait, the lower you can offer for your bid. If you want coins right away, bid at the quoted price, or a little higher.
Click the "Price per coin in Dollars" and enter how much you will pay per Bitcoin.
Click the "Amount to buy" and enter the number of Bitcoins to buy at that price.
You may increase the hundredths of a cent you will pay per Bitcoin, since the total may be the same.
Click "Buy Bitcoins".
You will see a message "Your entire order can't be filled at that price. What remains is stored in your open orders."
At the bottom of the screen will be "Your Open Orders", showing information about your bid.
If someone sells Bitcoins at or below your bid, your order will be filled.
Note that Bitcoins bought on Mt.Gox are tied to your account there, and not yet part of your wallet.dat. If you trust Mt.Gox and don't want to deal with your own wallet.dat, you can leave them there. Also, if you intend to resell them on Mt.Gox in the near future, you will save transaction fee by leaving them there. Likelihood of being seized by the federal government: high.
#bitcoint-otc
To buy with no intermediary, go to IRC channel #bitcoin-otc on the irc.freenode.net network. This can be very risky, as someone you don't know on an IRC channel may take your payment and not deliver Bitcoins afterwards. PayPal won't be used, because the seller is at a huge risk of the buyer disputing the PayPal transaction. Currently, you will need to find a trusted seller, which can be difficult.
From the channel topic:
OTC marketplace for Bitcoin trading and
exchange. || http://bitcoin-otc.com/ || Bot's control sequence is
';;'. || Start with the ;;guide command. || Before you trade, talk to
people, and check user ratings. || Beware the FRAUDSTERS. ;;fraud ||
#bitcoin-pit for professional trading-only talk || Enjoyed your
trade? Support bitcoin-otc! 1F1dPZxdxVVigpGdsafnZ3cFBdMGDADFDe
From what I've read, the key here is their "rating system", described here: http://wiki.bitcoin-otc.com/wiki/OTC_Rating_System. I have yet to try a transaction here. There is also a lot of off-topic chat about bitcoin-related issues in this IRC channel.
Mining Bitcoins
You can "mine" Bitcoins by running software that calculates "blocks" used by the Bitcoin network. ATI 5800 series cards seem to be preferred for these types of calculations. Your odds of calculating a block could be quite low without a lot of machines working in parallel. The easier way to do this is join a Bitcoin mining pool. This shares the work between several people over the internet, making success for the group more likely and splitting the rewards based on the amount of work performed.
The Beginner's Guide goes into great detail. I'll show an example signing up with "mining.bitcoin.cz", but there are many pools to choose from. The key question for a mining pool is, will you be compensated fairly after performing your share of work.
Signing up
Click "Sign up HERE" in the top right.
Enter your information
Username
Email address
Password
Click "Register now!"
Check your email for info@bitcoin.cz, and click the activation link.
Sign in with your username (not email address) and password.
Enter your Bitcoin wallet address and click "Save".
Mining
For your Windows machine with GPU, start here:
http://www.newslobster.com/bitcoin/how-to-set-up-pooled-bitcoin-mining-in-windows