Here are answers to some common questions posed by those new to bitcoin.
What makes bitcoin special?
There are many different electronic payment systems, but Bitcoin is special because of these features:
- Bitcoin transactions cannot be censored. You can pay anyone in the world at any time you like. You can run your own desktop or mobile wallet with control over your private keys and no one can freeze or confiscate your bitcoins. There is no central organization that can stop you from using your bitcoins as you see fit.
- Bitcoin transactions are irreversible. Once a bitcoin transaction has been confirmed enough times – 6 confirmations is the widely accepted number – it cannot be reversed by anyone. This means that when you have received bitcoin there is no risk of payment reversal or payments fraud. The downside to this is that bitcoins that are stolen or accidentally sent to someone cannot be recovered.
- It is decentralized. Other payment systems are centralized and governments and powerful groups can exert pressure on the central organization controlling those payment systems to censor transactions, freeze accounts or otherwise restrict the use of the payment system. Bitcoin is not beholden on any central organization. It is a peer 2 peer currency.
- It is an open system. Bitcoin is a totally open system. Anyone can buy bitcoins and transfer them to anyone in the world. There are no gatekeepers whose permission you need to get. You can download free and opensource bitcoin wallet software and receive bitcoins to it. There is no need to sign up anywhere or submit personal information.
- It is programmable. Computer programs can receive and send bitcoin. Autonomous systems may one day be built that use bitcoin.
- It is cheap. Currently sending bitcoins is very cheap. The default transaction fee is just ₨ 7.50 per kilobyte and most transactions are about 200 bytes. The amount of money transferred does not affect the fee, so you can transfer huge amounts at a low fee.
However, while bitcoin itself is an open and unrestricted system the conversion of fiat to bitcoin is often regulated by governments. Once you have your bitcoins though you are totally unrestricted as to what you can do with them.
How does bitcoin work?
You can read about getting started with bitcoin. If you are interested in the technical side of things you can read about how bitcoin works.
Where can I buy or sell bitcoins?
In Pakistan you can buy or sell bitcoins from traders on Local Bitcoins. Local Bitcoins is a site which facilitates trades between buyers and sellers by providing a virtual meeting place including an escrow and feedback system. There are many Pakistani traders active there and they support local payment methods like bank deposit, Easypaisa and even hand-to-hand cash trades
What is the best wallet?
There are lots of different wallets and they all have their upsides and downsides. The bitcoin.org website has a summary of the various wallet options.
I recommend a desktop wallet called electrum. If you want a mobile wallet then mycelium for android is pretty good.
Why is a bitcoin so expensive?
People who ask this question often have a misunderstanding of bitcoin. You don’t have to buy a whole bitcoin. You can buy fractions of a coin. Each coin can be divided into 100 million pieces i.e. to 8 decimal places. So while a whole coin may cost tens of thousands of rupees you can buy any fractional amount you feel comfortable with. Sending and receiving bitcoin works the same regardless of the amount of bitcoin you have. Fractions of a coin are bought and sold at the same rate as a whole coin.
Now as to why a bitcoin costs as much as it does? The reason is that there will only ever be 21 million bitcoins so it is a deflationary currency. That is why bitcoins will rise in value over time if the trend of increasing consumer adoption continues.
What do I have to give the sender in order to receive bitcoins?
You have to give him one of the receiving addresses in your bitcoin wallet. An address is a set of numbers and letters that begin with ‘1’. An example:
There are also multisig addresses that begin with ‘3’ but these are rarer.
Why do I have more than one address in my wallet?
Because all bitcoin transactions are public it is recommended that you use a different address for each transaction so that you have some semblance of privacy. It also helps you keep track of who sent you what amount when you use a different address per transaction.
Can I use any of the addresses in my wallet?
Yes you can use any of the receiving addresses in your wallet.
Can I continue to use my old address more than once?
Yes you can continue to use your old address as many times as you like. It will continue to work.
Do I have to keep my bitcoin wallet running to receive bitcoins?
No you don’t.
Where are my bitcoins stored?
Bitcoins are actually values recorded in a public ledger called the Blockchain. This ledger is secured by cryptography. Every computer running bitcoin core software has a copy of the Blockchain. In short your bitcoins are out there in the “cloud”.
Your wallet stores your private keys that allow you to spend your bitcoins. If you want to know more about how bitcoin works please read this article.
How can I get started with mining?
It isn’t feasible to mine bitcoins in Pakistan. Bitcoin mining is done with specialized devices called ASICs on an industrial scale in data centers. ASICs are not available in Pakistan and you would have to import them yourself. Even if you managed to get your hands on the latest ASICs you would still face some of the highest electricity costs in the world in this country. You also will not enjoy the economies of scale that the large scale miners in other countries enjoy.
People mining cryptocurrencies in Pakistan use commodity PCs with GPUs to mine alt-coins. Alt-coins are bitcoin clones that come and go practically every day. People mine them, hype them up and then sell them off for a quick profit at the expense of others.
This then is the reality of mining. If you want to learn more then you need to do your own research on the bitcointalk forums.
How do I make money with bitcoin?
Bitcoin is a digital currency. It is not a get rich quick scheme. If you want bitcoins you will have to either buy them or earn them by selling goods or services for them.
However, there will only ever be 21 million bitcoins so in the long term bitcoin is deflationary. This means that if you are willing to hold your bitcoins for years they might appreciate in value.
What will happen when all the bitcoins are mined?
Over time transaction fees will increase to compensate miners for the fall in block subsidy. Eventually transaction fees will be all that miners get for their work.
How can 21 million bitcoins ever be enough for the whole world?
Each bitcoin can bedivided into 100 million pieces i.e. to 8 decimal places. The smallest such unit is called a ‘satoshi’ after the founder. There are quadrillions of satoshis in 21 million bitcoins. There is more than enough divisibility for a global currency.