Bitcoin Explained

Bitcoin is a digital currency and payment system created by Satoshi Nakamoto, that uses peer-to-peer networking and various encryption mechanisms that keep transactions anonymous. Unlike Paypal which acts like an online bank account for real-world currencies, Bitcoin uses its own unit of currency (Bitcoins), which can be traded with real-world currencies or used to purchases products and services online.

The identity of Satoshi Nakamoto is not known, but here is a popular rendition used for an Internet meme. Nakamoto developed Bitcoin in order for people to undertake free trade outside of the scope of politicians and the predatory global banking system.

Although Bitcoin is decentralized and somewhat autonomous, the network which was launched on January 3, 2009, keeps public electronic records of all completed transactions. No identifiable information is stored in the database, rather it is used as a validation method to show the system is running smoothly.


To begin using Bitcoin, users are prompted to download a piece of open-source software, simply known as Bitcoin (Download Here). This client, sometimes called a wallet, connects to the P2P Network and allows users to send and receive Bitcoins. The client generates a unique Bitcoin address (string of characters) that users need to provide when receiving Bitcoins. When sending Bitcoins the user must obtain the receiver’s address.

Alternatively users can use an online wallet service that does much of the same but doesn’t require any software. This is potentially more risky because you’re entrusting a third party with your coins.


When a transaction is made various cryptographic mechanisms come in to play behind the scenes. A user’s address is given what is known as a public key, which publicly (although encrypted) associates the coins in the wallet with their address, and a private key that we can say unlocks the coins for a transaction. When Bitcoins are sent to another user the private key verifies that the coins being sent belong to the address and have been queued for sending to somebody else. A message is then sent across the P2P network to the receiver’s address, which attaches the receiver’s public key to the coins. This is broadcast and logged across the Bitcoin network as a successful transaction.

Because of the P2P system and the verification process, sending and receiving Bitcoins is not instant. The record of a transaction is kept within what is called a block, which in turn is kept within the whole block chain. All computers with Bitcoin software running have a copy of the block chain, which is continually passing new blocks of transactions back and forth between peers. Each new block contains all the transactions that have been sent since the previous block. Before a transaction is considered safely confirmed it needs 6 confirmations, which means 6 peers have received the block containing your transaction. Depending on the amount of peers connected, this can take anywhere from a few minutes to a few hours. It will never take longer than a day.

At the bottom of the basic Bitcoin software screen you can see how many peers you are connected to, the total number of blocks you’ve helped process, your number of personal transactions, and in the large window a list of those transactions and how many times they have been confirmed.


Unlike fiat currency used by most modern banking systems, Bitcoins are not printed out of thin air by central banks or loaned in to existence as credit by high street banks. Bitcoins are a true representation of value because there is a finite amount.

Every block introduces 50 new coins in to the system, gradually approaching a total amount of 21 million. This limit of 21 million Bitcoins is hard-wired in to the protocol, and there will never be more Bitcoins than this. It will reach this point by around the year 2033.

These coins are generated by “mining”, a process where volunteer computers are specifically set up to create coins. This requires additional computer hardware and incurs electricity costs. It’s not particularly financially beneficial to be a miner, because of the costs involved and the amount of users simultaneously mining.

Coins can be traded in the tiniest of fractions, meaning scarcity is not an issue, the market will simply define how high or low the exchange rate is, in relation to the wider economy. Products and services may ultimately be priced in hundredths or thousandths of a Bitcoin if ever the scale of the Bitcoin economy warrants it.


To begin with one of the most troublesome aspects of the system was how to actually obtain Bitcoins. Other than having very small amounts donated to you or going to to the trouble of mining small amounts, the only option is to use a traditional currency to buy them. This requires joining exchanges, making bank transfers etc, which can be risky and time consuming. Now the system is further along there are several user friendly and trusted exchanges. is a service that allows users to buy and sell Bitcoins using US Dollars, UK Pounds, EUROS, and the Polish Zloty. The platform was developed and is run by the Bitcoin Consultancy company, who have been featured on news pieces by the BBC, CNBC, Wall Street Journal, Reuters and others.

The process is relatively straight forward if you have online or telephone banking. After signing up users deposit real-world money in to their account via bank transfer and then when this transaction is complete, the money can be used to buy Bitcoins from other users. A recommended exchange rate is set based on the market, or you can check the table for users wanting to sell their coins instantly at their own chosen rate, which can be lower or higher than the market.

If you choose to buy at the recommended rate or a significantly better rate, the order is queued until it can be matched with a seller. If it cannot be matched within a time-frame you find reasonable, you can cancel the transaction and choose a different rate. For those that simply want to buy Bitcoins and spend them as fast as possible, the best method is to look at the seller table for the best rate which corresponds with the amount of coins you want to purchase. This will be an instant transaction. It’s unlikely the seller rate will be grossly different from the recommended rate.

If you do not want to be exposed to fluctuations in purchasing power it’s recommended to only purchase Bitcoins you are willing to spend right away. Purchasing large amounts and sitting on them without knowledge of the markets may leave you with less bang for your buck as the Dollar or Pound, or Bitcoin rises and falls.


One of the more popular controversies with the Bitcoin network emerged thanks to its anonymity and subsequent use on the black market. In 2011 there was widespread media coverage of a secretive website called the Silk Road, where users can buy and sell illegal drugs and weapons. The website is accessed by using a program called TOR, which hides the location of a user’s computer and IP behind a series of proxies and advanced privacy protection methods.

The site is effectively an Ebay of illegality. Users deposit Bitcoins, buy and sell anything from Marijuana to Heroin, and send and receive the goods via the regular postal service. If satisfied, feedback is left praising the buyer or seller.

As reported by

About three weeks ago, the U.S. Postal Service delivered an ordinary envelope to Mark’s door. Inside was a tiny plastic bag containing 10 tabs of LSD. “If you had opened it, unless you were looking for it, you wouldn’t have even noticed,” Mark told us in a phone interview.

Mark, a software developer, had ordered the 100 micrograms of acid through a listing on the online marketplace Silk Road. He found a seller with lots of good feedback who seemed to know what they were talking about, added the acid to his digital shopping cart and hit “check out.” He entered his address and paid the seller 50 Bitcoins — untraceable digital currency — worth around $150. Four days later, the drugs (sent from Canada) arrived at his house.

“It kind of felt like I was in the future,” Mark said.


WideShut has successfully bought, traded and spent Bitcoins using the website.

Waiting a day or so for bank transfers and then an hour or so for Bitcoin transactions can be annoying, but the system works and can only improve.

The anonymous aspect of the system is very appealing in today’s tracked an traced society, but whether Bitcoin can replace the corrupt financial system and become a people’s currency rests with the people. Could Goldman Sachs buy up all the Bitcoins? Could it be hacked? Could western Government make it illegal? Quite possibly, but that could happen with anything; it will take the people to make it work and safeguard it from threats.

The fact that new ideas are blossoming is a huge leap in the right direction and it can’t hurt to give Bitcoin a try.


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