Understanding Bitcoins: Bitcoin, Litecoin, Whatcoin? Oh My!

You’ve probably heard of Bitcoin by now, and at the time of this writing, meaning mid-April 2013, it’s currently experiencing a blossom that has caught everyone by surprise and made a lot of people very rich.

What you may not know, though, is that Bitcoin is just one of several emerging virtual currencies. Bitcoin is definitely the biggest, but it’s important to understand the other currencies too, especially if you plan on investing or mining coin.

In this article, part of the Understanding Bitcoin series, I’ll talk about each of the different cryptocurrencies and what distinguishes them from each other. I’ll focus mostly on the two largest, Bitcoin and Litecoin, and then give you a brief overview of some of the other cryptocurrencies out there.


Let’s start with the basics. A cryptocurrency is a virtual currency that people use for various purchases. Currently, it’s used a lot of places online, but even offline brick-and-mortar stores are beginning to accept cryptocurrencies. This is especially true for Bitcoins.

There are already several cryptocurrencies in existence, each having slightly different characteristics and have uses in different scenarios. Which one will be used and which will die is a matter of great speculation, and as with all things that have a geeky nature, it’s often becoming a debate of passion. When I read these debates, I’m often reminded of Linux vs. Windows vs. Mac debates, or Android vs. iPhone, or similar debates where the underlying differences aren’t really that huge but people still get massively passionate about their particular favorite.

What most agree, though, is that digital currencies have a place in society now, and especially on the internet. With the democratic, global, and decentralized nature of cryptocoins, the ease of use for anyone, the inherent security and potential anonymity, as well as the technical abilities, cryptocurrencies are starting to look like a perfect model for internet heavy economies. Cryptocoins, although certainly not the only form of digital currency, seems to have the characteristics that users and society covets.

Cryptocurrencies work in much the same way as regular currencies and are in their simplest form nothing more. It’s money, and that’s really all you need to know. Whether the money is worth anything is up to society, if society adopts it as an accepted measure of value, then cryptocurrencies have value just like ‘hard’ (or fiat) currencies. Adoption is rising rapidly so there is evidence to support the idea that cryptocurrencies have merit and thus value.

On the flip-side, cryptocurrencies are extremely young and nobody really knows where they will go. The technology hasn’t been proven on a large scale and we know there are inherent problems that need to be resolved at some point. We do not know how governments around the world will react, although we do know that the US have declared digital money as just another foreign currency, giving it at least some credibility. We also have no way of determining value. Cryptocoins can take over online trade completely, and if so, even the current pricing is ridiculously low, or not exist at all in a year or two, in which case any value is overrated, even at one US cent per Bitcoin.

For the purposes of the rest of this article, I’m going to focus on two of the cryptocurrencies that derive from the open-source Bitcoin code. Bitcoin was the first of these currencies, but several other currencies have since appeared with different characteristics making them useful and beneficial in different situations. The other one is Litecoin.

Bitcoin (BTC)

Bitcoin was the first and remains by far the largest cryptocurrency. It is largest in market capitalization, acceptance by merchants, transactions, and mining power.

On the downside, Bitcoins’ size is starting to become a problem, or will shortly. For example, by design, a particular transaction block can be up to 1 Mb in size and must contain every transaction since the previous block was solved. This means that as more transactions happen, the block fills faster, and some transactions must wait until the next block, delaying transactions.

The mechanism designed to solve this is a voluntary transaction fee, which is added to the bonus of the block. As Bitcoin evolves and transactions increase, this voluntary transaction fee becomes the main revenue for mining operations, and if the market decides so, the fee will effectively be mandatory by giving low fee transactions less priority and slower transaction times, with a larger fee ensuring a faster transaction.

At the moment, mid-April 2013, BTC is seeing a rocket ride in terms of price. Be aware, though, that the actual value (as opposed to price) is still very undetermined and absolutely unknown. Anyone claiming to know is wrong at this point, whether they are warning against a bubble or hailing this as the most important thing on the planet.

Bitcoins have a fixed distribution rate and will end up with a maximum of 21 million coins. Most of those coins will be mined by 2032, though so after that (or even before) transaction fees will make up most of mining profitability. Bitcoins are mined using an SHA-256 based algorithm.

For Bitcoin based financial and investment services, there are currently both currency exchanges and stock markets, and other services from traditional financial markets are emerging. Still, because of the nature of Bitcoin, there is no government regulation or guarantees for these markets, so it is extremely risk to invest in BTC-based markets. The largest BTC/USD exchange by far is MTGox. Two other prominent currency markets are BTC-E and Vircurex, while MPEx (large, but expensive and somewhat difficult), BTC-T (smallest but easier), and Bitfunder corners the market on stock trades.

Litecoin (LTC)

Litecoin is the second largest cryptocurrency at this time, but is still much smaller than Bitcoin. Although the relative size varies in terms of market capitalization, at present the Litecoin economy is about 1/30 the size of Bitcoin.

Note: Numbers are based on sizes from http://dustcoin.com/mining

Litecoins have some different characteristics from Bitcoins. First, it is mined using a slightly different algorithm, called Scrypt, which is more resistant to massive mining rigs than the SHA-256 based currencies. That means that even personal computers, provided they have sufficiently powerful graphic card, can still participate in profitable mining.

Note: For a mining operations guide, read the previous post in this series on cryptocurrency mining.

Litecoins like Bitcoins are limited in total number of coins too, but its limit is 84 million coins. This really has nothing to do with its price or value, and because Litecoins are generated at a much faster rate, it evens out in the long run.

When I say that the Litecoin economy is much smaller, I mean much smaller, not just in market capitalization but also in adoption. Adoption is growing, though, but it looks like the community and merchants are waiting to see whether Bitcoins take off. Few merchants accept Litecoins yet, at least compared to Bitcoin, so its circulation is mostly based on person to person transactions and not so much for purchasing products or services.

On the plus side, Litecoins have a faster rate of block generation. Where Bitcoin blocks are designed to appear every 10 minutes, Litecoin blocks appear every 2.5 minutes. This has the benefit of giving potentially quicker and cheaper transactions, although it doesn’t necessarily mean that it will be quicker or cheaper.

Also, as the largest of the alternative cryptocurrencies, it may take a place as a backup currency in case Bitcoin transactions have issues like high fees, slow transactions, or even technical issues. Adding support for Litecoins once a merchant has support for Bitcoins is easier than trying to add other backup payment alternatives.

At the moment, Litecoin price is tied closely to the price of Bitcoins, so a rise in Bitcoin price often lead to a rise in Litecoin price. Litecoins are mined using a Scrypt-based algorithm.

Note: You can see an exchange rate for LTC to BTC or USD on BTC-E http://btc-e.com/. MTGox, the largest Bitcoin exchange in the world, is rumored to introduce Litecoin support soon.

Other Cryptocurrencies

Bitcoin and Litecoin combined make up more than 99% of the market at the moment, but that doesn’t mean they are the only currencies available. Other currencies exist, perhaps with more obscure characteristics, and right now, nobody knows whether these will survive or grow alongside their bigger brothers.

Namecoin is a much smaller currency, even compared to Litecoin, having about 0.3% of the market share. It’s designed to work with identities, currently mainly through an alternate DNS system that allows for completely anonymous domain name registrations. Very much a currency and system for privacy freaks bit can also be used to provide secure identification services. Namecoins utilize merged mining, meaning they are mined alongside regular Bitcoin mining at no extra cost to the miner.

PPCoin is a somewhat different cryptocurrency that implements an alternative method of minting coins and securing transactions, called Proof of Stake (BTC and LTC uses Proof of Work). There are several benefits to this, and the details go beyond the scope of this article, but feel free to read up on it on the PPCoin Github wiki.

Devcoin is a coin designed to support open source development, where mining generates revenue for open source projects. 90% of coin generation goes to open-source projects, the distribution of which is done through bounties administered by a democratic voting process. Anyone can apply and three random administrators vote on whether to approve the project, thus giving revenue to the project.

Novacoin is a bit of a controversial coin due to allegations of fraud in the introduction of the coin. The founder allegedly pre-minded a lot of coins before the introduction, many or all of which were used in a bribe and later destroyed (read more). It is the only alternative coin that uses Scrypt for mining (like Litecoins) so it may be an alternative to Litecoins, should Litecoins need one.

Terracoin is a relatively new coin that has seen some recent troubles due to its similarity to the Bitcoin code. In short, the profitability of mining rose drastically in a short time, making it practically worthless for normal miners to support. The developers have taken steps to correct the issue, which may help the coin survive.

Freicoin is another very interesting but obscure currency with some pretty remarkable characteristics. For one, it effectively implements negative interest, meaning you need to spend your money unless it loses its value gradually through Demurrage. The argument for this is that holding money is bad and circulation is good, encouraging investors to invest and banks to loan rather than hoard money.

Why, Oh Why?

With all these different types of coin in existence, it’s pretty clear there will be confusion for many people. The risk is huge like we saw with Terracoin, that technical issues and exploitation may kill smaller coins completely. New and innovative algorithms may stall this or prevent it completely, but it’s still a very immature technology and subject to malicious intent, like most other technologies.

However, it also shows that there is innovation in the way money works and should work and what society wants from its currencies. Cryptocurrencies is a great tool for encouraging innovation in monetary scenarios.

Even more, we have only seen the start of this innovation, perhaps at the level where the web was around 1997 when it too was four years old (Bitcoin is four years in 2013). Nobody knows yet whether this is a passing fad or whether the world is ready for new ways of using money, but if nothing else, Bitcoin and its smaller siblings have already had an effect on people’s minds.

I’m rooting for the future!


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Understanding Bitcoins: Cryptocurrency Mining Equipment and Preparation

In the previous post of this series, I explained that you can make your own money in cryptocurrencies. That’s right, you make your own money. Feel free to read it again so I don’t have to repeat myself.

This may not be for the faint of heart, though, and will require that you do some research. In the end, your cost may exceed your earnings, so you don’t want to based your pension on mining coins unless you’re prepared to spend considerable time preparing.

For the purposes of this article, I’ll be using examples from mining Litecoins. Litecoins is a cryptocurrency, a younger and much smaller brother of Bitcoin, that uses a slightly different algorithm for mining than its big brother. I’ll explain more later in the article.

Oh, and the article is written in mid-April 2013, so chances are high that the numbers will be wildly different at a later date (better or worse; it will likely be different).

Mining for Money

In terms of cryptocurrencies (of which Bitcoin is the major player), mining refers to the process by which new money come into existence. This process is performed by performing massive amounts of calculations and then by sheer luck ending up with a certain result that matches a pre-determined value. I explained this briefly in the article Making Money!

This may sound strange, but works very well and is a very fair way of distributing money. You get more money if you put in more computational power.

It does, however, favor the geeks who are willing to spend the time to do the mining. Mining for coin is certainly not as easy as double-clicking Setup.exe and accepting all the defaults.

You need to make sure you have the right hardware. Technically, you can mine on any computer, but chances are you may be spending more money in electricity than you gain from the venture. Next, you need the right software and the patience to learn how it works, and to be honest, it’s quite hostile at times.

Finally, you need to get your expectations right. It’s easy to get blinded by the initial earnings you can reap from coin mining, but you’ll likely have a rude awakening before long unless you know what to expect.

Let me elaborate on these details.


TL/DR; If you don’t have a high-end graphics card, you won’t make money.

The first consideration you need to make is what hardware to use. Now, you may have a brand new laptop that you’d want to use to mine or you have an old PC laying around that’s collecting dust, and you want to see whether you can get some money from it.

Chances are, you won’t make any money, and in fact may lose money due to power cost, unless you have a high-end graphics card, and preferably one from AMD.

The reason for this is simple; the computational tasks you need to perform are perfect for the graphics processing unit (GPU) of your graphics card, but utterly inefficient for a CPU. Your CPU is designed to perform a wide variety of tasks while your GPU is designed to do only one thing; crunch numbers by the billions. You can read more about why a CPU is inferior to a GPU in the Bitcoin Wiki.

A good high-end card, though, may pay for itself over a few months, so if you’re planning on upgrading your gaming PC in any case, then you may actually get the graphics card partially of even fully paid for by using it to mine coins.

By high-end graphics card, I mean the top two or three cards on the market. You always want to get an AMD card, for example a Radeon HD7950, over an nVidia Geforce card, for example, because the Radeon cards have more ALU pipelines than Geforce. If that tells you nothing, think of it as AMD having more but simpler ways of doing calculations. This means you can get more simple stuff done per second, often by a factor of 4-5 in favor of AMD, which is all that matters in coin mining.

How much money can you make from a card? Well, it greatly depends and it goes down over time. It’s impossible to accurately predict how much money you will make, but you can get a pretty good estimate by using numbers from a mining hardware guide and putting those numbers into a mining profitability calculator.

Note: The Dustcoin mining calculator at http://dustcoin.com/mining will show you the profitability of several cryptocurrencies so you can pick the one that gives you the most money.

Give Me Power!

TL/DR; You want enough power and a good PSU. A cheap or bad one may cost you money or lost revenue.

And important consideration in mining profitability is your power consumption. This is a reason why older machines perform far worse; they are simply less power efficient.

When you start mining, your power consumption will skyrocket. At idle, a GPU may consume 40-60 watts, but at full peak, a 7950 can easily drain 250 watts or more if you overclock it.

As such, keeping tabs on your power cost is vital to figuring out whether you will make money. For most older computers, they consume so much power and generate so little computational power that the calculations simply don’t add up.

As an example, my rather old Intel Core 2 Quad Q6600 CPU will generate around 14 kilohashes per second of computational power, but will consume 105 watts of power. Putting that into the mining calculator at at present, I will earn a whooping US$0.27 per week mining Litecoins. However, my new 7950 GPUs generate around 550 kilohashes per second (around 40 times as much as the CPU) consuming around 200 watts of power at peak. Put that into the calculator, and at present, it will generate around US$83 per week.

Note: Yes, those examples contained a lot of new terms. I’ll explain in a moment.

Because you need a lot of power, you also need to make sure your power supply unit (PSU) can cope. If you are building a new machine for the purpose of mining, that means a high-end PSU too. Expect around 200-250 watts per GPU plus 100-150 watts for the rest of the system. Also make sure you have a quality PSU; in terms of system stability, not all power is equal, and a bad PSU may seriously affect your mining operations and reduce profitability by giving you less than peak performance and possibly downtime.


TL/DR; If you hate tweaking settings through a user hostile interface, you are out of luck.

The choice or software for mining is simpler, because in reality, there are just a couple of options. You can either use Reaper or cgminer. At the time of this writing, Reaper seems to be a dead project and the normal download links are dead, so cgminer is your weapon of choice.

cgminer is a free tool that is incredibly well designed once you get to know it. However, it has a console user interface and you need to know what you are doing to work it properly. Not using it properly means you lose a lot of hashing power, as much as 40-60 percent. It requires constant tweaking until you get it to run at peak efficiency.

As an example, with its default setting, my new GPUs do around 250 kh/s, while properly tweaked, they run at over double that.


There is a nice graphical user interface version that will give you an easy way to just get started, but I highly recommend not using that. As for a non-tweaked cgminer, it will simply yield lousy results and you’re throwing money out the window.

In other words, you should expect to spend a fair amount of time tweaking settings and learning what yields the best results, or you should avoid the whole thing; it simply won’t be worth it.

Expectations and Results

After you’ve set up your mining operation, it’s time to start evaluating the results of your hard work and time to understand some of the terms I used earlier.

First, you need to understand that there are two types of mining for cryptocurrencies; SHA-256 and Scrypt. Every currency uses one of these methods, but both share the property of being far more profitable on a GPU than a CPU.

For SHA-256 based currencies (like Bitcoin, Namecoin, and PPCoin), you usually evaluate your efficiency in millions of hashes solved per second, or MH/s. For Scrypt based currencies (like Litecoin and Novacoin), you usually evaluate your efficiency in thousands of hashes solved per second, or kH/s.

Note: A further difference is that Scrypt based mining is resilient against ASIC mining due to memory requirements. ASIC mining refers to using specialized chips that do hashing very fast, by several orders of magnitude.

This does not mean that Scrypt based mining is 1,000 times slower or less efficient. In fact, at the time of this writing, the Scrypt based currencies are more efficient than SHA-256 in terms of return on investment. You can check Dustcoin for the relative efficiency of the various currencies.

Of course, the only proof is in the pudding, so the ultimate evaluation of your result depends on whether you make more money than you spend.

What Will I Earn?

Patience, grasshopper, it’s not as easy as giving an amount X which works in all or even most situations.

First of all, you need to understand that mining profits adjust based on the need and power of the network. The more power combined, the more difficult it becomes for everyone to find a correct solution to the problem. Thus, the more profitable mining becomes, the more people will want to mine, and the harder it gets, reducing profitability. Then, when people stop mining from lack of profitability, the difficulty decreases, and profitability rises again.

Note: Mining power moves between the different currencies in response to profitability. You can check the relative profitability on the Dustcoin mining calculator.

Due to this self-regulating characteristic,

What is your electricity cost? If you are mining on inefficient or older hardware, chances are your output is going to be less than the cost of your power drain. At the time of this writing, mining using your CPU is already obsolete, and for SHA-256 mining, even GPUs are falling behind the efficiency of ASIC miners.

What is the cost of your hardware? If you are purchasing new equipment to mine for currencies, you need to account for the cost of hardware over time, and this becomes a bit more complicated due to the self-adjusting difficulty of mining operations.

Let’s say you buy a new Radeon HD7950 card for $250, and put it through the hoops of tweaking until it reaches an output of around $10 per day. “Great”, you think, “I’ll have that baby paid off in a matter of weeks”.

Well, sorry to burst your bubble, Sunshine, but because the difficulty increases as more hashing power is added to the network, so does your profitability. At times, the difficulty has increased by 80-100% during a week, meaning your profitability may have dropped to $5-6 per day by the end of next week.

And yes, this will keep happening.

Oh, and let’s not forget that the reward for finding a block (which is how new coins are minted) goes down on a regular basis. That means that at predictable intervals, the profitability halves.

Get Rich Quick!

Here’s the bottom line, and I’ll elaborate on this further in a later article. If you think the price of cryptocurrencies is going to go up, there’s really no point in buying mining equipment. This may sound counter-intuitive, so let me explain.

First, though, allow me to thank Deprived over on Bitcointalk.org for explaining this somewhat counter-intuitive idea.

Let say you buy a Bitcoin right now at $250 because you think the price per Bitcoin will go up, and the future proves you’re right, sending the price per Bitcoin to $500 after a month. Now you can sell your Bitcoin and buy twice the processing power that you could when you started, because your equipment will be denominated in dollars.

Note: Denominated simply means its price is set in a certain currency

You won’t be nearly able to mine coins enough with your new equipment to warrant a repayment in a month. Most likely, you are looking at several months, probably more, before your investment has repaid itself. Of course, this also means that the Bitcoins you have mined will be more valuable.

Now, if you think the price per Bitcoin will fall, however, then buying your equipment now will mean you safeguard yourself against a drop in BTC prices because you’ve not invested anything in Bitcoins per se. Let’s say the price of a Bitcoin drops to $125; you can now buy two Bitcoins for the same dollar amount, so sell your mining equipment and buy two Bitcoins instead. Again, with the reduced Bitcoin value, your mining operation has likely produced a loss.

I’m not going to give financial advice, because I really suck at it, but you need to understand that the prospect of making your own money is more complex than you think. If you’re not willing or able to properly evaluate the investment before you begin, your chances of getting rich as opposed to losing money is minute.

Thanks for reading, and don’t forget to tip your waitress.


Understanding Bitcoins: Making Money!

No, this isn’t about SharePoint, like my blog usually is. So sue me! It’s my blog and I do whatever I please, so suck it up rather than complain.

In this series, I’ll explain what Bitcoins are, how they work, and offer some thoughts and opinions. Feel free to leave comments or questions, and I’ll try to respond.

In this part, I’ll tell you how Bitcoins appear, and even how you can make your own money for free. No, it’s not an April fools joke; you can actually create your very own Bitcoins.

Sounds fishy? Read on and I’ll explain how it works, and more importantly, why it works.

Refer to the bottom of this article for other parts of the series.

Make you Own Money!

One very unique characteristic of Bitcoins is that you can make them yourself through a process called mining. I’m certain that sounds dubious at first, so let me explain briefly how that works. I’ll write this as simply as possible, so there will be some shortcuts that may make analogies inaccurate, but the principles are sound. If you want further information, check out the Bitcoin wiki.

Bitcoins creation is based on a concept called proof-of-work, which means that to get them you need to prove that you have done something. In the world of Bitcoins, that ‘something’ is generating hashes, which is a cryptographic tasks based on the fact that a hash is difficult to reverse but easy to create. This, in fact, is a key factor in all modern cryptography; a task is easy to verify but difficult to do.

Note: If you don’t care about the details, think of it like this; it is very difficult to predict a dice roll before the roll, but very easy to verify afterwards whether the prediction was right.

In Bitcoin terminology, the difficult task is to generate a cryptographic hash which has certain properties from a data ‘block’ of transactions. You can’t reverse engineer a hash, but you can easily verify whether it is correct once you have it. In Bitcoin, the properties of the hash which makes it a valid solution is that the hash should be lower than a certain global ‘target’, and since there is no known way to start with the hash and reverse it back to its source, you are forced to calculate a huge number of hashes to find the ones that ‘solve’ the particular block by being lower than the target.

The target is somewhat important here, because it determines the difficulty of solving new blocks. The Bitcoin network is designed to let the entire world solve approximately six blocks per hour. Of course, as computers become faster, the ability to solve hashes greatly increases, so to keep the rate steady, the Bitcoin network changes the difficulty my modifying the target required in the hash. So, if more computing power is thrown at ‘mining’, the difficulty increases, leaving the rate at a steady six per hour for the entire world.If fewer people mine, the difficulty decreases, and the rate is still steady.

When solving a hash for a given block, the ‘solver’ gets a reward in Bitcoins from the network. That reward is designed to decrease over time, but is currently at 25 BTC. In other words, if you solve one of these blocks and finds the right hash, you get 25 BTC.

Note: The reward is halved for every 210,000 blocks, so the next time it is halved, which happens in late 2016, the reward will be 12,5 BTC for a block.

Start Your Engines, or Don’t Bother

All of this means that you can start mining for Bitcoins by solving hashes right now. Your CPU is just sitting there doing nothing, and those wasted cycles can be used to generate Bitcoins which you can then use to purchase things or trade for other currencies like US dollars, Euros, Rupees, or Norwegian Kroner.

However, keep this in mind: Solving a particular block is very difficult on average. If you use a regular CPU then you may spend years before you are able to solve your first block and get the coveted 25 BTC (or even lower at a later date).

If you have a graphics card of some power, however, your ability to solve blocks greatly increases, by a factor of tens or maybe hundreds. The reason behind this is somewhat technical, but think of it in the way that a GPU is purposely built to solve massive amounts of simple calculations at the same time while your CPU is designed to solve many different tasks at once like manage memory, control hardware, and so on. Your GPUs ability to solve simple tasks at an astonishing rate means that it can generate hashes much faster than your CPU.

Check the resources section at the end of this article for information on mining, including software you need to mine.

However, you still will find that it will take a very long time to solve a block. There’s no accurate way to predict this because whether you find the right hash is simply a matter of luck, but as an example, on my Radeon HD6950 graphics card, having a fairly powerful GPU, it seems to take around 250 days to solve one block at the current difficulty. Again, not that this is completely random, so I may go for decades without finding a single one or I may find ten over the next hour.

There’s one other factor to put into the calculations. Because Bitcoins are rapidly becoming popular, several companies have made and are in the process of launching purpose built machines containing dedicated chips called ASICs that solve Bitcoin blocks at a rate that dwarves any current GPU. For a few hundred US dollars, you can soon buy Bitcoin ASIC machines that solve hashes at 300 times the speed of my current CPU, this reducing the time taken on average to just a few days.

Note: Remember that the rate of creation is steady so when these new monster ASIC machines enter the network, the rate at which current CPUs and GPUs can solve blocks go down rapidly. Because the difficulty increases, the ASIC machines won’t be as lucrative as the initial numbers may indicate.

Those were the bad news regarding mining, so let’s wrap up with some good news.

To counter the increasing difficulty of solo mining, several groups have formed mining pools. A mining pool works by having a large groups of people solve hashes together. When one of the participant in the pool solve the block, the reward gets distributed to all participants. Thus, instead of having to wait maybe months or years for a large reward, each participants get rapid but much smaller rewards. In fact, because the rate at which blocks are solved is steady, you can expect to get paid several times per day.

I’ve joined a pool called Slush’s pool, which is so far a stable and functional pool with a large enough group that it makes sense to participate and rewards are frequent. However, there are many other pools out there, so you may consider picking another one.

I’m Impatient – Give Me Bitcoins Now!

So, you want to get some Bitcoins, huh? Well, if you can’t wait around for mining to give you the huge piles of cash you’re unlikely to ever get, the alternative is to buy them. Again, this works just like any other currency; you exchange your money for other types of money.

The major difference is that, thus far, no traditional banks offers exchanges to Bitcoins. There are Bitcoin exchanges that partner with banks, like Bitcoin Central, but you can’t just go into any brick and mortar bank branch and ask to get Bitcoins moved to your wallet, at least not yet.

One reason for this is the irreversibility of transactions in Bitcoin. Where a traditional bank can reverse a credit card charge, once a BTC transaction has taken place, there’s no way to change it. Because banks and credit card companies in most civilized countries have responsibility for the charges made, this irreversibility doesn’t sit well with them.

This will probably be resolved at some point as digital currencies become more popular, but there are already ways for you to buy Bitcoins. I use Coinbase.com, a site that allows me to fund my Bitcoin balance directly from my US bank, but other exchanges offer similar funding options too. Very few offer the ability to pay with credit cards, though, for the reasons mentioned above.

Note: Be vary of anyone trading Bitcoins in reversible transactions and never sell Bitcoins using reversible transactions (including bank transfer, PayPal, credit card, and so on) to people you don’t know. Anyone can simply reverse the charges leaving you without money and without Bitcoins.

Getting Bitcoins take time because nobody wants to risk selling Bitcoins using a reversible transaction. You should always expect to prepay for your Bitcoins unless your marketplace of choice offers a direct link to your bank (like Coinbase).

Before You Jump Into Bitcoins

A word of caution, though. Bitcoins at the time of this writing (early April 2013), has seen an amazing rise in value and is currently trading at over US$100 per BTC. This may or may not be a bubble, and as for any investment, there’s always a risk that things can go terribly wrong. Don’t buy Bitcoins as an investment until you know about the risks involved in any currency speculation.

I am not a financial advisor and you should not listen to any financial advice I give you. Really. My personal opinion is that Bitcoins are extremely cool and I enjoy learning more and more about the technology. It’s equally fascinating from a technical point of view as observing how Bitcoins work in society.

I’ll offer further thoughts and ideas for Bicoins in future posts in this series.

Once you’ve gotten your Bitcoins, however, you can immediately start using them and enjoy low rates for transactions (free is as low as it gets), quick transfers, security, potential anonymity, and, of course, being part of the cool gang 🙂

Want More Bitcoin Information?

Check out these resources on how to get Bitcoins.

Bitcoin Wiki on Mining

GUI Miner for Windows

Install this to start mining. Make sure you have updated OpenCL drivers (graphics driver). I also highly recommend joining a mining pool first (see links below)

Slush’s Mining Pool

BTC Guild – Largest mining pool

Mining Pool Comparisons

Coinbase.com, my preferred purchase site

MTGox – Largest BTC Exchange