Common Questions About Bitcoin

Answers for the most commonly asked questions about Bitcoin.

How do I get bitcoins?

There’s lots of ways, see a list of methods here.

What are bitcoins backed by?

Bitcoins are not backed by any physical asset, bank, or government.

Instead, they are backed by math, cryptography, and a public distributed network with a hash computing power of over 740,000 PetaFLOPS (currently). As of this writing, the Bitcoin network is over 256 times faster than the top 500 supercomputers, combined.

But what does that mean? It means that many of the world’s citizens and companies have dedicated computers to constantly run and process Bitcoin transactions. And it adds up to a huge amount of computing power. Math and cryptography are used to prove individual ownership of bitcoins, while the computing power of the Bitcoin network is used to secure the the public ledger of all Bitcoin transactions against double spending.

Why should I use Bitcoin? I already have a bank account/credit card/Paypal account.

Bitcoin has lots of advantages over existing payment methods:

  • There is no centralized middleman controlling the flow of money, so your funds can’t be frozen, held, or subjected to arbitrary spending limits.

  • You can send nearly instant payments anywhere in the world for a very small, optional fee; usually equivalent to a few cents.

  • Bitcoin transactions are irreversible. For merchants, this means no chargebacks and a much smaller risk of payment fraud.

  • All Bitcoin transactions are on public record, so it’s possible to prove a payment has been made or personal ownership of bitcoins.

  • Bitcoins cannot be counterfeited or debased — only a finite amount of bitcoins can ever be created.

  • Bitcoin can be an anonymous form of payment if certain precautions are taken.

This is dependent on jurisdiction, but to date, no government has passed any law that makes Bitcoin or cryptocurrency illegal. See the BitLegal site for more information on specific jurisdictions.

Is Bitcoin anonymous?

No, not inherently. Bitcoin is pseudonymous, see an explanation here, as well as how to use Bitcoin anonymously.

Is Bitcoin a ponzi scheme?

No. A Ponzi scheme is a scam that promises the people who buy into it a certain return, yet the return is secretly paid using money from new investors, instead of from any real profit generated by the investment. The returns being paid out attracts even more new investors. Eventually the operator stops paying out returns to investors, and claims the operation has gone bust while secretly pocketing all remaining funds.

Bitcoin does not have an operator collecting and paying out money to and from investors, nor is there any promise of a gain or return.

Is Bitcoin a “pump and dump” scheme?

Probably not. A pump and dump scheme is a fraudulent operation where the operators own lots of a low-valued stock or commodity, and use mass advertising to lure large amounts of money from new investors, which in turn inflates the price. Once the commodity has reached a sufficiently high price, the operators “cash out” by selling all their holdings, which causes the commodity’s price to plummet, and the later investors lose most of their invested money.

It’s very unlikely Bitcoin fits this description because Bitcoin offers value as a form of money: using the proof-of-work concept, Bitcoin sufficiently solves the problem of reaching a consensus among a network of untrusted peers, allowing for funds to be quickly transferred to anyone on the planet without trusting a 3rd party. Bitcoin is the first payment system to accomplish this.

Conversely, early adopters of Bitcoin were able to easily mine large amounts of bitcoins and could potentially realize tremendous gains as the exchange rate continues to rise. Some have estimated that 927 people own half of all bitcoins. Additionally, the blockchain indicates that Bitcoin’s anonymous creator, Satoshi Nakamoto, may have mined nearly 1 million bitcoins, now worth over 1 billion US dollars at today’s exchange rates. Still, in the face of these facts, the following opposing arguments can be made:

  • There is no evidence of collusion by early Bitcoin adopters. Early adopters took a risk with Bitcoin and any gains from the increased exchange rate are rewards for that risk.

  • From the beginning, Bitcoin has been promoted as an experiment, not an investment, by developers, early adopters, and associated foundations.

  • Studies of the blockchain indicate that Satoshi Nakamoto’s original 1 million mined bitcoins have never been moved, spent or “cashed out”.

  • The Bitcoin exchange rate has recovered from every bubble and crash it has experienced.

  • The Bitcoin code is open source, and is continuously being developed by both a small group of core developers and a large community of contributors.

Won’t governments try to kill Bitcoin?

Maybe. Bitcoin might be the idea that eventually brings an end to the global bank and government monopoly on money. Some governments might see that as a threat to their power. Others might embrace Bitcoin and its potential for economic growth.

Bitcoin is decentralized, so it’s a tough target for an adversary to hit. What could governments do to attack Bitcoin?

  1. Excessively regulate or tax centralized Bitcoin based businesses (i.e. online Bitcoin exchanges).

  2. Completely outlaw the usage of Bitcoin and cryptocurrency.

  3. Turn off the internet.

It can be argued that (1.) is already occurring in some jurisdictions: in China, banks are currently outlawed from processing Bitcoin related transactions. United States law requires expensive money transmitter licenses to operate payment and money exchange services, which has been determined to apply to related Bitcoin businesses. Yet Bitcoin continues to flourish.

Prohibition (2.) would probably be met with fierce opposition in free-ish nations, even from citizens that don’t use Bitcoin on the basis of freedom. But nonetheless, illegalization is always a possibility, but the outcome of prohibition might have the reverse effect on Bitcoin’s popularity and usage.

The likelihood of (3.) seems small. Most of the global economy relies on the internet. Yet in this case, decentralized internet access may be a viable solution.

Is Bitcoin only used by criminals to buy drugs?

No. Lots of upstanding, law abiding citizens use Bitcoin for all sorts of legal activities on a day-to-day basis. Check out the giant list of merchants and service providers on the Bitcoin Trade wiki page, or the over 12,000 merchants in the Bitpay directory.

Can Bitcoin be used to buy drugs and other naughty things? It sure can! Just like fiat cash money, or anything else with value, people are willing to use it to conduct illegal trade. Can you guess which form of money is most commonly used for illegal stuff?

Do people have to pay taxes on Bitcoin?

Tax law is dependent on your country and locality. Recently in the United States, the IRS has declared that Bitcoin is to be treated as property, not currency, for tax purposes. All income in the US is taxed, regardless of what form it takes. If you’re paid in bitcoins, you’re supposed to pay taxes on your earnings at the BTC/USD exchange rate when you receive payment. Same goes for any capital gains made when you trade bitcoins for items or sell them for cash. Of course, US taxes can’t be paid in bitcoins, they can only be paid in US dollars, you big silly!

This should not be construed as legal advice or instruction, contact and pay a tax attorney for that.

What is mining?

Mining is how new bitcoins are minted, as well as how the Bitcoin public ledger (a.k.a. the blockchain) is secured. See explanation here.

Can I make lots of money mining Bitcoins?

Probably not anymore, see explanation here.

Why is it so hard to get, use, and understand Bitcoin?

This is a subjective question. Tech-savvy folks typically have an easier time getting started with Bitcoin. But there is no question that even technical people struggle with understanding the Bitcoin protocol: it involves many complex cryptographic and computational concepts that the average person usually isn’t familiar with.

The best answer may be that Bitcoin is still a new thing, and lots of people in the Bitcoin space are working on lowering the barrier to entry.

For instance, checkout trybtc.com — you can get a small amount of bitcoins and start using them in minutes. Or view the guide on getting started with Bitcoin: covering basics like choosing a wallet and sending, receiving, and protecting your bitcoins.

How do I explain Bitcoin in simple terms to someone?

See this post on bitcoin.stackexchange.com.

How many Bitcoins are there?

At the time of this writing, roughly 12.2 million bitcoins have been created. The total amount of bitcoins that can ever exist is limited to 21 million.

Some bitcoins have been lost forever due to technical loss: dead hard drives, forgotten passwords of encrypted wallets, and lack of wallet backups. To date, at least 35,000 bitcoins are known to be lost forever. Some estimate this number to be much higher. Millions of bitcoins from the early mining days remain unmoved after being minted, and many suspect that the owners no longer have access to the wallets belonging to these bitcoins.

How many people use Bitcoin?

There’s no way to know an exact figure, but some random 2013/2014 estimates on the internet have been between 100,000 and 1 million people.

Who owns the most Bitcoins?

It’s difficult to know who owns the most bitcoins. Addresses are not necessarily tied to peoples’ identities, and anyone can have multiple Bitcoin addresses, each with their own balance. Many people suspect the inventor of Bitcoin, Satoshi Nakamoto, owns the most bitcoins: roughly 1 million.

As of this writing, the single Bitcoin address with the largest balance is 1FfmbHfnpaZjKFvyi1okTjJJusN455paPH at 144,000 bitcoins. The address belongs to the FBI; the bitcoins were seized from the alleged Dread Pirate Roberts, accused of running the Silk Road marketplace.

The top 100 richest Bitcoin addresses can be found on the BitcoinRichList.

Why is Bitcoin sometimes spelled with an uppercase ‘B’ and other times spelled with a lowercase ‘b’?

“Bitcoin” typically refers to the protocol and associated software, while “bitcoin” refers to the unit of currency. For instance:

I read an article about how Bitcoin works.

versus

I'll pay you 100 bitcoins for that red Cadillac.

What is a Bitcoin wallet?

A Bitcoin wallet can be computer software, hardware, or a printed piece of paper, but they all essentially do the same thing: they allow you to spend and receive bitcoins.

The core part of a Bitcoin wallet are its private keys. Each private key is a very large randomly generated number, and is used to create a corresponding Bitcoin address (a.k.a public key). Each matching private and public key constitutes a cryptographic key pair.

Simply put, public keys are how you receive bitcoins, and private keys allow you to spend bitcoins. Public keys are derived from your private keys, and your wallet contains your collection of private keys.

So basically, wallets allow you to store and manage your bitcoins. Take a look my comparison of different Bitcoin wallets for the various features, advantages, and disadvantages of each type.

Keep in mind if your wallet is ever lost or stolen, your bitcoins are gone forever. So keep your wallet secret and safe.

What’s the difference between Bitcoin-Qt and Bitcoin Core?

They’re the same thing. As of version 0.9.0, Bitcoin-Qt was renamed by the developers to Bitcoin Core to “reduce confusion between Bitcoin-the-network and Bitcoin-the-software”.

How can I know which Bitcoin services to trust?

The short answer is: you can’t. Some services that have had thousands of customers and operated in a trustworthy manner for years have ultimately either lost or fled with customers’ bitcoins (i.e. the MtGox debacle).

The long answer is that you should rely on the experiences of others before making that first leap into depositing bitcoins with a service. Read reviews from others and research the service’s reputation by looking on sites such as bittrust.org and searching for the service on the Bitcoin subreddit and bitcointalk.org. Businesses that have been established longer or are run by known people in the Bitcoin community tend to be more trustworthy. It’s a good idea to distrust any service that does not list their business address or operates anonymously.

The safest place to keep your bitcoins is in your own possession.

Do you have an another question you’d like to see answered here? Contact me.