Bitcoin Survival Guide: Everything You Need to KnowAbout the Future of Money

Illustration: T.A. Gruneisen/WIRED

The price of a bitcoin topped $900 last week, an enormous surge in value thatarrived amidst Congressional hearings where top U.S. financial regulators tooka surprisingly rosy view of digital currency. Just 10 months ago, a bitcoin soldfor a measly $13.

The spike was big news across the globe, from Washington to Tokyo to China,and it left many asking themselves: “What the hell is a bitcoin?” It’s a goodquestion — not only for those with little understanding of the modern financialsystem and how it intersects with modern technology, but also for those

The spike was big news acrossthe globe, from Washington toTokyo to China, and it left manyasking themselves: ‘What the hellis a bitcoin?’

steeped in the new internet-driven economy that has so quickly remade ourworld over the last 20 years.

Bitcoin is a digital currency, meaning it’s money con-trolled and stored entirely by computers spread acrossthe internet, and this money is finding its way to moreand more people and businesses around the world.

But it’s much more than that, and many people — including the sharpest of in-ternet pioneers as well as seasoned economists — are still struggling to come toterms with its many identities.

With that in mind, we give you this: an idiot’s guide to bitcoin. And there’s noshame in reading. Nowadays, as bitcoin is just beginning to show what it’s ca-pable of, we’re all neophytes.

Bitcoin isn’t just a currency, like dollars or euros or yen. It’s a way of makingpayments, like PayPal or the Visa credit card network. It lets you hold money,but it also lets you spend it and trade it and move it from place to place, almostas cheaply and easily as you’d send an email.

As the press so often points out, Bitcoin lets you do all this without revealingyour identity, a phenomenon that drove its use on The Silk Road, an onlinemarketplace for illegal drugs. But at the same time, it’s a system that operatescompletely in the public view. All Bitcoin transactions are recorded online foranyone to see, lending a certain transparency to the system, a transparency thatcan drive a new trust in the economy and subvert the anonymity sought bythose on The Silk Road, which the feds shut down last month.

Bitcoin is much more than a money service for illegal operations. It’s a re-imag-ining of international finance, something that breaks down barriers betweencountries and frees currency from the control of federal governments. Bitcoin iscontrolled by open source software that operates according to the laws of math-ematics — and by the people who collectively oversee this software. The soft-ware runs on thousands of machines across the globe, but it can be changed.

Click to enlarge. Illustration: T.A. Gruneisen/WIRED

It’s just that a majority of those overseeing the software must agree to thechange.

In short, Bitcoin is kind of like the internet, but for money.

Birth of the Bitcoin

What does that mean, specifically?

About five years ago, using the pseu-donym Satoshi Nakamoto, an anony-mous computer programmer or groupof programmers built the Bitcoin soft-ware system and released it onto theinternet. This was something that wasdesigned to run across a large networkof machines — called bitcoin miners —and anyone on earth could operate oneof these machines.

This distributed software seeded thenew currency, creating a small numberof bitcoins. Basically, bitcoins are justlong digital addresses and balances,stored in an online ledger called the“blockchain.” But the system was alsodesigned so that the currency wouldslowly expand, and so that peoplewould be encouraged to operate bit-coin miners and keep the system itselfgrowing.

When the system creates new bitcoins,

you see, it gives them to the miners.Miners keep track of all the bitcoin transactions and add them to the blockchainledger, and in exchange, they get the privilege of, every so often, awardingthemselves a few extra bitcoins. Right now, 25 bitcoins are paid out to theworld’s miners about six times per hour, but that rate changes over time.

Why do these bitcoins have value? It’s pretty simple. They’ve evolved intosomething that a lot of people want — like a dollar or a yen or the cowry shellsswapped for goods on the coast of Africa over 3,000 years ago — and they’re inlimited supply. Though the system continues to crank out bitcoins, this willstop when it reaches 21 million, which was designed to happen in about theyear 2140.

The idea was to create a currency whose value couldn’t be watered down bysome central authority, like the Federal Reserve.

When the system quits making new money, the value of each bitcoin will nec-essarily rise as demand rises — it’s what’s called a deflationary currency — butalthough the supply of coins will stop expanding, it will be still be relativelyeasy to spend. Bitcoins can be broken into tiny pieces. Each bitcoin can be di-vided into one hundred million units, called Satoshis, after the currency’sfounder.

The Key to the System

How do you spend bitcoins? Trade them? Keep people from stealing them? Bit-coin is a math-based currency. That means that the rules that govern bitcoin’saccounting are controlled by cryptography. Basically, if you own some bitcoins,you own a private cryptography key that’s associated with an address on theinternet that contains a balance in the public ledger. The address and the pri-vate key let you make transactions.

The internet address is something everyone can see. Think of it like a reallycomplicated email address for online payments. Something like this: 1DTAX-

If you own some bitcoins, whatyou really own is a privatecryptography key that’sassociated with an address on theinternet

PKS1Sz7a5hL2Skp8bykwGaEL5JyrZ. If someone wants to send you bitcoins,they need your address.

If you want to send your bitcoins to someone else, youneed your address and their address — but you alsoneed your private cryptography key. This is an evenmore complicated string that you use to authorize a

payment.

Using the math associated with these keys and addresses, the system’s publicnetwork of peer-to-peer computers — the bitcoin miners — check every trans-action that happens on the network. If the math doesn’t add up, the transactionis rejected.

Crypto systems like this do get cracked, and the software behind Bitcoin couldhave flaws in it. But at this point, Bitcoin has been tested pretty thoroughly,and it seems to be pretty darned secure.

For the ordinary people who use this network — the people who do the buyingand the selling and the transferring — managing addresses and keys can be abit of a hassle. But there are many different types of programs — called wallets— that keep track of these numbers for you. You can install a wallet on yourcomputer or your mobile phone, or use one that sits on a website.

With these wallets, you can easily send and receive bitcoins via the net. Youcan, say, buy a pizza on a site that’s set up to take bitcoin payments. You candonate money to a church. You can even pay for plastic surgery. The numberof online merchants accepting bitcoins grows with each passing day.

But you can also make transactions here in the real world. That’s what a mobilewallet is good for. The Pink Cow, a restaurant in Tokyo, plugs into the Bitcoinsystem via a tablet PC sitting beside its cash register. If you want to pay foryour dinner in bitcoins, you hold up your phone and scan a QR code — a kindof bar code — that pops up on the tablet.

Ironically, the best way to keepbitcoin purchases anonymous isto meet up with someone here inthe real world and make a trade.

How to Get a Bitcoin

If all that makes sense and you wanna give it try, the first thing you do is get awallet. We like blockchain.info, which offers an app that you can download toyour phone. Then, once you have a wallet, you need some bitcoins.

In the U.S., the easiest way to buy and sell bitcoins is via a website called Coin-base. For a one percent fee, Coinbase links to your bank account and then actsas a proxy for you, buying and selling bitcoins on an exchange. Coinbase alsooffers an easy-to-use wallet. You can also make much larger bitcoin purchaseson big exchanges like Mt. Gox or Bitstamp, but to trade on these exchanges,you need to first send them cash using costly and time-consuming interna-tional wire transfers.

Yes, you can keep your purchases anonymous — or atleast mostly anonymous. If you use a service likeCoinbase or Mt. Gox, you’ll have to provide a bank ac-count and identification. But other services, such asLocalBitcoins, let you buy bitcoins without providing personal information.Ironically, the best way to do this is to meet up with someone here in the realworld and make the trade in-person.

LocalBitcoins will facilitate such meetups, where one person provides cash andthe other then sends bitcoins over the net. Or you can attend a regular Bitcoinmeetup in your part the world. Because credit card and bank transactions arereversible and bitcoin transactions are not, you need to be very careful if you’reever selling bitcoins to an individual. That’s one reason why many sellers liketo trade bitcoins for cash.

The old-school way of getting new bitcoins is mining. That means turning yourcomputer into a bitcoin miner, one of those nodes on Bitcoin’s peer-to-peer net-work. Your machine would run the open source Bitcoin software.

Back in the day, you could do bitcoin mining on your home PC. But as the

price of bitcoins has shot up, the mining game has morphed into a bit of aspace-race — with professional players, custom-designed hardware, and rapid-ly expanding processing power.

Today, all of the computers vying for those 25 bitcoins perform 5 quintillionmathematical calculations per second. To put it in perspective, that’s about 150times as many mathematical operations as the world’s most powerful super-computer.

And mining can be pretty risky. Companies that build these custom machinestypically charge you for the hardware upfront, and every day you wait for de-livery is a day when it becomes harder to mine bitcoins. That reduces theamount of money you can earn.

This spring, WIRED tested out a custom-designed system built by a KansasCity, Missouri company called Butterfly Labs. We were lucky enough to re-ceive one of the first 50 units of a $275 machine built by the company.

We hooked it up to a network of mining computers that pool together comput-ing resources and share bitcoin profits. And in six months, it has earned morethan 13 bitcoins. That’s more than $10,000 at today’s bitcoin prices. But peoplewho got the machine later than we did (and there were plenty of them) didn’tmake quite so much money.

Online Thievery

Once you get your hands on some bitcoins, be careful. If somebody gets accessto your Bitcoin wallet or that private key, they can take your money. And in theBitcoin world, when money is gone, it’s gone for good.

This can be a problem whether you’re running a wallet on your own machineor on a website run by a third party. Recently, hackers busted into a site calledinputs.io — which stores bitcoins in digital wallets for people across the globe— and they made off with about $1.2 million in bitcoins.

In the bitcoin world, whenmoney is gone, it’s pretty muchgone for good.

The feds have stopped short oftrying to kill Bitcoin, but they’vecreated an atmosphere whereanybody who wants to link theU.S. financial system to Bitcoin isgoing to have to proceed withextreme caution

So, as their bitcoins start to add up, many pros move their wallets off of theircomputers. For instance, they’ll save them on a thumbdrive that’s not connected to the internet.

Some people will even move their bitcoins into a real physical wallet or ontosomething else that’s completely separate from the computer world. How isthat possible? Basically, they’ll write their private key on a piece of paper. Oth-ers will engrave their crypto key on a ring or even on a metal coin.

Sure, you could lose this. But the same goes for a $100 bill.

The good news is that the public nature of the bitcoin ledger may make it theo-retically possible to figure out who has stolen your bitcoins. You can always seethe address that they were shipped off to, and if you ever link that address to aspecific person, then you’ve found your thief.

But don’t count on it. This is an extremely complex process, and researchers areonly just beginning to explore the possibilities.

Bitcoin vs. the U.S.A.

Bitcoin is starting to work as a currency, but because of the way it’s built, it alsooperates as an extremely low-cost money-moving platform. In theory, it couldbe a threat to PayPal, to Western Union, even to Visa and Mastercard. With Bit-coin, you can move money anywhere in the world without paying the fees.

The process isn’t instant. The miners bundle up those transactions every 10minutes or so. But today, payment processors like BitPay have stepped in tosmooth things out and speed them up.

The trouble is that federal regulators still haven’t quitefigured out how to deal with Bitcoin.

The currency is doing OK in China, Japan, parts of Eu-rope, and Canada, but it’s getting its bumpiest ride in

the U.S., where authorities are worried about the veryfeatures that make Bitcoin so exciting to merchants and entrepreneurs. Here,the feds have stopped short of trying to kill Bitcoin, but they’ve created an at-mosphere where anybody who wants to link the U.S. financial system to Bit-coin is going to have to proceed with extreme caution.

Earlier this year, the U.S. Department of Homeland Security closed the U.S.bank accounts belonging to Mt. Gox, which has generally been the world’slargest Bitcoin exchange. Mt. Gox, based in Japan, let U.S. residents trade bit-coins for cash, but it hadn’t registered with the federal government as a moneytransmitter, and it hadn’t registered in the nearly 50 U.S. states that also requirethis.

The Homeland Security action against Mt. Gox had an immediate chilling ef-fect in the U.S. Soon, American Bitcoin companies started reporting that theirbanks were dropping them, but not because they had done anything illegal.The banks simply don’t want the risk.

Now, other Bitcoin companies that have moved fast to operate within the U.S.are facing the possibility of being shut down if they’re not following state andfederal guidelines.

Even if the feds were interested in shutting down Bitcoin, they probablycouldn’t if they tried, and now, they seem to understand its promise. In testi-mony on Capitol hill earlier this week, Jennifer Shasky Calvery, the director ofthe Treasury Department’s Financial Crimes Enforcement Network, said thatBitcoin poses problems, but she also said that it’s a bit like the internet in itsearliest days.

“So often, when there is a new type of financial service or a new player in thefinancial industry, the first reaction by those of us who are concerned aboutmoney laundering or terrorist finance is to think about the gaps and the vulner-abilities that it creates in the financial system,” she said. “But it’s also importantthat we step back and recognize that innovation is a very important part of our

economy.”

It is. And Bitcoin richly provides that innovation. It just may take a while forthe world to completely catch on.

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