BitCoin - Hands On.
What Is It ?
BitCoin is a virtual currency. It's just like any other money, only it's not physical, it's made up, literally, out of thin air and stored on computers as data. It's main advantage is that it is decentralised and convenient to make transfers with minimum cost. There are few other currencies or commodities that can make this claim.
Your first concern might be, how can anyone trust such a currency ? Well, BitCoin was designed using mathematics, this means it uses rules that are universal, and cannot be refuted.
BitCoins are generated by computers. it takes a long time and a lot of processing power, but there are bitcoin 'miners' out there generating bitcoins everyday. Between 2009-2013, 12 million bitcoins have been created. The limit of production is 21 million but a bitcoin can be divided into decimal for use (as they are now). It is also possible for the limit be raised in the future.
How Does it Work
Bitcoins only exist as 'data'. Transactions are stored on copies of a 'block-chain' (i.e a ledger) shared between computers. Miners (i.e bitcoin generators) have an incentive to store and validate transactions because they get rewarded with bitcoins in doing so.
To hold bitcoins, you must have a peice of software called a 'Wallet'. The wallet holds an address (i.e public key) and a private key. The address is used publicly (for receiving) while the private key (for sending) is kept secret.
While the balance and transacations are kept on the internet, it is the the wallet that provides access to receive or send bitcoins i.e to make new transactions.
Using a wallet means you are communicating with the block-chain on the internet.
Wallets are either standalone or rely on a server to update a copy of the block-chain.
Standalone Wallets are normally used at home on a PC because they require a lot of storage for the block-chain (~12G Nov.2013). It can take as much of 24hrs for the first synchronisation.
'Light' Wallets on the other hand just communicate with other servers to transfer requests and updates, so can be used immediately. Wallets like these are the ones found on mobile phones.
There is a third type called 'Web Wallets'. These wallets don't belong to you, instead they are owned by a company on the Web who give you access to them. Normally this type of package includes other services like bitcoin currency trading to other currencies or virtual money. All transactions are via the website's interface. You have no control over the wallet's ownership or security. There are usually added costs per transaction/ trade/ transfer. The advantage is convenience.
How to Buy BitCoins
Once you have a wallet, you'll want to make a deposit.
There are very few places you can exchange other currency for bitcoins because you need big players and perhaps a nod from the authorities. Also,
BitCoin uses very little transaction fees compared to what other virtual currencies charge. Therefore it makes no sense for other money transfer companies (e.g PayPal, Skrill, Netteller..etc) to put themselves out of business by promoting BitCoin.
That leaves us with actual exchange places where buyers and sellers can exchange bitcoin with other currencies.
Typically the exchange makes a profit by charging commission off both parties. The reason why exchanges are few is because governments have not yet decided whether to allow virtual currency trading. And if so, what the exchange operators are required to comply with.
The first thing I tried was the VirWox method. VirWox.com is 'a sort of' exchange for currencies with a base currency called Linden Dollars (SLL) primarly used for virtual worlds recreation. You must open an account and use VirWox's wallet.
To buy bitcoins you first have to buy SLLs and then sell them for bitcoins. The method is well known because it's probably the only way you can indirectly buy bitcoins using PayPal. PayPal disallows the direct purchase of bitcoins but strangley makes no fuss about buying SLLs .
However, this lengthy process means you pay plenty extra for PayPal charges AND VirWox charges for selling dollar, buying SLLs, selling SLLs, buying bitcoins and transferring bitcoins to you own wallet. It is worth noting that you do want to do that last step because e.g VirWox charges more (0.002 btc) for a bitcoin transaction compared to a personal wallet-to-wallet transaction (0.0001 btc).
The other nagging thing about VirWox is the mandatory 2-day delay on the first transaction. The subsequent delay was 1 day and then it's supposed to get better, the more transactions you have. This is supposed to deter illegal activity by having manual checks. But it is annoying for a payment system to not have instant feedback, especially if the check is random, it means you have no way of knowing if the delay is real or not and could keep you guessing for every transaction.
Proper Exchange Review
Not happy with VirWox, I then tried a local website exchange which accepted local currency.
Again, this means that you have to open an account with the exchange and use their bitcoin wallet they created for you.
Deposit is via a local bank. It does not mean that they can access your bank account, but they do need your bank account number so you can make withdrawals. For deposits, they give you their bank account number and you go to your bank to make the deposit. If the bank is the same, there is probably no charge, otherwise there will be a transfer fee or a bank-wire fee. Once the money is in, you can buy/sell bitcoins similar to stocks and shares. A commision is paid (0.1% - 0.6%) if a transaction is successful. As for most websites, there is a fee for withdrawals. The major difference here is that transaction and withdrawal fees are much less compared to VirWox. The only downside is that it takes longer to setup due to the website requiring ID verification details from you. If you are thinking of a local exchange, be sure to check out their charges and requirements.
Have Ready Your Own Wallet
As you can see, both methods require you to use 'their' web-wallets. I highly recommend you to have your own wallet too, so that you can transfer bitcoins to your personal wallet whenever you want. Spending bitcoins with your personal wallet is the cheapest of all, since the only extra fee is a mining fee which is (not fixed) but usually very small.
Transactions are not instantaneous. Currently (nov 2013) it takes about 5 to 10 minutes for the first confirmation and 10-20 mins for the second. You can usually check this on your wallet. There are also websites that display transactions by looking into the block-chain. Just type in you transaction info.
The block-chain 'is' the ledger. It records any and very transaction since day 1. You will be able to find any transaction you have ever made by using a search. Transactions are conifrmed by miners and other wallets all the time.
'Light' Wallets depend on info from their servers (who do all the real work). The transaction confirmation reports are not a bad indicator of how effcient your mobile wallet is and/or how busy the servers are.
You could even use the timing to decide which wallet works best for you.
The system deters hackers because it is designed to 'trust' the data of the 'consensus'.
It is also very work consuming for a hacker to follow transactions after making an illegal modification in order to cover his/her tracks. Be sure to keep your wallet and private-key safe.