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How to Get Started with Bitcoins (pzxc.com)
52 points by pzxc on Dec 12, 2010 | hide | past | web | favorite | 47 comments

What nerd doesn't love the idea of virtual currency?

But, it seems like all of the exchanges have closed or are temporarily closed to new registrations. This seems problematic, and means the only realistic way in or out is dealing directly with other people and businesses who believe in this particular currency. I spent some time reading the list of people and companies accepting Bitcoin payments, and was extremely underwhelmed. Lots of pyramid schemes, random low-rent affiliate crap like phone cards, etc. No actually useful goods or services. And, a lot of the websites that are talking about this stuff have a definite "get rich quick" vibe about them.

Basically, it's all extremely flaky seeming stuff. This brings me to the thing that makes me worry more: Who developed the code for Bitcoins? How do I know it is secure? The people that seem to be most involved in Bitcoin discussions seem to be...well, kinda dumb. I don't trust dumb people to build strong encryption (I don't even trust smart people to build strong encryption, unless they're talking it over with lots of other smart people). Reading the FAQ at Bitcoin.org doesn't do much to alleviate my concerns. There's another FAQ in the wiki that mentions SHA and a few other reassuring things, but I'm not having much luck finding the real meat of the thing, and names of people responsible for the security of the system.

In short, if this is a serious virtual currency implementation by people who understand the security implications of such, I'm unable to find strong evidence of that fact. And, so, I worry about dealing with it.

MtGox.com is a good site to use. However, MtGox is only site worth using. All others are not as convenient. That being said, paypal aren't used on almost all site because paypal can do chargeback.

Bitcoin is open source. You can inspect the source code if you want.

"Bitcoin is open source. You can inspect the source code if you want."

While being Open Source is definitely on the "must have" list of items I'd want to see in a virtual currency system...I know that I'm not capable of determining the security of such a system. My understanding of cryptography is much too weak for me to have any understanding of the finer points of what's happening in this system. And, it only takes one flaw to bring the whole system crashing down.

If people I knew to be competent security and cryptography professionals (such as our friends tptacek and cpercival here at HN) were involved and willing to put their name and reputation on the code and the project, I might be more inclined to trust it. But, I couldn't find even a single real name in my search of the wiki and bitcoin.org. The bitcoin draft "specification" has no names on it, which makes it among the oddest specifications I've ever met.

The web of trust that would make a virtual currency work requires trusted parties, at least providing some assurance of the security of the system itself, if not providing any evidence of value in the currency. I don't trust completely anonymous people on the Internet with my labor, my computation, or my dollars. Maybe I'm a crazy paranoid old-timer, but I'm not putting money into a system that is surrounded by credulous morons, get-rich quick schemers, and driven by seemingly wholly anonymous developers. Maybe bitcoin has great and well-known people involved and the tech is well-tested by competent people, but I couldn't find evidence of that.

In short, being Open Source is no assurance of it being correct, strong, or secure.

In short, being Open Source is no assurance of it being correct, strong, or secure.

Fair point. However, we have not yet receive much attention from cryptographic or security experts yet.

Perhaps, words will finally reach someone who actually know something.

Which means that when (I can't bring myself to say "if" in this situation) holes are found, everyone with bitcoins will be SOL.

That said, after more digging, I note that a name I know and trust and have worked with in the past (Jeff Garzik), seems to actually be heavily involved in bitcoin, which lends it quite a bit more credibility in my mind. I don't know him as a security or cryptography guy, but I do know him as a really smart and competent developer. The project really shouldn't make it so hard to figure out who is writing the code and the standards (I still don't actually know what Jeff has to do with bitcoin, I just see his name a lot in the forums).

My basic problem with them is question three in the FAQ (http://www.bitcoin.org/faq). In a nutshell, "What backs BitCoins? Nothing." It is true that a currency that is accepted by people is by definition valuable at the point in time where they accept it, but that does not mean you can create a backless-currency and have it all just magically work, nor that it will necessarily work across time. A dollar is accepted because you can use it to pay your debts to the US Government. Inductively, another economic entity will accept them for another good or service because they also have that value for a dollar, and further inductively because they know they can then use it for some other good or service, until the inductive net spans the globe. But they're trying to skip the base case. That doesn't work.

(And I suspect even if you could magic wand it into existence it would still be very vulnerable. Take any fiat currency today of your choice. Remove the government backing. How long does it last? Probably not zero, but it probably crumbles at the next crisis at the latest. It would only take one metaphorical bank run to demolish the entire currency in a heartbeat. And it would only take a small nucleus of savvy people to prompt such a bank run, too, and such savvy people definitely exist.)

And in startup parlance, this is just about the worst possible "boil the ocean" plan possible. Virtual currencies will eventually happen and I'd even bet within a century you could live entirely off non-government-backed currencies, but it'll happen organically, not by fiat. And, no joke, it'll probably be some form of MMORPG cash, because those are by far the best seed I can think of for this sort of system to crystallize around, though probably some future MMORPG that makes today's look like tinkertoys.

We could imbues bitcoin with intrinsic value if we use bitcoin as a notarization database.

The problem with that is the use of bitcoin as a notarization service will erode bitcoin as a form of money. You would need to pay higher fee to prioritize bitcoin over big documents such as DNS record and contracts. That become inconvenient real fast for those who transact in bitcoin.

BitCoin is not backed by the trust of a government, correct. However it is supposed to be computationally hard to generate them. So its bales by your faith that someone hadn't made a big breakthrough in computer science.

I'm getting sick of hearing about bitcoins already, and I'm pretty sure I'm going to get more sick of hearing about them over the next year or so. (Then, one day, I'll mysteriously never hear about them again.)

Why? Because everyone who owns some of this intrinsically worthless asset immediately has an incentive to start working on talking them up. Social news sites are the front line of this battle... write a story about how they're going to be the next big thing and submit it, and you can be guaranteed a bunch of upvotes from everyone else who owns some bitcoins. This story alone probably caused at least a 10% increase in the value of 'em.

Personally I'll buy some bitcoins the moment they become exchangeable for pogs.

A bitcoin<->pog exchange sounds like a business that'd have at least one customer, then...

I've looked at bitcoins, and then figured that I don't really have much use for the things I can buy with them, including phone cards or online poker chips. On one bitcoin thread, I mentioned that using bitcoins for an online game currency wouldn't work for me as a game developer because I actually need to buy food and housing.

Perhaps, though, just perhaps, bitcoins are going through the 3 phases described by Arthur Schopenhauer: 1) ridiclued, 2) violently opposed, 3) accepted as fact.

But personally I have to admit I'd feel more comfortable with 9mm ammunition or bags of rice as a reliable currency.

I will send you 2 pogs for every bitcoin sent to this address:

Please include shipping address in the transaction. Limit 100 pogs per address. Offer expires May 1, 2011.

It's not possible to include extra information like 'shipping address' in a bitcoin transaction, unless that transaction is sent to an IP address (vs sending to a bitcoin address).

By my understanding, this system requires every transaction to be published to everyone, and to be remembered forever. That sounds like it inherently can't scale very far.


The basic data structure is a hash-chained list of blocks of transactions, with each block including one transaction of XX bitcoins from /dev/null to whoever generated that block. A node trying to calculate a next block include all (valid) transactions it knows. If the list branches, nodes ignore the shorter branch (this makes transactions more secure as they get older, assuming the swarm has more computing power than any troublemakers; so the time for a transaction to "clear" is whenever you trust that there are enough later blocks). In order to know if a transaction is valid, the node needs to have the prior transaction(s) that the involved bitcoins came through last (and any other subsequent transactions of that prior one). That prior transaction could be arbitrarily far back.

1. There had been talk of pruning information that the blockchain don't need, especially information that got confirmed a gazillion time.

2. There had been talk of a lightweight client that download the block header or something.

I might have considered this a good idea, before I played SecondLife with Linden dollars, or used points on Listia, or got gold on Gaia Online.

The problem with these virtual currencies so far is that they're very unstable and they suffer from quick and dramatic deflation and inflation (usually the latter) that makes them absolutely terrible as primary currencies if you don't want to starve to death.

This isn't to say that gov't backed currencies don't have this problem; far from it: http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...

Keeping currencies stable is very difficult, which means that I'm really nervous about any system that isn't well-established already. It's not a guarantee, but it's better than nothing.

The problem with these virtual currencies so far is that they're very unstable and they suffer from quick and dramatic deflation and inflation (usually the latter) that makes them absolutely terrible as primary currencies

What is different about Bitcoin is that the amount of it will be fixed, therefore no monetary inflation is really possible.

That said, its value in dollars can depreciate if M3 in dollars + outstanding credit in dollars contracts. And this might happen in the following years since outstanding credit in dollars, with the exception of Government debt, is contracting.

I think Bitcoin is a good idea but it solves a problem (hyperinflation) that we don't have right now. If we had hyperinflation Bitcoin would become the Napster of central banking.

What is different about Bitcoin is that the amount of it will be fixed, therefore no monetary inflation is really possible.

However there's another problem, deflation. The people who get in there first and generate loads of BitCoins will gradually get richer and richer if they just sit on their money and don't trade it. It seems unfair that someone who got in first gets to be rich in this new bitcoin world.

What is different about Bitcoin is that the amount of it will be fixed, therefore no monetary inflation is really possible

Until the day that everybody decides the bubble is over, at which point the value of the bitcoin drops to zero. But hey, you might make some real money in the meantime!

Until the day that everybody decides the bubble is over

Same thing can happen with any fiat currency, like the dollar or the euro. Actually, the same thing can happen with any currency, period. Even with a gold-backed one. If science finds a way to make gold without mining it, gold would drop in value.

True. All that gold and dollars have that bitcoins don't is hundreds and/or thousands of years of history and billions of people who think they're worth something.

The problem with deflation though is that it encourages people to save them and not spend them. Why would you create a currency which is meant to deflate? In most cases, deflation is worse than inflation.

That's because in a debt based economy, deflation means a shrinking of the money supply, and a shrinking of the money supply means less money is being lent, and less money being lent means economic stagnation.

An economy based on bitcoins couldn't work like this - because deflation doesn't shrink the money supply, and doesn't necessarily have anything to do with less money being lent.

I'm a reasonably long time HN'er, and also just got back from a business trip with the owner of Mt. Gox, really the only working BitCoin exchange. In fact, I'm in Liberia, Costa Rica right now, checking HN waiting to fly home from my trip, and I saw him this morning.

We have, in fact, been discussing a co-founder partnership deal, so I have lots of right-now thoughts... Here's my summary on BitCoins, and what I think the system needs:

There are currently four categories of people interested in BitCoins:

1) Deflationary Currency wonks / Gold-standard tinfoil hat types

2) Crypto and Currency Nerds

3) Speculators

4) Russians

Here is what BitCoin is good for:

Semi-anonymous-to-the-rest-of-the-world transactions of bitcoins, accomplished relatively quickly with no regard for global borders.

The system is reasonably anonymous, reasonably secure and makes some fundamental innovations in how value is transferred around: Consider if you can think of any other digitally transmitted, no-central-authority, semi-anonymous value systems. I am unable to think of any, and have been thinking for a number of months now.

To naysayers like SwellJoe, I have a degree in Theoretical Math and a background in Cryptography, and I have read, fairly thoroughly, the process and mechanisms used, and would say that the system does a reasonably good job delivering what it promises. Of course, it's open source, so go crazy and come back with an alternate viewpoint.

So, to my mind, there's clearly a place for BitCoins on the internet. I believe they will be useful in four possible scenarios:

1. For digital goods that one wishes to purchase privately.

2. For international value transfers

3. For activities like 'tipping' others on the Internet

4. In a credits-type system where the developer cannot or will not produce their own system, either because users do not trust the developer, or it's just easier to use an existing one.

I don't believe BitCoins will ever be useful in a currency-for-hard-goods situation, for a few reasons, one of which is that labor is unlikely to accept it (except possibly in Russia, or places where the government currency is seriously broken), the second -- extreme currency fluctuation against USD is likely to continue for some time.

There are roughly a thousand users of BitCoin right now, maybe 2k. The coins are released, 50 per 10 minutes, regardless of number of users. Consider -- what will happen when 10,000 or 100,000 new users enter the system? If the currency tips at all, or multiple times, it is highly likely that demand will push cost of BitCoins very high. So, this makes it an appealing thing to speculate in right now, of course. And, might make you wish to participate in an online exchange as a founder.

To counterbalance, the issue of running an exchange for BitCoins has a few major hurdles. A quick scan of my listed usage scenarios indicates that Bitcoins are best for money laundering russian mafia and porn sites. Combine that with the fact that an exchange is allowing people to trade a fungible currency derivative semi-anonymously, and you have a LARGE raft of legal items and compliance issues to take care of. I've had three separate estimates run in the roughly $1mm to do filing and compliance, US only. Ouch!

To counter-counter-balance, if I ideate properly, a well-run BitCoin exchange could conceivably be a sort of Paypal/Visa competitor -- providing merchant services and easy payment transfers to a wide range of people who really need it. That's appealing.

I hope this has been interesting, I enjoyed getting my thoughts down on HN paper.

I wonder if it's possible to pool computing resources and share the resulting bitcoins. Having to wait one year for a block (50 coins) is a real turn-off.

Consider using up 0.2kW continuously for a year (a typical mid-end PC at full load), with the local price of 13 cents per kW-hour, it works out to about $228 worth of electricity for 50 coins (note the computer itself would depreciate in this time). That means $4 per bitcoin minimum costs, far above the 20 cents at which it is trading now.

What are your costs where you live? Calculate:

  cost_per_coin = 0.2 * 8765 (hours in a year) * your_kWH_price / 50 or
  cost_per_coin = 30.56 * your_kWH_price

Yes you can. There are mining pools that work cooperatively and share the resulting generated block. See http://mining.bitcoin.cz/ and http://www.bitcoin.org/smf/index.php?topic=1458.0 for two different approaches.

Right now, you can definitely make money using GPUs to 'mine' bitcoins. Computers without GPUs aren't sensible, though.

According to the FAQ it takes about a year to generate 50 bitcoins, and at the current exchange rate they'll be worth about $12.50 USD. That's very little value for a year's worth of computation, and they're still quite rare. As more are created the exchange rate is going to drop unless they become very widely accepted, but there probably won't be enough of them to support a large economy.

The idea behind it is that they're (nigh-) infinitely divisible. One bitcoin in existence, forever, would be enough; 21 million just makes the numbers nicer to look at. The ability to generate more offers the ability to make up for lost coins, and slightly mitigate deflation, and not much else.

The ability to generate more offers the ability to make up for lost coins, and slightly mitigate deflation, and not much else.

It's also a key part of the marketing spiel -- selling people on the idea that they can get bitcoin-rich for free is a key part of getting people hooked on bitcoins. If I tell you "I've invented a new currency, want to buy some?" you'll tell me to sod off, but if I tell you "I've invented a new currency, you can mine it yourself as a background process" then you might be persuaded to give it a go. Pretty soon you've got some bitcoins of your own, and every incentive to start talking them up to everyone you meet.

Bitcoiners already downing everyone that think they can generate bitcoin for free.

"Unless you have a GPU farm, go buy bitcoins instead" and variations thereof.

And as a computational physicist I think the thing that probably annoys me most about all of this is the amount of CPU time which is going to be wasted before this particular bubble ends. I could be using those millions of CPU hours to actually do stuff, y'know.

Agreed - it would be really great to be able to have a currency that gets issued to the solver of protein folding problems or something, but unfortunately I don't think those solutions have as nice mathematical properties as spinning and computing SHA hashes all day.. : )

I think the BitCoin community would be interested if you could combine folding@home, say with BTC. It seems possible to me, but of course, you'd need to be able to verify the work quickly. I agree it would be nice to do something useful with the GPU/CPU time.

The total ammount of BTC is fixed and so at some point it won't be worth it to allocate any more computing resources to it.

Even right now, I doubt you can just grab a high end GPU and get cranking for a profit, unless you manage to steal electricity or steal access into a computer you don't own.

Bitcoins sound interesting, however I don't like the fixed 21 million limit, which the bitcoin community seem to promote. A fixed limit means all the people who got started early and have thousands of bitcoins will then be very rich and wealthy in this new currency.

Sounds like bitcoin community has a lot of the "inflation is bad, back to the gold standard" pseudoeconomists

Very interesting. I've always been interested in virtual currencies (and virtual countries, anyone remembe freedonia?) but as the author mentions they've mostly fallen prey to money launderers. I think it's an interesting experiment to limit the money supply, it gives you an incentive to get involved _right now_. I'll be trying it out, anyone else?

I tried running it for a while on my laptop while at home. Let it run for a week, didn't see a single coin. Calculated how long it would take to generate one on average, concluded that it wouldn't be worth it. There is teraflop GPU at work at the moment which is completely fallow, and I might be able to get some bitcoins out of that, but that would be misappropriation of resources. (It's not true, as the article claims, that generating bitcoins uses fallow resources. Computing those hashes burns a lot of juice...)

It would be interesting to calculate the current cost per bitcoin, in terms of electricity used to generate them (and hey, perhaps the quantity of CO2 produced too!).

21 million bitcoins seems like a low limit to set. According to http://newlibertystandard.wetpaint.com/page/Exchange+Rate the exchange rate is currently 221 Bitcoins per USD, so the total value of all possible bitcoins is only 95000USD.

Deflation seems to be happening at a tremendous pace (for a unit of exchange). So, that 21 million bitcoins will, if things continue, be "worth" dramatically more in the future. I suppose this is built-in to the system as a means to encourage early adopters.

But, given that there are very few means to cash out into other currencies, and the products one can buy with bitcoins are extremely limited and generally virtual goods, it's still wildly speculative that they have any longterm value.

Their low cash-value is probably almost wholly due the difficulty in getting cash for them.

Deflation of bitcoins can effectively be infinite, but should slow significantly if/when a significant amount of people get in on it and start using them.

I think it would be enough to jumpstart the process if one service that already reliably trades virtual currency for money (say, EVE) were to start accepting bitcoins for the purchase of said virtual currency.

Absolutely true. Which won't happen until the developers of a game such as Eve can use bitcoins for buying something more than phone cards and online poker chips. Developers need to eat.

bitcoins are divisible, and their value, like paper money, is asigned by those receiving them

Current prices are roughly 4 BTC per dollar, at www.mtgox.com. This is the only functioning USD-BTC exchange.

If you can buy them for 221/USD somewhere, buy a lot. You will be happily selling them for USD within the day.

So how many bitcoins are currently in existence? What is the value of every bitcoin that exists right now?


  4.87 million BTC
  or 1031762 USD
  or 21339945 RUB
  or 1047 ounces of gold
Based on relatively low transaction volumes, but you get the idea.

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