1. This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn More.

So how does bitcoin work in laymans terms?

Discussion in 'BlackHat Lounge' started by Saracin, Apr 10, 2013.

  1. Saracin

    Saracin Registered Member

    Joined:
    Jan 5, 2008
    Messages:
    66
    Likes Received:
    9
    Noticed there is a lot of confusion about Bitcoin on bhw. I'm going to try to explain it as I understand it in simple terms

    Bitcoin is a virtual peer-to-peer(p2p) currency. You gain access to this p2p network by either downloading a bitcoin client or using an online wallet service, which has access to this p2p network. Basically, it is like bit torrent, except that each client connected to the network is sharing the same file, known as the 'blockchain'. This blockchain contains all of the 'money', as well as all of the transactions that have taken place since bitcoin was first introduced. To get access to that money, one needs the addresses to their location within the blockchain, as well as a 'private key'. This information is contained in a wallet file, on the clients computer. When that client makes a transaction, the wallet file will point to different addresses that reflect the new balance. The encryption that is used on these files is impossible to crack with current technology.

    The advantages of Bitcoin
    • It is a decentralized currency (The 'bank' or 'federal reserve' of bitcoin are all those clients downloading the blockhain, not some snakes who print up as much money as they want)
    • Allows for 'anonymous' transactions (relatively speaking)
    • Amount of maximum bitcoins is limited, meaning it's value as a currency may go up over time (unless and until a superior virtual currency overtakes it)
    • Low fees for sending coins (Send bitcoins to someone half way across the world and they exchange it for cash. Pay much less in fees than western union)

    The disadvantages of Bitcoin
    • A government or huge company could try to gain over 51% of the p2p network and mess around with the blockchain file, effectively killing it (Will be less likely as more people mine it)
    • Transactions are irreversible (Not much you can do if you send money to an anonymous scammer. And with bitcoin, there are many scammers!)
    • Not many online vendors accept it yet (That can change over time)
    • Long transaction wait times (The transaction does actually happen instantly, but a lot of vendors usually wait about 1 hour for confirmations that the payment went through)
    • The value of it is very volatile (today it's worth $250, tomorrow it might be 50% more or 80% less)
    • The blockchain size keeps growing (Eventually, it may be too large to store it on a personal computer, and have to be on servers only)

    I noticed a lot of people on here are interested in buying bitcoin as an investment, hearing that it's going to be worth $1000 or $10000 soon. You have to keep in mind that there are people who have a lot of bitcoins that are constantly praising bitcoin and trying their best to whore it to the media. Many of those people bought it simply to hold it for the price to go up and then sell it. The people who buy it from them are also buying it to hold it for the price to go up and sell it to the next person who is buying it for the same reason. Eventually, it will reach a price where no one is going to buy it, and it will crash. As there are currently lots of people flocking to buy bitcoin now, it may be a while before this happens.

    The real value that derives from bitcoin is based on those advantages that I listed above (And maybe others that I forgot about), and not from people who plan to hoard it and sell. Eventually the price of bitcoin will reflect the real value, and that price may be higher or lower than what it is right now. If you are interested in getting into bitcoins, I suggest you do a lot more reading on the subject before plunking down 1000's of $$$$ into it.

    Here is some advice I can offer if you do decide to get into bitcoins:
    • Do not use an online wallet (There are a lot of potential problems: website gets hacked, company runs away with your money, ddos attack and can't log into website, etc.)
    • Don't leave large amounts of money in an exchange for long periods of time (These can also run into the same problems as above)
    • Be careful who you trust when buying stuff with bitcoin (Nothing you can do if you get scammed)
    • If someone sends you a payment and it doesn't show up in your client right away, don't panic (These things happen sometimes, there are ways to verify it was sent)
    • Make backups of your wallet file and encrypt them (If you lose that file, you lose your coins)
    • Do business that earns bitcoins instead of buying them (I sold a virtual item for 1 bitcoin while writing this post :))
    • Be wary of predictions that bitcoins are going to be worth x amount of dollars soon (Unless they have something of substance in their claim)
    • Be wary of companies selling ASIC mining equipment (Many are flat-out scams, or will ship the equipment once it becomes obsolete. Even the legit ones take a long time to ship)

    I left many aspects of bitcoin out in this post for the sake of keeping it simple. I hope it helps people who are still confused about bitcoin. Feel free to add your criticisms/suggestions and point out any mistakes in my post, as I am hardly a bitcoin expert.
     
    • Thanks Thanks x 8
  2. reinie

    reinie Elite Member

    Joined:
    Jan 16, 2009
    Messages:
    1,574
    Likes Received:
    1,040
    Thanks for the explanation. Great write up. I was actually just watching a video on it, still trying to wrap my head around it.
     
  3. SittinLow

    SittinLow Registered Member

    Joined:
    Dec 24, 2010
    Messages:
    61
    Likes Received:
    6
    Great post, I have done more research on bitcoin in the past 48 hours than my entire senior year at University! I do have a question though. Can you trust sites such as MtGox? Use Okpay or western union to transfer funds to MtGox then use MtGox to purchase the coins?

    Also, LTC going on MtGox, what do you think of that?

    And when you purchase a BitCoin or LTC, how exactly do you verify that you 'own' one of these? Does it stay within the site purchased? Or do you get some sort of file?

    I want to invest $400 in one of these - Preferably LTC because I have the potential at making a lot more money (Or losing it) :)
     
  4. Furious George

    Furious George Supreme Member Premium Member

    Joined:
    Dec 13, 2012
    Messages:
    1,437
    Likes Received:
    2,176
    I've been using bitfloor.com - zero issues, really quick service
     
  5. SittinLow

    SittinLow Registered Member

    Joined:
    Dec 24, 2010
    Messages:
    61
    Likes Received:
    6
    So is the LTC on MtGoox a hype? Or is it actually going to happen? I think it is starting to get some talk as an alt currency to bitcoin so the price might boom before it shits the bed.
     
  6. Saracin

    Saracin Registered Member

    Joined:
    Jan 5, 2008
    Messages:
    66
    Likes Received:
    9
    • MtGox has a really big backlog with people trying to deposit their money right now, so it may take a while for your deposit to go through there. By the time your money does show up in your account, who knows what the bitcoin price could be.

    • Although MtGox has announced that they are going to support Litecoin, there are no guarantees when and if they will actually do so.

    • When you purchase bitcoin on a website, it will show up in your account on that site. If you want to withdraw if from there you will need to use an online wallet like blockchain.info, or download a bitcoin client like bitcoin-qt or multibit or others. It is better not to keep a lot of bitcoins stored on a website in case something happens to the site. If you check out some of the bitcoin forums, you'll find a lot of stories where people have lost bitcoins worth 1000's of dollars because they were storing them on a website that got hacked or shutdown, etc.
     
  7. teal777

    teal777 Newbie

    Joined:
    Apr 30, 2013
    Messages:
    14
    Likes Received:
    0
    Looks like LTC on MTGOX is gonna happen in the next couple weeks or so. I guess the question now is the price already up so much that adding MTGOX won't help it much?