If you have heard a lot of bitcoin buzz during the last year but thought it was too complicated to understand, let alone use, you were not alone. Count me in that crowd. But the promise of bitcoin was so great and my curiosity so peaked, I decided to give it a try. What I discovered was that it was a very familiar, but slightly different, way of doing things. Overall, it was easy peasy.
In some ways, using a bitcoin is very similar to what we are used to. Just like using a dollar bill, you will need a wallet, you will buy some bitcoin to put in your wallet and then you can spend your bitcoin. I have already covered how to get a wallet. And next week, I will cover how to spend bitcoin.
After getting a wallet, the next step is getting bitcoin.
There are three ways to get bitcoin: earning them, mining them and buying them.
To earn them, you simply have to accept them for payment for the products or services that you provide. It would be the equivalent of a customer taking money out of their wallet and you putting it into your own wallet. While that would be effective, for a business, it might not be practical.
As a result, there are a number of applications that basically set up a merchant account for bitcoin. These applications facilitate sending invoices, receiving payments and integrating bitcoin into your website to ease online ordering. Most charge a transaction fee, usually around 0.5 percent, which is much less that a credit card’s fee. BitPay, BTCMerch,CoinBase and Coinkite are but a few of the popular bitcoin merchant account services.
To mine bitcoin, you need a powerful computer with specialized mining hardware and software. The mining process is how bitcoins are created and is similar to how coins are created. In essence, computers solve progressively complicated math problems and get bitcoins in return until all 21 million possible bitcoins are mined. The process uses resources like computing power and electricity, whereas coins are created by a Federal Reserve accounting entry and made by the U.S. Mint using resources like artistic design and metal fabrication.
Some popular manufacturers who design and sell a large volume of these computers are Avalon, AsicMiner, BitFury, Butterfly Labs and KNC. Some popular software at the moment is BFGminer, CGminer and EasyMiner. Note that this has become a very competitive business and the entry costs can be significant while the upside has decreased. Gone are the days when your home computer could mine a few bitcoins.
Most of us will get bitcoin by buying it. While you can buy it from people in your community (LocalBitcoins.com is kind of like Craigslist for bitcoins), bitcoins are typically bought on an exchange. This is the equivalent of a bank or currency exchange when you try converting your dollars to the local currency while on vacation.
The first step is to select a bitcoin exchange to use. The most comprehensive list of bitcoin exchanges by country is howtobuybitcoins.info. Note that these exchanges are relatively new and are not subject to bitcoin-specific federal regulation, though some states like New York are considering state regulation. However, all the exchanges are subject to federal regulations impacting specific aspects of bitcoin. For example, the Department of Treasury requires that bitcoin exchanges collect information about their customers just like any other money-transmitting business the Treasury regulates.
After selecting a bitcoin exchange, you will need to set up an account with them. This will entail connecting your bank account so you can transfer funds to the exchange and buy a bitcoin. Once you do that, there will be a few verifications steps and then you can start purchasing.
The exchange will let you know the price of a bitcoin in the currency that you will be purchasing your bitcoin with. When a purchase is made, the exchange debits your bank account and delivers your bitcoin to your wallet. Both your bank and the exchange will charge small fees for the transaction. Once the coins are in your exchange account, make sure to move them to your private wallet.
Overall, I found the process to be logical, relatively simple and getting easier as the bitcoin ecosystem matures.
Next week, how to spend your bitcoin.
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