Bitcoin is often referred to as a decentralized virtual currency. It is controlled by no government or central bank, is not debt-based, has a limited supply, and it has no central server.
Bitcoin is actually an online payment system. You can use it to pay for goods or services, and it can be used to receive payments. Unlike most other payment systems, transactions are not conducted in physical traditional currencies, but in bitcoins.
For more information see the bitcoin project website.
The Bitcoin Protocol, the Blockchain, Mining, Controversies, Price Fluctuations
These aspects of bitcoin are beyond the scope of this article, We will purely consider the use of bitcoin as an online payment system.
For more technical information, visit The Bitcoin Wiki.
Why Pay Using Bitcoin?
There are a variety of reason why you may choose to use bitcoin to pay for goods or services.
- Potential to purchase anonymously (see below)
- Some goods or services are only available to purchasers using bitcoin
- Some goods or services are not available to other online payment mechanisms (such as Paypal)
- Reluctance to use debit or credit cards online
- No mandatory processing fees
Plus of course the desire to use this relatively new payment mechanism.
One of the hardest concepts to grasp in bitcoin is the nature of bitcoin addresses. You will notice when you acquire a wallet (see below) that it generates one or more addresses to enable bitcoins to be sent to you. These addresses are actually a single use token. Each new transaction should use a new address.
In order to pay with bitcoins you need to:-
- Select a wallet to store your bitcoins
- Buy some bitcoins (or portions thereof)
A wallet is a secure software mechanism to hold the data items that represent your bitcoins. The wallet software is also used to send bitcoins to a bitcoin address.
1. Desktop Wallets
A desktop wallet is a program that resides on your PC or laptop. Whilst this reduces the risk of an online security breach, it does require that you:-
- Properly secure access to your PC or laptop
- Protect the PC or laptop from online threats (using a firewall and antivirus program)
- Make regular backups of your wallet data
For my tests I used the Bitcoin core application which also acts as a wallet. The program needs to download the entire bitcoin blockchain when it is first run. If you don’t allow it to start with your PC, any subsequent use will require the program to download the latest transactions before it can operate.
Other and more sophisticated desktop wallets are available. A guide to desktop and other wallets is available on bitcoin.org.
A screenshot of the program is shown below.
2. Web Based Wallets
In many ways a more practical approach than a desktop wallet is the use of a web-based facility.
For my tests I used the Blockchain web based wallet. A screenshot is shown below. Note the display of transactions, and the options available to take your own backup (and the sound advice to do so).
The disadvantage with a web-based wallet is that all your bitcoins are stored on a remote system. The demise of Mt. Gox in 2013, and loss of $450 million worth of bitcoin undermined faith in the currency.
3. Mobile Wallets
A mobile bitcoin wallet is an app which, unlike a desktop wallet, does not keep a copy of the entire blockchain on the mobile device. It communicates with a server, operating in a similar way to the use of a web-based wallet, but via a user interface designed for phones or tablets.
Unfortunately Apple has in the past chosen to remove wallet apps from its store; however at the present time (October 2014) mobile wallets are available for Android, Blackberry and IOS.
I used the Blockchain Android app; the IOS version is also available. No Windows Phone wallets are currently available.
The screenshot below, taken during the post-installation setup procedure, shows an annoying problem with the current version; the mandatory checkbox is almost completely hidden by an un-necessary rectangle!
Once the above difficulty had been overcome, the screenshot below shows the application in operation:-
I also tested an IOS wallet, on an iPhone 4S:-
I used a bitcoin exchange in order to buy some coin.
Most exchanges will not accept credit card or Paypal due to the level of consumer protection.
I chose Bittylicious which easily allowed me to transfer the funds via my online bank account.
A novel means to obtain bitcoin is a bitcoin ATM. The one featured in this link converts cash into bitcoin; a further aid to anonymity (see below).
Purchasing with Bitcoin
For my first bitcoin purchase I chose an item with a recognised fixed value in the real world; a £5 Amazon gift voucher, purchased through the site pock.io which facilitates the purchase of many popular gift cards.
For my purchase, I registered with the site. I used Google Chrome as my web browser, and when I had selected the item, clicked the “buy with bitcoin” button, Chrome asked for permission to use my desktop wallet. When granted, the wallet assembled the transaction, allowing me to actually pay.
A bitcoin transaction has to be confirmed (technical: mined to a level of blocks deep); my wallet recommends 6 confirmations. In practice that means that it took about 20-30 minutes before my purchased gift card code was available to me. (Some retailers may choose to not wait until the transaction is sufficiently confirmed, and run the small risk of loss due to an attempted double spend).
The screen below shows the completed purchase summary. Note that the price in bitcoin was computed by the site. As you can see, on 6th October 2014 a full bitcoin is trading for a little over £200.
Anonymity with Bitcoin
Part of the attraction of bitcoin, and part of its notoriety, is the potential to undertake anonymous transactions online using the system. But how anonymous are users?
Bitcoin is built around the blockchain, a public and permanent record of each transaction. Those transactions only show the addresses used and the balance, but the record is public. This is one reason to change address for each transaction.
Also, the IP addresses used could be logged; so use a VPN or TOR if you wish to be anonymous.
Read here for more information on anonymity.
Bitcoin is the most famous digital currency, but it has rivals such as Litecoin, Darkcoin and Dogecoin.
Changing the World
So that is bitcoin, briefly explained and demonstrated. Will it (or the similar networks) change the world as we know it? Will everyone be using it by 2020?
Probably not, but it’s useful to be informed. The problems with bitcoin include:-
- Volatility of the currency. It peaked at $1000 in late 2013 but is now around a third of that value.
- Lack of government protection – there is no deposit safety scheme, as there is for example in the UK.
- Transaction verification is slow.
- Risk of loss if you lose your physical wallet or the password.
I plan to keep using it as a purchase mechanism but will probably hold bitcoins only in small chunks of about 0.5 bitcoin, which as of today is about £100. I have no plans to enter the volatile world of bitcoin trading.