In this two part series I'm looking at the practicalities of buying and selling Bitcoins.
- In Part 2 (this part), I'll take you through how I bought and sold them.
Off we go
As I mentioned in, "mining" is no longer a practical way to get into Bitcoins because of the requirement for specialised hardware and because it's very difficult for small scale operations to get any money to drop out in that way.
The easiest way to get started is to send some "proper" money to a Bitcoin exchange.
There are a few of these, the most famous being Mt. Gox. I used Bitstamp -- my method of selection being "random". I went to Bitcoin Charts to find a list of exchanges, and went through a few until I found one that made me feel in some way vaguely confident.
You can't get started on this journey with a credit card -- you need something more like hard cash. I had to phone my bank to incept a wire transfer to Bitstamp's bank. This happened to be a bank located in Slovenia.
The problem with credit cards is that they can be clawed back on the lightest suspicion of fraud. Everyone involved wants Bitcoin to feel and act like cash -- if you have Bitcoins, the premise is that they are definitely yours. (Plus, if you could use credit cards, the whole system would be absolutely slapped to pieces by credit card fraud.)
Thus the first step on this journey was to wire EUR 200 (USD 260) to a company I'd never heard of in a country I'd never been to. But I guess it's my problem that I'd never been to Slovenia.
This did, I should say, work and within a couple of days my Bitstamp account showed some USD.
Next step was to buy some Bitcoins. I spent my whole allowance, and Bitstamp took a small commission. Notice the amount in BTC. This isn't really a system where you buy round numbers of units -- everything is done to eight decimal places.
And there we have it. The trade went through almost instantly and I had some Bitcoins.
So now I had to have something to do with them. In order to spend them, you have to download them to a wallet. I used Bitcoin-Qt, for the simple reason that this is the one that is listed on the official Bitcoin site.
Wallets are slightly odd things in that in this era of put-everything-in-the-cloud, this is very much a "device local" arrangement. You end up with a "wallet.dat" on your device that contains the references to your Bitcoins. Lose the wallet, lose the Bitcoins.
Sending money requires an address. Each wallet comes configured with one address, but you can create as many addresses as you like. This is to get around some of the issues with regards to lack of anonymity -- creating multiple addresses against one wallet supposedly makes it harder to trace transactions back to real people.
Anyway, I initiated a withdrawal from Bitstamp and after some time, the money appeared in my wallet.
I should stress "some time". This actually took ten hours. The wallet has to synchronise itself with the Bitcoin network. This seemed like it too an oddly long time -- I'm not confident it would always take this long.
Part of the issue appears to be that every wallet downloads the entire transaction history for every Bitcoin transaction, ever. That's useful, I suppose, upon the eventual coming of the zombie apocalypse. If you happen to have a wallet on your laptop, you're in a position to reboot the world's Bitcoin currency should you be asked to do so.
The next thing I tried was sending the Bitcoins somewhere. This time I used Mt Gox.
Like when I transferred money from Bitstamp to my wallet, sending money to Mt Gox requires an address. All of the exchanges provide for funding through Bitcoins. I plugged the address into the wallet and transferred my entire balance.
To increase anonymity on the system (remember, the system is not anonymous although people tend to assume this) wallets have multiple identities. The idea is that you create separate identities for each party that you want to work with.
This worked fine, but it also took hours. As discussed in, all of the transactions have to be mashed up into this giant distributed transaction log and this process takes a long time. However, eventually it did appear in my Mt Gox account.
(I must say though, this is a little stressful as it disappears from your wallet immediately.)
In, I touched on the issues around actually buying things. In the first instance, there is a lack of merchants out there that accept Bitcoins. (It would be nice if Amazon accepted Bitcoins, but they do not.)
I did want to buy something as part of this guide -- although this was tricky. Most of the small merchants don't peg Bitcoin prices to a proper currency. This results in companies that set their prices up on a Monday, but by Friday the market has moved so much the prices are so adrift from the underlying currency that the whole thing falls apart.
BitcoinStore is one of the more advanced merchants with systems that do peg prices to USD. So I bought a mousemat and shipped it to one of the ZDNet editors. (They wanted $50 to ship a $3 mousemat to the UK.)
BitcoinStore uses a system called BitPay to handle the Bitcoin payments. You can implement this on your own site if you like.
It works just like you'd expect. You're given an address to send money to. All you need to do is go to your wallet and send the money.
After a short while, the money transaction processes through. On this transaction log I took some Bitcoins out of my Mt Gox account into my wallet and sent it from there. Technically I didn't need to do this -- I could have sent the Bitcoins from Mt Gox directly to BitcoinStore through BitPay.
Once you get your head around it and set-up, working with Bitcoins is actually very easy.
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Image credit: Wikimedia