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Fri, Mar 22 2013 23:54:25 UTC

An introduction to Bitcoin

If you offer commissions or work freelance, you may have encountered a client before that offered to pay you using Bitcoins. Maybe you know some things about this virtual currency, or perhaps you just heard the name before without really knowing anything about it. If this never happened to you, with the rise in popularity of Bitcoin, you may eventually find yourself in this situation. Here is a short primer on what this currency is, how it works, and whether you should accept it as payment.

The implications of Bitcoin

Bitcoin is a recent invention that uses various algorithms and cryptographic functions to ensure a predictable growth of the currency. It's a virtual currency, which means there is no government backing. This can be good and bad. The good is that you don't have the artificial inflation which occurs in real-world currencies. The USD or EUR currencies are highly dependent on the countries that back them. As you may be aware, there are a lot of financial troubles in some EU countries, and as a result the EUR value is going down. Government control also means taxes, fees and the potential for massive fluctuations based on the health of the Federal Reserve and other private banks.

On the other hand, while Bitcoins don't suffer from these issues, this also means speculators and unpredictable factors may influence the value of these coins. Right now, the value of Bitcoins change constantly. The USD value of one Bitcoin can go from $40 to $63 in a few days, which is a massive change, and makes it hard to value your goods or services properly. The other problem is that it can be hard to convert real-world currencies to Bitcoins. There are various online exchanges, but most of them only accept direct bank transfers, not PayPal or credit cards, because of fraud problems. They charge a fee, and take some time to transfer funds. The amount of time needed and the fees vary a lot between sites, again because there is no regulation.

Getting started

Getting started using Bitcoins is fairly easy. Just like cash, your virtual coins represent a certain value. However, for Bitcoins that value reside in an ever changing chain, which is a large mathematical block of data which exists across the Internet, replicated on thousands of sites and computers. All transactions are public, and when someone sends you coins, the transaction is transmitted across this chain, validating the transfer. You own a wallet, which is a simple encrypted file and contains your private key to these coins. You should think of this wallet like your cash wallet. If you lose it, then you lose the coins that's in it.

Your wallet can be stored on your own computer by downloading one of the many clients available, or it can be kept in the cloud, by using one of the online services. The way you transfer money is using Bitcoin addresses. Your wallet has one or more addresses. For someone to send you coins, you simply give them one of your addresses, and they can send you some coins. Sending them coins works the same way. Because you can create an unlimited number of addresses, while Bitcoin is a very public and visible system, the only thing seen by others is your Bitcoin address. So it's possible to make anonymous transactions.

If you want to try it out, you should check out the Bitcoin site to find out more and to download your client. Remember that as a new currency, you must be careful who you trust as transactions cannot be reversed, and funds are not guaranteed by any government.

* Can be anonymous
* Very easy to send and receive money
* No government control or fees
* Does not suffer from artificial inflation

* Can be hard to get started
* Value varies a lot
* Can be more risky

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