Explain Bitcoin please

R

reb00tin

Gawd
Joined
Apr 13, 2009
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864
How does it work, and how secure is the software? What would prevent the NSA from crashing the network.
 
What I can't quite wrap my head around is where the money vaue for bitcoins comes from - lets say I mine 1 bitcoin, and cash out. Who pays me? I guess the relevant bitcoin exchange, but where does the bitcoin exchange get its funds from?
 
reb00tin said:
How does it work, and how secure is the software? What would prevent the NSA from crashing the network.
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Every person who is 'mining' bitcoins is keeping the network up. It's distributed, like things like torrents. Everybody mining is passing around a ledger (the block chain) that has every transaction and everything that's happened on it. If the NSA wants to get rid of bitcoins, they have to get rid of all of the miners. The software is fairly secure because it's distributed. One of the biggest weaknesses would be a situation where more of the 'miners' are cooperatively malicious than legitimate. This is called a 51% attack. If someone has more than half of the power on the network, since the network is peer validated they essentially have the authority to say what is valid, even if what they're saying is valid is not valid. Of course, there are some protections built in against 51% attacks. The bitcoin client keeps track of 'checkpoints', so changes to the block chain that don't agree with these checkpoints would be rejected. If everybody knows Steve received 50 bitcoins in a transaction last month, then everybody knows the ledger has been messed with if it suddenly says Steven received 50,000 bitcoins in that same transaction instead.

elleana said:
What I can't quite wrap my head around is where the money vaue for bitcoins comes from - lets say I mine 1 bitcoin, and cash out. Who pays me? I guess the relevant bitcoin exchange, but where does the bitcoin exchange get its funds from?
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It's like the stock exchange. Anytime you sell a bitcoin, there's someone on the other end buying that bitcoin. If you try to sell and nobody wants to buy, your sell order will never go through and you won't get any money.

Bitcoins and other cryptocurrency derive their value in a similar manner to fiat money and commodity money.

Most importantly, Bitcoins are finite. Only so many of them can ever be made, and only the coins which have currently been mined currently exist. Something like sand could never be used as money, because anybody can just go to the beach and get more sand. There's just too much of it, so it isn't practically finite. But bitcoins are difficult to create, so there's only so many. And if you want one, someone has to be willing to give you one. So because there are people who want them, and there are only so many of them, and they're difficult to make, there's value.

The other thing is that people are willing to accept bitcoins as a payment. US dollars and other paper money are useless by themselves. It's just some cloth paper with some silly things printed on it. Yet people value US money anyways, and this is called fiat money. People value US money because they can exchange it for goods and services. If you find a $20 bill on the ground, this isn't going to be exciting just because you now have some stupid piece of paper; It's going to be exciting because you can take the stupid piece of paper and buy something with it. It takes a while for a currency to become valuable simply through people accepting it as payment, but bitcoins have been around long enough and attracted enough attention that people were wiling to accept them as payment for things in hopes that the value would later go up. Now that they're accepted, it's hard to discount bitcoins as money economically, because at some point, by not taking bitcoins, you're losing out. If you are selling something worth $100, and someone will give you a bitcoin for it, and you know other people are selling things worth more than $100 for a bitcoin, it'd be foolish not to take the bitcoin in such an example.
 
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Dogs said:
Every person who is 'mining' bitcoins is keeping the network up. It's distributed, like things like torrents. Everybody mining is passing around a ledger (the block chain) that has every transaction and everything that's happened on it. If the NSA wants to get rid of bitcoins, they have to get rid of all of the miners. The software is fairly secure because it's distributed. One of the biggest weaknesses would be a situation where more of the 'miners' are cooperatively malicious than legitimate. This is called a 51% attack. If someone has more than half of the power on the network, since the network is peer validated they essentially have the authority to say what is valid, even if what they're saying is valid is not valid. Of course, there are some protections built in against 51% attacks. The bitcoin client keeps track of 'checkpoints', so changes to the block chain that don't agree with these checkpoints would be rejected. If everybody knows Steve received 50 bitcoins in a transaction last month, then everybody knows the ledger has been messed with if it suddenly says Steven received 50,000 bitcoins in that same transaction instead.



It's like the stock exchange. Anytime you sell a bitcoin, there's someone on the other end buying that bitcoin. If you try to sell and nobody wants to buy, your sell order will never go through and you won't get any money.

Bitcoins and other cryptocurrency derive their value in a similar manner to fiat money and commodity money.

Most importantly, Bitcoins are finite. Only so many of them can ever be made, and only the coins which have currently been mined currently exist. Something like sand could never be used as money, because anybody can just go to the beach and get more sand. There's just too much of it, so it isn't practically finite. But bitcoins are difficult to create, so there's only so many. And if you want one, someone has to be willing to give you one. So because there are people who want them, and there are only so many of them, and they're difficult to make, there's value.

The other thing is that people are willing to accept bitcoins as a payment. US dollars and other paper money are useless by themselves. It's just some cloth paper with some silly things printed on it. Yet people value US money anyways, and this is called fiat money. People value US money because they can exchange it for goods and services. If you find a $20 bill on the ground, this isn't going to be exciting just because you now have some stupid piece of paper; It's going to be exciting because you can take the stupid piece of paper and buy something with it. It takes a while for a currency to become valuable simply through people accepting it as payment, but bitcoins have been around long enough and attracted enough attention that people were wiling to accept them as payment for things in hopes that the value would later go up. Now that they're accepted, it's hard to discount bitcoins as money economically, because at some point, by not taking bitcoins, you're losing out. If you are selling something worth $100, and someone will give you a bitcoin for it, and you know other people are selling things worth more than $100 for a bitcoin, it'd be foolish not to take the bitcoin in such an example.
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Decent explanation, but the truth is the US dollar has been universal for much longer than any crypto currency. Bitcoin can and likely will crash sooner than later, which makes the whole argument for its legitimacy void.
 
jmilcher said:
Decent explanation, but the truth is the US dollar has been universal for much longer than any crypto currency. Bitcoin can and likely will crash sooner than later, which makes the whole argument for its legitimacy void.
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No currency has ever stood the test of time. The Greenback has been "universal" for how long, 100 years? Less? Every currency will eventually crash or merge into something else so that makes all arguments for any currency legitimacy voice?

Bitcoin is a test that may or may not have any incentive value. The test is to show that a cryptocurrency outside regulation and control is plausible. It poses a question and pushes for an answer; think of this as a philosophical question on who controls monetary value, the government or people. Whether it has any incentive value is just like in currency in that they are willing to trade (i.e., barter) their goods for your goods (e.g., money for Bitcoin(s)). What does it mean for you? Nothing if you don't use it, a lot if you bought in cheap, or maybe another option to Visa, Mastercard, American Express, and Discover (and PayPal?).

Personally, I think more options are great, but one that is based on what "everyone thinks its worth" creates a lot of speculation. Valuation is worse then most roller coaster rides, and that's pretty bad for any type of currency.
 
I have no current interest in owning bitcoins, but I see it's value. An international currency that does not rely on a failing (or highly in debt) government sounds good; however, the rise of competition (litecoin) makes me think it's a gamble I'd wait out. I'd rather stick with gold/silver for now. Still not a perfect store of value, but it's proven more stable for way longer.
 
So what's the best way to buy bitcoins? And what determines the exchange rate between bitcoin and other official currencies?
 
FrostBite said:
Personally, I think more options are great, but one that is based on what "everyone thinks its worth" creates a lot of speculation. Valuation is worse then most roller coaster rides, and that's pretty bad for any type of currency.
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This is the biggest problem with bitcoin as a currency. Right now, most of the transactions that are going on are just speculative investors trying to make money off of price changes. It's risky to use bitcoins as money, since you could buy a TV with what was $600 worth of
bitcoins, only to have that amount become worth $800 an hour later. If you'd have waited an hour, bitcoins would have been worth more and you would have needed to spend less of them to get your product. At the same time, the seller could sell you a TV for what is $600 worth of bitcoins, only to have the price drop and be left with something now worth only around $300.

This makes bitcoins more of a quasi-commodity than a currency at the moment. Maybe if things ever level out and become a bit less volatile it could be a useful currency. Right now, though, there's too many day-traders out there trying to make high-yield returns on their investment.
 
elleana said:
What I can't quite wrap my head around is where the money vaue for bitcoins comes from - lets say I mine 1 bitcoin, and cash out. Who pays me? I guess the relevant bitcoin exchange, but where does the bitcoin exchange get its funds from?
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This was explained to me the other day. Where does the "value" of absolutely anything come from? You could agrue that at one time the money in our pockets was backed by gold. But what makes gold have "value"?

The concept of money, especially money that isnt backed by anything at all is mind boggling. How does something get its value? Why does the physical money in my have value? Simply put because a large number of people say it does. Thats about it... So Bitcoins only have value because the peolpe who have them and accept them say they do.

Now... Once we establish they have value they (and all forms of currency) follow the same rules of supply/demand as everything else. This is why inflation occurs. Its often skewed... we think things are getting more expensive, when in reality our dollars are worth less. We just dont see it because the numerical digit on the bill doesnt change. We cant possibly print .98 dollar bills, or .70 dollar bills. Though THAT is exactly whats happening in terms of their value when our government prints more. What we really see is a price for something raising. The result is that the dollars are getting lower in value not that the value of something is increasing.

With bitcoins this is good. In 2040 (?) they will cease making bitcoins. They are released on a schedule for them. There will be a limited and fixed supply. What this means, is especially when they get close to top making them is that their value will actually increase.

I just recently got into bit coins. Bought $500 worth. Figured I've wasted $500 on dumber things so why not. Maybe in 5 years the value will increase so much that I'll be able to pay off my student loans? Who knows.

Economics is a fickle thing. Our government likes to think they can medel in it, like anything else. But in the end they just fuck it up and as a result we end up poorer.
 
jadams said:
With bitcoins this is good. In 2040 (?) they will cease making bitcoins. They are released on a schedule for them.
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There is no 'they', bitcoins aren't 'released', and there is no 'schedule'. They're created as a result of mining. There are only so many permutations of numbers that are valid bitcoins, which causes a finite limit of 21 million bitcoins. It's not a date thing...It's a quantity thing. This is what prevents inflation, along with the fact that the difficulty of producing a bitcoin increases with the amount of power used to create bitcoins. More mining means a higher difficulty.
 
my question is how is it not the case that someone (albeit skilled) can just find a way to crack the algorithm and code something which just gives themselves a bunch of bitcoins for free? Where is the security for controlled growth and also who decides how fast the supply increases?
 
lol, research or languish in the dustbin of history newbs...
 
cthulhuiscool said:
my question is how is it not the case that someone (albeit skilled) can just find a way to crack the algorithm and code something which just gives themselves a bunch of bitcoins for free?
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There are plenty of other things which rely on SHA2 (the algorithm you'd need to 'crack' for bitcoin). If this concerns you too much, you might decide to cancel every online account you've ever had, withdrawal all of your money from all of your banking accounts and go live in a remote part of the Suriname rainforests where nothing electronic can bother you. The same math which makes lots of other things on the internet secure (like TLS/SSL encryption and IPsec) is what bitcoin relies on as proof-of-work. If you place no faith in the bitcoin algorithm, then you should place no faith in the rest of the internet, either. If someone does crack SHA2, bitcoin won't be the only thing we have to worry about.

Normally I'd be much more willing to explain in better detail why it is secure, but SHA2 is a bit of a complicated topic to explain to someone with no background in cryptography.
 
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