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7 things you need to know about Bitcoin

Alex Wawro | April 12, 2013
Bitcoin is booming, but don't buy the hype before you read our guide.

But unlike gold, bitcoins enter the world at a rate that shows very little variation. The Bitcoin algorithms dynamically change in difficulty based on how often bitcoins are being awarded; and this ensures a smooth, steady drip of virtual currency into the network. If mining drops off, bitcoins will become easier to mine. If mining becomes exceedingly competitive--as it is now, with bitcoin miners investing in high-end PCs and server farms as part of a processing-power arms race--bitcoin mining becomes more difficult.

"At this point, mining for bitcoins is a very bad idea," says Vitalik Buterin, head writer at Bitcoin Magazine. "You'll basically get nothing. The best way to get bitcoins is to buy them on an exchange."

My research suggests that Buterin is right: These days, you probably won't earn many bitcoins through mining unless you're part of a mining pool--a group of users who combine their processor resources cooperatively to chew through solutions faster, and thus increase their rate of earning bitcoins. Plenty of mining pools exist, each with its own rules and methods of distributing bitcoin rewards. If you're interested in getting into mining, pick a promising group from this short list of big bitcoin mining pools and contact the pool operator.

Most major retailers don't accept bitcoins (yet)

If you do decide to take the plunge and buy some bitcoins on an exchange like Mt. Gox, you'll need a place to spend them. Bitcoin is still young, but the list of merchants that accept bitcoins is growing rapidly as the currency gains traction through media exposure. The lion's share of bitcoin business still happens online, as befits a virtual currency--you can spend bitcoins at Reddit, WordPress, Mega, and Wikileaks, for example. But brick-and-mortar businesses--mostly bars and corner stores with connections to Bitcoin advocates--are gradually adopting the currency as well.


A Reddit user claims to have found this plaque in a corner food market in British Columbia.

You'll find a much, much bigger list of websites where you can spend your hard-earned bitcoins on the Bitcoin wiki, and a growing list  of businesses that accept bitcoins in the real world.

Bitcoins aren't protected or insured by anyone

Bitcoin transactions are irreversible. Once a bitcoin transaction is broadcast to the network it can't be revoked. So a hacker who accesses the PC that stores your bitcoin wallet can send your entire bitcoin fortune to another wallet--and there's nothing you can do about it. Caveat emptor.

Of course, if the PC that stores your bitcoin wallet is owned by a third party that insures it against theft--say, a respectable bitcoin wallet hosting service--you might be able to recover the value of some or all of your stolen currency. For example, the recently hacked bitcoin wallet hosting service Instawallet shut itself down in the wake of a devastating hack attack and provided refunds to users who had lost 50 BTC or less.

 

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