FAQ

FAQ

General Questions

What is Bitcoin?

Bitcoin is a peer-to-peer network based anonymous digital currency. ''Peer-to-peer'' (P2P) means that there is no central authority to issue new money or to keep track of the transactions. Instead, those tasks are managed collectively by the nodes of the network. ''Anonymity'' means that the real world identity of the parties of a transaction can be kept hidden from the public or even from the parties themselves.

How does Bitcoin work?

Bitcoin utilizes public/private key cryptography. A coin has its owner's public key on it. When a coin is transfered from user A to user B, A adds B’s public key to the coin and signs it with his own private key. Now B owns the coin and can transfer it further. To prevent A from transferring the already used coin to another user C, a public (but anonymous) list of all the previous transactions is collectively maintained by the network of Bitcoin nodes, and before each transaction the coin’s unusedness will be checked.

For details, see the technical paper: Bitcoin: A Peer-to-Peer Electronic Cash System.

What can I buy with Bitcoin?

Check out the Trade-page. If you have a service provider you often buy from, we really appreciate if you can ask if they'd like to accept Bitcoin as payment!

Where does the value of Bitcoin stem from? What backs up Bitcoin?

Bitcoin has value because it is accepted as payment by many. The initial market value was achieved when people speculated, that because of its properties, the currency would be accepted by others later on.

When we say that a currency is backed up by gold, we mean that there's a promise in place that you can exchange the currency for gold. In a sense, you could say that Bitcoin is "backed up" by the price tags of merchants and currency exchangers – a price tag is a promise to exchange goods for a specified amount of currency. Of course, price tags may or may not be as long-term promises as those made by central banks or governments.

It's a common misconception that Bitcoins gain their value from the cost of electricity required to generate them. Cost doesn't equal value – hiring 1,000 men to shovel a big hole in the ground may be costly, but not valuable. Also, even though scarcity is a critical requirement for a useful currency, it alone doesn't make anything valuable. Your fingerprints are scarce, but that doesn't mean they have any exchange value.

How are new Bitcoins created?

New coins are generated by a network node each time it finds the solution to a certain calculational problem (i.e. creates a new block), for which an average solution time can be calculated. The difficulty of the problem is adjusted so that in the first 4 years of the Bitcoin network, 10,500,000 coins will be created. The amount is halved each 4 years, so it will be 5,250,000 in years 4-8, 2,625,000 in years 8-12 and so on. Thus the total number of coins will approach 21,000,000 over time.

What's the current total amount of Bitcoins in existence?

The number of blocks times the coin value of a block. The coin value is 50 bc per block for the first 210,000 blocks, 25 bc for the next 210,000 blocks, then 12.5 bc, 6.25 bc and so on.

As of October 30th 2009, there are about 26,000 blocks in the block chain, which means 26,000 * 50 bc = 1,300,000 bitcoins in existence. You can see the up-to-date number of blocks in the status bar of the Bitcoin main window.

What is a "block"?

A block is a unit which contains the information of the transactions made after the previous block, plus a transaction which assigns a new coin to the creator of the block. Blocks form a chain from the first block to the latest block. To create a new block you need to spend CPU time, which acts as an unbribable timestamp for the previous transactions. The average rate of block creation in the whole system is 6 / hour. For details, see the technical paper: Bitcoin: A Peer-to-Peer Electronic Cash System.

The block chain length is shown in the status bar of the Bitcoin main window. The number increases rapidly while your Bitcoin client is downloading the block chain from other nodes. After the downloading is finished, your node can start generating new blocks.

So your wealth is determined by the amount of CPU power you have?

No. There's a constant average rate of new Bitcoins created, and that amount is divided among the nodes by the CPU power they use. When Bitcoins start having real exchange value, the competition for coin creation will drive the price of electricity needed for generating a coin close to the value of the coin, so the profit margin won't be that huge. The easier way to gain a lot of wealth would be trading goods.

At the moment, though, you can generate new coins quite profitably, if you expect them to have real value in the future. If you choose to, be aware that Bitcoin is still experimental software.

Is Bitcoin safe?

Yes, as long as you make backups of your Bitcoin wallet, protect it with a strong password and keep keyloggers away from your computer. You need to make a backup of your wallet after each transaction, as the old wallet backup will be partially or completely invalid.

If you lose your wallet or if some unknown attacker gets it and manages to break your password, there’s no way to get your coins back. On the other hand, that is usually also the case if you lose your physical wallet.

Why should I use Bitcoin?

  • Transfer money easily through the Internet, without having to trust middlemen.
  • Third parties can’t prevent or control your transactions.
  • Bitcoin transactions are practically free, whereas credit cards and online payment systems typically cost 1-5% per transaction plus various other fees up to hundreds of dollars.
  • Be safe from the instability caused by fractional reserve banking and bad policies of the central banks. The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) throughout the network, not monopolized to the banks.

Where can I get Bitcoins?

Find a Bitcoin owner and sell her something - MMORPG equipment, IT support, lawn mowing, dollars or whatever you can trade with her. You can also generate new Bitcoins for yourself by running a Bitcoin network node.

You can find currency exchangers on the Trade page.

How to help Bitcoin?

You can:

  • offer Bitcoin as a payment option at your web shop or service
  • tell about Bitcoin to people who might be interested
  • translate Bitcoin to your language if it isn't already here
  • write documentation on the wiki
  • report bugs, help people and discuss Bitcoin on the forum
  • help people, or just chat in the irc channel with your own client if you have one, or use the official Freenode webclient here

Using Bitcoin

How do I make a transaction?

When you want to send coins, click the ''Send Coins'' button up in the main window. You can send coins to the recipient's IP address if he's running the Bitcoin client, or to his Bitcoin address even if he's not online or doesn't want to reveal his IP. A comment can be included when sending to an IP.

If you're receiving a valuable amount of coins from a sender whom you can't be sure to trust, before accepting the transaction you may want to wait until it's verified by a few blocks. The more blocks you wait, the closer to zero is the sender's chance to successfully double-spend the coins sent to you. The amount of blocks after the transaction is shown in the ''Status'' column of the transaction list in the main window.

How do I generate coins?

Turn on ''Options -> Generate Coins'' to run a node and generate new coins. Be sure to have port 8333 open for incoming connections (instructions).

How long does it take to generate a coin?

Initially your Bitcoin client will have to download and verify the Bitcoin block chain, which is indicated by the number of blocks (shown in the status bar) increasing rapidly. On a modern PC that might take a few hours, after which it will start generating coins.

Your average coin creation rate will be (6 * 50 coins / hour) * (your CPU speed / the total CPU speed in the Bitcoin network). At the moment (August 2010) it might be something like 50 coins / 3 weeks, for example.

My Bitcoin client shows 0 connections, where’s the problem?

That could happen if port 8333 is not open for incoming connections (instructions).

How do I open port 8333?

If you’re behind a firewall, it will usually ask if you want to allow incoming connections to an application when running it for the first time. If you’re also behind NAT, see www.portforward.com for instructions how to forward the port correctly. Select your router from the list and see its Default Guide.

Use www.canyouseeme.org to check if the port is accepting incoming connections.

How do I backup my wallet?

Your wallet.dat is stored in the directory ''%appdata%\Bitcoin'', which is typically:

 Windows XP:
   C:\Documents and Settings\username\Application Data\Bitcoin
 Windows Vista:
   C:\Users\username\AppData\Roaming\Bitcoin
 Linux:
  ~/.bitcoin

You need to make a backup of the wallet after every transaction, as the old backup file will be partially or fully invalid. Wait at least a few seconds after your last transaction before making the backup.

If you want to encrypt your backup, you can use some program like TrueCrypt. An in-built tool for encrypting your wallet will be included in Bitcoin later on.

Advanced Questions

How do I use Bitcoin on the server-side?

Run bitcoin with switch -server or use the Bitcoin daemon (bitcoind) supplied with the download package. Bitcoin has an API that can be used via command line or JSON-RPC. The API documentation can be found in the wiki.

How divisible are Bitcoins?

Technically, a Bitcoin can be divided down to 8 decimals, so 0.00000001 BTC is the smallest possible amount. For convenience, the program currently accepts only 2 decimal places.

How does the peer finding mechanism work?

Bitcoin finds peers primarily by connecting to an IRC server (channel #bitcoin on irc.lfnet.org). If a connection to the IRC server cannot be established (like when connecting through TOR), an in-built node list will be used and the nodes will be queried for more node addresses.