New to bitcoin

[humphrey]

I have such a headache...

I have read and watched videos from countless sources but still cannot wrap my mind around the "bitcoin."



What I have so far is:

the bitcoin exe is a program that allows you to send and receive coins (currency) and also generate them, the generation process beguines after the things called blocks are downloaded- once downloaded i believe the program will create 50 coins every 6 hours. and to generate them you must leave the bitcoin application open- the application uses cpu power.

Now when it says it uses the cpu's power- does that mean if i have a 3.5ghz processor it will use (guessing) 1.3 of those ghz leaving the rest of the computer 2.7ghz?

I see a lot of people talking about mining- what is that even about? can you run multiple applications on a machine? lets say if I ran two copies, would that make 100 coins in 6 hours?


im sure I have more questions but I am way to tired to think- anyways thanks for anyone that replies.

[Pieter Wuille]

I'm afraid you misunderstood some things. Mining is the process of generating blocks, but it is much, much slower than the numbers you give.

The bitcoin executable you can download does a number of things. First of all it manages your wallet (the coins you own), and allows you to send and receive them. Apart from that, it also contains a built-in miner, which uses your CPU to generate coins. Without knowing its actual speed, I think it is safe to say that generating coins now using that will at least take a few years, sorry if you had your hopes up.

Mining is currently mainly done using certain high-end GPU's, which are way faster at this than CPU's. The total number of coins to be earned every day is limited by the system, so the more people are trying to get a share, the less everyone will get. This may sound like a bad idea if you wanted to have some extra income from it, but it's actually a very good thing for the security of the network.

Bitcoin is not about mining, it's about creating an independent currency, which you can buy and sell. However, if you insist on mining, you can join a pool (which can give you very small but much more frequent payouts), or look into GPU mining if you have a fast graphics card.

PS: could you tell us where you got the information about 50 coins every 6 hours, or that it only requires 1.3GHz of your CPU?

[eMansipater]

Hi Humphrey,

Don't worry--BitCoin is a complicated technology and it can take a while to wrap your head around just how ingenious it is!  The mining and "generating coins" thing is probably the #1 source of confusion for newcomers--you should know right off the bat that you don't need to know anything about mining to use bitcoins.

The idea that computers, or "miners" generate bitcoins is a common misunderstanding compounded by the fact that it's been repeated in trusted sources like the www.weusecoins.com video.  This is only true in the sense that a job "generates" income for you--bitcoins do not come from the mining operation.  Instead, bitcoins are awarded to miners in a highly competitive market as a reward for processing transactions and securing the bitcoin currency network.  Because this market is so competitive, you're unlikely to earn much from turning on that option for your CPU--most mining these days is done on high-end graphics cards and returns an income relatively close to the costs involved, such as electricity and time.


Here is a good summary to help you understand BitCoin in general, by focussing on what BitCoin is and what problem it solves.  These two things are not typically well explained on most websites, and it is difficult to appreciate just how effective a technology BitCoin is until they are understood.

What BitCoin is:  An agreement amongst a community of people to use 21 million secure mathematical tokens--"bitcoins"--as money, like the Iroquois used wampum.  Unlike wampum, there will never be more bitcoins, they are impossible to counterfeit, they can be divided into as small of pieces as you want, and they can be transferred instantly across great distances via a digital connection such as the internet.  This is accomplished by the use of powerful cryptography many times stronger than that used by banks.  Instead of simply being "sent" coins have to be cryptographically signed over from one entity to another, essentially putting a lock and key on each token so that bitcoins can be securely backed up in multiple places, and so that copying doesn't increase the amount you own.

Because bitcoins are given their value by the community, they don't need to be accepted by anyone else or backed by any authority to succeed.  They are like a local currency except much, much more effective and local to the whole world.  As an example of how effective the community is at "backing" the bitcoin, at the beginning of this week someone sold 30,000 bitcoins on the largest exchange, consuming nearly all "buy" offers on the order book and dropping the price by nearly 1/3.  But within a couple of days, the price on the exchange has fully rebounded and bitcoins are again trading at good volumes, with large "buy" offers slowly replacing the ones consumed by the trade.  The ability of such a small economy (there are only 5 million out of the total 21 million bitcoins circulating so far, or about 3.75 million USD worth at current exchange rates) to absorb such a large sell-off without crashing shows that bitcoins are already working beautifully.

What problem BitCoin solves:  Mathematically, the specific implementation of the bitcoin protocol solves the problem of "how to do all of the above without trusting anyone".  If that sounds amazing, it should!  Normally a local currency has to trust all kinds of people for it to be able to work.  So does a national currency.  And in both cases, that trust is often abused.  But with bitcoin, there's no one person who can abuse the system.  Nobody can print more money, nobody can re-use the coins simply by making a copy, and nobody can use anyone else's coins without having direct access to their keys.  People who break its mathematical "rules" simply end up creating a whole different system incompatible with the first.  As long as these rules are followed by someone, the only way bitcoin can fail is for everyone to stop using it.

This marvelous quality of not having to trust anyone is achieved in two ways.  First, through the use of cutting-edge cryptography.  Cryptography ensures that only the owner of the bitcoins has the authority to spend them.  The cryptography used in BitCoin is so strong that all the world's online banking would be compromised before BitCoin would be, and it can even be upgraded if that were to start to happen.  It's like if each banknote in your pocket had a 100-digit combination lock on it that couldn't be removed without destroying the bill itself.  BitCoin is that secure.

But the second way of securing the system, called the "blockchain", is where the real magic happens.  Even with top-notch digital encryption, if there was no central registry to show that certain bitcoins had already been "paid" to someone else, you could sign over the same coins to multiple people in what's called a "double-spend attack", like writing cheques for more money than you have in your account.  Normally this is prevented by a central authority, the bank, who keeps track of all the cheques you write and makes sure they don't exceed the amount of money you have.  Even so, most people won't accept a cheque from you unless they really trust you, and the bank has to spend a lot of money physically protecting those central records, even if they are kept in a digital form.  Not to mention, sometimes a bank employee can abuse their position of trust.  And, in traditional banking, the bank itself doesn't have to follow the rules you do--it can lend out more money than it actually has.

The blockchain fixes all these problems by creating a single master registry of the already-cryptographically-secured bitcoin transfers, verifying them and locking them down in a highly competitive market called "mining".  In return for this critical role, the bitcoin community rewards miners with a set amount of bitcoins per block, taken from the original limited quantity on a pre-agreed schedule.  As that original amount gradually runs out, this reward will be replaced by fees paid to prioritise one transaction over another--again in a highly competitive market to ensure the lowest possible cost.  The transactions are verified and locked in by the computational work of "mining" in a very special way that means no one else can change the official record of transactions without doing more computational work than the cumulative work of all miners across the whole network.

This means that no matter where or how you process bitcoin transactions, the network remains secure.  Which is incredible--no one else has ever tried to create a system that worked this way!  All previous monetary systems have relied on trusting somebody, whether it was the king, town hall, the federal reserve, or banks.  BitCoin doesn't.  This also explains what "miners" are doing--they are processing transactions for the BitCoin network, and securing it against attack.  They do this through working on "blocks" but actually generating a block is quite rare, so nobody is earning 50 coins every 6 hours unless they have thousands of dollars worth of mining hardware.  In fact, block generation is so rare that most people mine together in large pools to even out the irregularity of the process.

The bitcoin.exe software downloads all blocks off the network in order to have a full, up-to-date record of transactions--this has nothing to do with mining but is just the way the BitCoin network works.  Does that make sense?  I'm sure you have lots of questions so feel free to ask away.

...Mining is the process of generating coins...

Your explanation is spot on, but please change this terminology so as not to confuse newcomers.  Miners generate blocks, for which they earn coins.

[deadlizard]

eMansipater ftw 

[Cryptoman]

Yeah, eMansipater is awesome.  We could all learn a thing or two from him about how to treat newbies.  Welcome to the Bitcoin forum, humphrey!

[RodeoX]

Yeah, eMansipater is awesome.  We could all learn a thing or two from him about how to treat newbies.  Welcome to the Bitcoin forum, humphrey!

Amen, Tiny tip sent to eMansipater for being such a cool guy to new forum members.

[humphrey]

FROM: sipa

it contains a built-in miner, which uses your CPU to generate coins.
Mining is currently mainly done using certain high-end GPU's, which are way faster at this than CPU's.

So it uses CPU's or GPU's?


Without knowing its actual speed, I think it is safe to say that generating coins now using that will at least take a few years, sorry if you had your hopes up.

AMD Athlon 64 x2 (2.11 ghz) [Dual Core]

GPU: http://www.nvidia.com/page/geforce_7300.html

PS: could you tell us where you got the information about 50 coins every 6 hours, or that it only requires 1.3GHz of your CPU?

Found it somewhere last night- not sure if I can locate again but if I do I will let ya know.

-----------------

FROM: eMansipater

you should know right off the bat that you don't need to know anything about mining to use bitcoins.

Mhmm- btw sent u 5 coins. Thnx for the reply.


Because this market is so competitive, you're unlikely to earn much from turning on that option for your CPU--most mining these days is done on high-end graphics cards and returns an income relatively close to the costs involved, such as electricity and time.

So you can use either the CPU or GPU to (GPU being better) to mine?




What BitCoin is:  An agreement amongst a community of people to use 21 million secure mathematical tokens--"bitcoins"--as money, like the Iroquois used wampum.  Unlike wampum, there will never be more bitcoins, they are impossible to counterfeit, they can be divided into as small of pieces as you want, and they can be transferred instantly across great distances via a digital connection such as the internet.


So there are only 21 million available bitcoins in this network?

What happens when they run out?
What if someone has a majority of these coins and never uses them?




Because bitcoins are given their value by the community, they don't need to be accepted by anyone else or backed by any authority to succeed.  They are like a local currency except much, much more effective and local to the whole world.  As an example of how effective the community is at "backing" the bitcoin, at the beginning of this week someone sold 30,000 bitcoins on the largest exchange, consuming nearly all "buy" offers on the order book and dropping the price by nearly 1/3.  But within a couple of days, the price on the exchange has fully rebounded and bitcoins are again trading at good volumes, with large "buy" offers slowly replacing the ones consumed by the trade.  The ability of such a small economy (there are only 5 million out of the total 21 million bitcoins circulating so far, or about 3.75 million USD worth at current exchange rates) to absorb such a large sell-off without crashing shows that bitcoins are already working beautifully.

DAMN!! (aka amazing)


This also explains what "miners" are doing--they are processing transactions for the BitCoin network, and securing it against attack.  

So basically the people that are running the bitcoin exe are the "miners" which is just a term used to explain that they are allowing the bitcoin network to secure itself threw them?

They do this through working on "blocks" but actually generating a block is quite rare,

So what does it mean to work on a block?
how many coins do you get for generating a block?
and how long does it take to create a block using a great computer setup?


Does that make sense?  I'm sure you have lots of questions so feel free to ask away.


U have no idea

Also, you mentioned a key "direct access to their keys." what key exactly?


also also, if i lose the wallet- the coins are gone for ever?
If i take my address from one computer to another (by adding the address with bitcoins to the address i get bitcoins at on another machine?)

[Ricochet]

The standard client does not try to mine by default, and is instead a way to manage your wallet and keep the blockchain up to date.  You have to manually check the "Generate" box, which will then use up 100% of your CPU.  There are alternative miners that other people have made (in the Mining forum here) that can utilize your GPU if it supports CUDA or OpenCL.  Most of them are command-line, though I understand someone made a GUI in one of those threads somewhere.

In both cases, you can use http://www.alloscomp.com/bitcoin/calculator.php to estimate approximately how long it would take you to generate a block yourself at any given hash rate.  Try turning the Generate option on for a minute to get a "khash/s" value (then turn it off) and plug that into the calculator to see just how futile it is to try to mine with the standard client at this point.  Note that the calculator is using the current difficulty number, and historically the difficulty has mostly risen every ~2 weeks or so.  

Just for grins, put "1" as the difficulty factor in the calculator, which is where it was when Bitcoin first began, and you'll see why people got the impression that "Bitcoins = generating free money!" since even a modest computer would solve a block within each hour.  But at that time, because they were so easy to get, people only traded them for less than a penny apiece.  Now that the computational power of the network has increased, and the difficulty has risen to compensate, each individual coin is worth more (up to today's exchange rate of about $0.80 apiece).

I'm not good at explaining just what exactly "solving a block" means, other than it writes various transactions permanently into the public record, which is immediately updated and sent to everyone else running the Bitcoin client.  Thus, running the client by itself doesn't really help secure the network, and neither does attempting to generate blocks without actually solving any.  It's the act of solving a block, verifying that all transactions up until that point are correct, that strengthens things.

The current reward is 50 Bitcoins for solving a block, though once we reach a certain point, that number will be cut in half, then half again later, etc which is why there will never be more than 21 million coins.  If they "run out" in that sense, or if someone hoards tons of them and doesn't use them, then the beauty of this is that it doesn't matter!  Each bitcoin is divisible up to 8 decimal places, so you can only truly run out when 0.00000001 BTC is worth too much to you to spend on what you want.  The current client is merely limited to 2 decimal places, but this can easily be changed.

EDIT:  "also also, if i lose the wallet- the coins are gone for ever? "  -- Yes.  You are your own bank here, and that's why it's so important to make sure you back up your wallet.dat file every few transactions.  Note that you can make up to 100 transactions between backups if you really want to, but better safe than sorry right?

[Alex Beckenham]

Try turning the Generate option on for a minute to get a "khash/s" value (then turn it off) and plug that into the calculator to see just how futile it is to try to mine with the standard client at this point.

It is futile in the same way that buying lottery tickets is a futile way to earn a steady income.

But I'm guessing even a dead slow computer doing 2khash/s could theoretically 'win the lotto' and earn 50 btc within 10 seconds of installing the client*

*someone more experienced tell me if I'm wrong about this.

[MoonShadow]

Try turning the Generate option on for a minute to get a "khash/s" value (then turn it off) and plug that into the calculator to see just how futile it is to try to mine with the standard client at this point.

It is futile in the same way that buying lottery tickets is a futile way to earn a steady income.

But I'm guessing even a dead slow computer doing 2khash/s could theoretically 'win the lotto' and earn 50 btc within 10 seconds of installing the client*

*someone more experienced tell me if I'm wrong about this.

Excluding the delay that bootstrapping the blockchain imposes at startup, then yes, it is possible for any computer to pull a hail mary at any time after it starts generating.

[Ricochet]

Well of course it's possible, yes.  It's just so extremely unlikely that I wouldn't bother with it, not when it's using up my CPU resources that I need for other tasks.

[Alex Beckenham]

Well of course it's possible, yes.  It's just so extremely unlikely that I wouldn't bother with it, not when it's using up my CPU resources that I need for other tasks.

I wouldn't bother with it either, but that's from a 'steady income' point of view.

My point is that if you do want to use a cpu for generating coins, you should probably be thinking of it more like buying lottery tickets.

[eMansipater]

FROM: sipa
it contains a built-in miner, which uses your CPU to generate coins.
Mining is currently mainly done using certain high-end GPU's, which are way faster at this than CPU's.
So it uses CPU's or GPU's?

BitCoin.exe will only use your CPU, but more advanced mining programs like poclbm, which is available with a graphic interface, use the parallel processing power of GPU's to far outperform them.  Because mining is essentially a competition, this is why it has become so difficult to earn bitcoins this way.

Without knowing its actual speed, I think it is safe to say that generating coins now using that will at least take a few years, sorry if you had your hopes up.
AMD Athlon 64 x2 (2.11 ghz) [Dual Core]
GPU: http://www.nvidia.com/page/geforce_7300.html

Based on other people's numbers it looks like your total generating capacity would be only 1-2 "MHash", which equates to earning one 50 BTC reward every 11 years.  These days the most powerful mining is done with leading edge AMD graphics cards where the owner of an AMD Radeon HD 6990 will get a 50 BTC reward about every 6 days if mining continuously.  But competition is always reducing the rate people earn, like Ricochet explained.

PS: could you tell us where you got the information about 50 coins every 6 hours, or that it only requires 1.3GHz of your CPU?
Found it somewhere last night- not sure if I can locate again but if I do I will let ya know.

Thanks humphrey--we like to track down misinformation whenever we can.  It sounds like those numbers were either very out of date or a misunderstanding.

-----------------

FROM: eMansipater
you should know right off the bat that you don't need to know anything about mining to use bitcoins.
Mhmm- btw sent u 5 coins. Thnx for the reply.

Thank you.  Tips always make my day .  By the way, I'm always curious to ask where people got their first bitcoins, since it used to be quite difficult but is getting easier and easier all the time.  Was it from CoinPal, or a friend, or something else (if you don't mind my asking)?

Because this market is so competitive, you're unlikely to earn much from turning on that option for your CPU--most mining these days is done on high-end graphics cards and returns an income relatively close to the costs involved, such as electricity and time.
So you can use either the CPU or GPU to (GPU being better) to mine?

Yes, exactly--see above.

What BitCoin is:  An agreement amongst a community of people to use 21 million secure mathematical tokens--"bitcoins"--as money, like the Iroquois used wampum.  Unlike wampum, there will never be more bitcoins, they are impossible to counterfeit, they can be divided into as small of pieces as you want, and they can be transferred instantly across great distances via a digital connection such as the internet.
So there are only 21 million available bitcoins in this network?

That's correct.  It's the limited amount that gives bitcoins their value--if there were an unlimited number there wouldn't be any competition to own them and it would be foolish to treat them as money.  Wampum, for example, started being mass-produced by dutch settlers and was ruined as money.

What happens when they run out?

The initial 21 million are going to be very gradually distributed, mostly over the next few decades, instead of running out.  But you will always be able to get bitcoins by trading goods, services, or other money for them with other people, just like you would get any other kind of cash.  Similarly, the total amount of gold in the world doesn't tend to change very much but instead the existing gold is just traded around and re-used.  Unlike paper currencies, bitcoins don't wear out so this isn't a problem.

What if someone has a majority of these coins and never uses them?

Trying to buy up the majority of bitcoins would be like trying to buy up the majority of gold in the world--it would soon get very expensive, and all the remaining bitcoins would increase greatly in value.  So in short--they would make everybody else rich.  As far as technically, having less bitcoins isn't a problem because unlike normal banknotes they can be divided into as small of pieces as you need.  The entire bitcoin economy could run on a single bitcoin if it needed to, because you could just transfer .0000001 btc at a time, for example.  For the time being we only use amounts as small as .01, but we can change that as bitcoin becomes more valuable.

Because bitcoins are given their value by the community, they don't need to be accepted by anyone else or backed by any authority to succeed.  They are like a local currency except much, much more effective and local to the whole world.  As an example of how effective the community is at "backing" the bitcoin, at the beginning of this week someone sold 30,000 bitcoins on the largest exchange, consuming nearly all "buy" offers on the order book and dropping the price by nearly 1/3.  But within a couple of days, the price on the exchange has fully rebounded and bitcoins are again trading at good volumes, with large "buy" offers slowly replacing the ones consumed by the trade.  The ability of such a small economy (there are only 5 million out of the total 21 million bitcoins circulating so far, or about 3.75 million USD worth at current exchange rates) to absorb such a large sell-off without crashing shows that bitcoins are already working beautifully.
DAMN!! (aka amazing)

Yes, it is very impressive!  And it's also a great sign for BitCoin's future.

This also explains what "miners" are doing--they are processing transactions for the BitCoin network, and securing it against attack.  
So basically the people that are running the bitcoin exe are the "miners" which is just a term used to explain that they are allowing the bitcoin network to secure itself threw them?

Right--the underlying mathematics of how mining works is ingenious, but intricate!  I would be happy to explain it if you're interested.

They do this through working on "blocks" but actually generating a block is quite rare,
So what does it mean to work on a block?

As transactions are processed and verified on the BitCoin network, they are put into blocks and an SHA256 checksum is computed of the whole block.  This is so that those transactions cannot be changed later.  However, the p2p network of bitcoin clients won't accept just any checksum, or hash, for a block.  Only hashes starting with a certain amount of zeroes are accepted (the number of zeroes depends on how fast blocks are appearing on the network), so if the first hash calculated doesn't work the block has to be changed slightly by adjusting a number called a nonce, and the hash calculated again.  This process gets repeated many, many times until the miner randomly finds a hash that starts with enough zeroes.  Because this block will now be accepted by the network, we call this "finding a block".  So the work a miner is doing is to first doublecheck all the transactions it has seen recently to make sure they are valid, then put them all in a block and try using different nonces many many times until they find a block with enough zeroes in its hash to be accepted by the network.  The difficulty in finding a hash guarantees that no one can just make up their own blocks to try and change the official record of transactions.  And, because each block also includes the hash of the previous block, these blocks together form an unbreakable series called the blockchain.  As long as a client connected to the BitCoin network uses the most computationally difficult blockchain, they will know they that the list of transactions in it is the "official" one and can be trusted.

Confused?  It's a little complicated, but once you understand it this is the underlying reason that BitCoin doesn't have to trust anyone, and why it would be very expensive for a fraudster to try and "write two cheques on the same bank account" in a double-spend attack.  Feel free to ask for more clarification.  The BitCoin wiki, which I keep linking to, is also a great source of detailed information.

how many coins do you get for generating a block?

The reward for generating a block (which is included as a transaction to themselves by the miner who finds the block, and accepted as valid by the rest of the network as long as they follow the rules) follows a set schedule and is currently 50 bitcoins.  Miners also earn any transaction fees paid by transactions they process (you can pay a fee to to jump to the head of the line, which is important if the bitcoin network ever starts to fill up with more transactions than can be processed for free).  The set schedule will reduce the reward over time to gradually approach that magical 21 million bitcoin total, and as the reward decreases it will be replaced by transaction fees to ensure people keep mining for ever without any new bitcoins having to be created.  By this time, if it is successful, the bitcoin network will probably have so many transactions on it that the fee will be very low but still create an incentive for miners to keep joining.

The more people start using bitcoin, the more bitcoins become worth (due to the limited number), and thus the more valuable block rewards become.  More miners join in the competition to find blocks, the network adjusts the number of zeroes needed for a block to count, and bitcoin becomes more secure.  So what this means is, the more people use bitcoin, the more secure it becomes.  Isn't that ingenious?!!  BitCoin is incredible.

and how long does it take to create a block using a great computer setup?

Well, if you have a $700 graphics card you will find one, on average, every 5-6 days of continuous mining--though it's random when it actually occurs.  If you have a $100 graphics card you will find one every 24 days of continuous mining on average (For mining AMD cards tend to outperform NVIDIA cards due to their differences).  Because of the randomness and the long waits, some people choose to join a mining pool where they mine together with a large group of people and split the proceeds.  Most mining pools charge a small fee for the server, so in the end the $100 graphics card tends to make a more consistent 2 BTC per day or so.  Of course, as new miners are always entering, this will go down over time with the increased competition.

By the time you pay for the electricity, the graphics card, and the time spent on it, nobody's really making a whole ton of bitcoins this way.  The best and simplest way to get bitcoins is simply to buy them, which is what most people do.  For smaller amounts CoinPal works well off a verified PayPal account.  For larger amounts most people do a bank transfer to a BitCoin exchange like Mt. Gox.  In both cases there will be a slight fee for exchange because of either the expense involved or the risk of fraud (people will do crazy things for bitcoins because they're so secure and they're basically digital cash).

You can also sell something or work for bitcoins, just like any other kind of cash!

Does that make sense?  I'm sure you have lots of questions so feel free to ask away.
U have no idea

Also, you mentioned a key "direct access to their keys." what key exactly?

When you use the normal bitcoin client, this happens behind the scenes.  What's going on is that a person's public address, like the one in my signature, is where coins are sent to.  But only the person who holds the private encryption key to that address can spend them.  These keys are normally stored in a file on your computer called your "bitcoin wallet" and then used by bitcoin.exe every time you send coins.  If someone gets these keys they can steal your bitcoins, so be careful to protect them!  You should also make a backup of them in case your computer crashes.  Right now making a secure backup is a little intricate, but it will probably be much easier in a future edition of the bitcoin client.

also also, if i lose the wallet- the coins are gone for ever?
If i take my address from one computer to another (by adding the address with bitcoins to the address i get bitcoins at on another machine?)

Yes, if the private keys in your wallet are lost and you don't have a backup, no one will ever be able to spend those bitcoins and they will be essentially lost.  The simplest way to move bitcoins from one address to another is simply to send them like a normal transaction--then you will only need the new private keys in the new wallet file to spend them, no matter what happens to the old computer.

I hope that answers some of your questions

[echonaut]

Great response, that really helped me a lot.

I do have one question though, and it's more a request for clarification than an actual question:

As I've been reading and reading and reading about Bitcoin, the nagging thought in the back of my head has been: how can I (if possible) use this system to pay for those core things that I need to live, such as groceries and rent. The answer to that, in my mind, has been that I will, at the end of the day, need to convert BTC to USD in order for the BTC to basically "interface" (for lack of a better term) with other, more widely circulated currencies; basically the currencies that we use day to day. That is, I imagine, where an exchange comes in.

My biggest concern has been the trustworthiness of the exchange, but I think I've been considering it all wrong: I've been thinking of exchanges as, essentially, banks that have a quantity of money and I pay them, then they pay me in Bitcoins. There is, of course, the concern for fraud, which is one of the things that BTC is trying to create a system against.

But am I thinking about it wrong? Do these exchanges purely facilitate the trade of Bitcoins-to-USD/CAD/EUR/whatever between the users? So that I go to, for instance, Mt. Gox, put a proposed exchange, and then I'm contacted by the user with the appropriate currency to then do the exchange, and everything is done directly so that there is no intermediary that acts as a bank to hold money for me (or anyone else) to withdraw from? Or is it these services that act as escrow, essentially?

I apologize if these questions seem pretty rudimentary, but I'm intrigued by the prospect of BTC as a thing, and I'm always and forever interested in crypto-anything, so why not get involved in cryptocurrency?

[Reto]

Currently, the bitcoin is still a pretty niche idea, but it's spreading quite virally. Even so, it'll be a long time before grocery stores start accepting them. Bitcoin, in its purely electronic nature, is geared towards exchanges for electronic/digital goods and services. Maybe in the future, stores will have a terminal-ish thing for Bitcoin transactions.

I'm also going to add that bitcoin mining by yourself is extremely slow, in terms of probability. You could get lucky and get that 50 BTC prize, but the chances are so slim you're better off participating in pooled mining. Pooled mining is a service where many people cooperatively try to solve blocks, and the block reward is split among the participants. How it's split is up to the pool's host.

I mine with Deepbit, but there are other pools posted around the forum.

-edit-

Also, you won't get anywhere even in a pool with CPU mining. The GPU is much more adept at mining, reasons at this page. You'll have to use a GPU miner to take advantage of your GPU. I use m0mchil's GPU miner.

[Cryptoman]

As I've been reading and reading and reading about Bitcoin, the nagging thought in the back of my head has been: how can I (if possible) use this system to pay for those core things that I need to live, such as groceries and rent. The answer to that, in my mind, has been that I will, at the end of the day, need to convert BTC to USD in order for the BTC to basically "interface" (for lack of a better term) with other, more widely circulated currencies; basically the currencies that we use day to day. That is, I imagine, where an exchange comes in.

It will be awhile (years) before Bitcoin is widely accepted enough for you to no longer need traditional currencies.  Most of the early adopters are people who are either technically-inclined or are fed up with the way that government-backed currencies are being manipulated.  It's really just a big experiment at this stage, albeit one that many people are putting a lot of effort and faith into.

My biggest concern has been the trustworthiness of the exchange, but I think I've been considering it all wrong: I've been thinking of exchanges as, essentially, banks that have a quantity of money and I pay them, then they pay me in Bitcoins. There is, of course, the concern for fraud, which is one of the things that BTC is trying to create a system against.

This is one aspect of the experimental side of Bitcoin.  It's a social experiment in a lot of ways.  Since Bitcoin transactions are irreversible, the person sending Bitcoins has to place a lot of faith in the other party.  They can't just call up the Bitcoin bank and cancel payment.  There will be a larger use of escrow with Bitcoins than with traditional payment methods.  However, you can choose whether or not to utilize escrow rather than subsidize the cost of fraud protection for everyone, which is how credit cards and checking accounts work today.

But am I thinking about it wrong? Do these exchanges purely facilitate the trade of Bitcoins-to-USD/CAD/EUR/whatever between the users? So that I go to, for instance, Mt. Gox, put a proposed exchange, and then I'm contacted by the user with the appropriate currency to then do the exchange, and everything is done directly so that there is no intermediary that acts as a bank to hold money for me (or anyone else) to withdraw from? Or is it these services that act as escrow, essentially?

In the case of Mt. Gox, all funds have cleared by the time offers are placed on the exchange.  So whether you're buying or selling Bitcoins, you can rest assured that the matching funds are there.  The trust you place is in the exchange operator.  You trust that you will be able to withdraw your funds once the exchange is complete.  There are also a lot of individuals who do exchanges (myself for one).  In fact, a lot of us believe that the best way to facilitate exchange is for everyone who holds Bitcoins to offer to do exchanges.  After all, one of the strengths of Bitcoin is that it is decentralized, so why would we want to rely on a centralized exchange?

[eMansipater]

Great response, that really helped me a lot.

Glad to hear it!

I do have one question though, and it's more a request for clarification than an actual question:

As I've been reading and reading and reading about Bitcoin, the nagging thought in the back of my head has been: how can I (if possible) use this system to pay for those core things that I need to live, such as groceries and rent. The answer to that, in my mind, has been that I will, at the end of the day, need to convert BTC to USD in order for the BTC to basically "interface" (for lack of a better term) with other, more widely circulated currencies; basically the currencies that we use day to day. That is, I imagine, where an exchange comes in.

As Reto said, bitcoins will need to become much more popular before they are accepted widely in "meatspace".  Personally I estimate that it will be a couple years before the value of bitcoins stabilises enough that the value proposition for large, established companies will be sweet enough.  But depending on who your landlord is and where you get your groceries, you might be able to convince them sooner.  Since most people aren't earning their living directly in bitcoin yet this isn't a problem, but I can see that some people will need to use another currency as an interface, like you said.  It will be the existence of these people that will provide the incentive for more established companies to start adopting bitcoin.

My biggest concern has been the trustworthiness of the exchange, but I think I've been considering it all wrong: I've been thinking of exchanges as, essentially, banks that have a quantity of money and I pay them, then they pay me in Bitcoins. There is, of course, the concern for fraud, which is one of the things that BTC is trying to create a system against.

But am I thinking about it wrong? Do these exchanges purely facilitate the trade of Bitcoins-to-USD/CAD/EUR/whatever between the users? So that I go to, for instance, Mt. Gox, put a proposed exchange, and then I'm contacted by the user with the appropriate currency to then do the exchange, and everything is done directly so that there is no intermediary that acts as a bank to hold money for me (or anyone else) to withdraw from? Or is it these services that act as escrow, essentially?

I apologize if these questions seem pretty rudimentary, but I'm intrigued by the prospect of BTC as a thing, and I'm always and forever interested in crypto-anything, so why not get involved in cryptocurrency?

You're exactly right that exchanges merely facilitate trade between users.  Although I'm sure exchange operators do some trading, the vast majority of volume is travelling between their users.  In fact, a fair bit of trading still occurs through #bitcoin-otc where there is no exchange and users trade with aid of the "web of trust" system.

As far as how transactions actually occur--some exchanges leave the actual transaction up to the users, while some are essentially acting as escrow agent, like you said.  Obviously when you hold both the bitcoins and the dollars/euros/whatever of users directly it increases the confidences of the users drastically, provided the exchange itself is trusted.  That way you know the person is actually capable of completing their order--and in fact it is done immediately.  So having trusted exchanges is the ideal vs having to figure out whether you trust each individual users.  Exchanges like Mt. Gox, for example,  have secured the trust of the community and this is why the Mt. Gox price is often used as the benchmark of bitcoins' exchange value.

My personal advice to people is always that the riskiness of BitCoin itself is much greater than that of using a major exchange like Mt. Gox, or a trusted trader like Bitcoin4Cash or CoinPal.  Bitcoin is groundbreaking technology that has a chance of being wildly successful, but you still shouldn't be putting any money that you can't afford to lose into bitcoins.  Put a small amount in and start using it, and get your friends to do the same.  BitCoin needs to scale up slowly and carefully, prove itself, and then become wildly successful if all the kinks have been worked out.  Most of us here in the BitCoin community are in it for the long haul--we don't need the price to go through the roof tomorrow and have bitcoins accepted at the grocery store on Monday.  Building a successful currency will take time, patience, and a lot of hard work.  But if you can help that process along by participating in the BitCoin economy, the powerful business models it enables, and ideally offering goods or services for BitCoins yourself, the future would be greatly indebted to you.  Even if all BitCoin becomes is the greatest experiment ever, the knowledge gained will be incredibly worthwhile.  Just think of the stress-testing of the cryptography alone!

At the end of the day, buying bitcoins today is a little bit like buying shares in Microsoft at its IPO.  Sure, there is the potential for incredible gains and the investment of capital is critical for its success.  Everybody these days wishes that they had bought shares in Microsoft, or Google, or whatever at just the right time.  But back when the buying of those shares had to happen, the future of that company was a big question mark.  It was simply impossible to tell for sure what would happen--which is the whole reason initial investors made so much.  Make sense?  To invest in bitcoins now is to take on the risk of the bitcoin's future.  We need people to do it, and if BitCoin is successful they will be greatly rewarded, but you shouldn't take a risk that you can't afford to.

Maybe that investment advice was completely superfluous there, but I always try and include it just in case its not.  On a more personal note, I've convinced a number of my friends and family to put small amounts into bitcoin and start playing around with it--it's a fantastic idea and I believe it may well be bigger than any of us realise.  But it's also unproven--be wise.

[eMansipater]

eMansipater ftw 

Yeah, eMansipater is awesome.  We could all learn a thing or two from him about how to treat newbies.  Welcome to the Bitcoin forum, humphrey!

Yeah, eMansipater is awesome.  We could all learn a thing or two from him about how to treat newbies.  Welcome to the Bitcoin forum, humphrey!

Amen, Tiny tip sent to eMansipater for being such a cool guy to new forum members.

Aww shucks guys.  Thank you .  Some day I will have to publish some statistics on my tips--they are an awesome feedback tool to know that I'm doing something right.  The only wish I have is that I could do a different address per post and increase the resolution of it!  Maybe that will be the killer app for bitcoins.  Any of you coders--hint, hint .

[alittlegreen]

Ok I am blonde and NOT good at math so help me here.  My hubby and I are missionaries living in one country and working in about 14 others.  We travel constantly.  People mostly from America and Europe send us donations from time to time.  If I were to use Bitcoin how would this work?  How would I turn bitcoins to usable national currency like Euros.  and how would I deposit that money in my bank account?

For example: Right now I use Paypal, so a person in Montana sends me 100 dollars (through Paypal) and I accept it, exchange it to the 10 euros its worth (just kidding I know its worth a bit more then that) and withdraw it to my bank account.  How would that transaction work with bitcoin?

Blessings,
ALG

[NghtRppr]

Ok I am blonde and NOT good at math so help me here.  My hubby and I are missionaries living in one country and working in about 14 others.  We travel constantly.  People mostly from America and Europe send us donations from time to time.  If I were to use Bitcoin how would this work?  How would I turn bitcoins to usable national currency like Euros.  and how would I deposit that money in my bank account?

For example: Right now I use Paypal, so a person in Montana sends me 100 dollars (through Paypal) and I accept it, exchange it to the 10 euros its worth (just kidding I know its worth a bit more then that) and withdraw it to my bank account.  How would that transaction work with bitcoin?

Blessings,
ALG

It would work the same as changing any currency into any other currency. You need to work with a currency exchange. If you're looking for anonymity there are several cash-by-mail services such as mine, bitcoin2cash.com. If you're looking for convenience there other others that will send you USD or Euros by wire transfer, or other forms of payments. Look at the trade wiki for the different exchanges being operated.