Simple use of Bitcoin

Executive summary

  • Create a Mt.Gox account
  • Add funds to your Mt.Gox account using traditional currency
  • Send bitcoins from your Mt.Gox account to your personal wallet.
  • Send bitcoins from your personal wallet to anyone you like.

Disclaimer 1: Bitcoin does not provide strong anonymity. Do not count on it for life-or-death situations.

Disclaimer 2: I am a Bitcoin newbie

On with the show…

1. What is Bitcoin?

Bitcoin

Bitcoin is a digital currency. Just like countries use national currencies ($, €, £ etc), Internet users can use digital currencies. One of these digital currency systems is Bitcoin. It is not well understood by the general population and is still considered an experimental system, but using it for simple tasks like making a single transaction is quite straightforward, as detailed below.

Why would you want to go through the trouble of learning how to use a new currency system?

Well, it has some unique advantages:

  • Better anonymity than traditional non-cash transactions. Transactions are linked to the unique identity of the wallet you are using at the time, but wallets can be created easily and do not require human identity validation. This is not strong anonymity (e.g. against the state monitoring you specifically), but is much better than the current payment processing systems (guy on the street buys a coke using a plastic card in Moscow, 30” later Washington knows). Read also a precautionary note with funky graphs about how Bitcoin is not anonymous. (hat tip to hypnos)
  • Transactions are instantaneous. There are no intermediaries involved. No banks. Bitcoins move instantly and directly to their destinations. Bitcoin is a peer to peer system with no central authority.
  • Transactions can not be blocked by the usual payment processors – e.g. when in 2010 Visa, Mastercard and Paypal blocked donations to Wikileaks, it was still possible to donate using bitcoins.
  • There are no fees to transfer bitcoins.

In short, Bitcoin is an alternative to the traditional currency system that does not appear to be controlled by banks or payment processors like Visa or Mastercard.

2. Exchanging traditional currency for Bitcoins

Most people will want to convert a small amount of traditional currency into bitcoins to test the system first. You can use a Bitcoin exchange for this. One such exchange is Mt. Gox: https://mtgox.com

After you have created an account on the Mt. Gox website you will want to buy some bitcoins. To do that, go to “Funding Options -> Add Funds”. There you are given the bank details you can use to send money with a traditional bank money transfer or other methods. You have not started using bitcoins yet, so this is a very traditional transfer of funds between your bank and Mt. Gox.

Once Mt. Gox have received your funds, your Mt. Gox account will reflect them. Say for example you instructed your bank to send Mt. Gox $10 with a method that did not incur any charges. Your Mt. Gox account will show you have $10 available to spend.

You can now go to Trade -> Buy Bitcoins and buy some bitcoins at the going rate for USD to bitcoin conversion. Let’s say you manage to buy 2.31 bitcoins with your $10. You can send these bitcoins directly to the person/organisation you wish to pay, which is the quick option, but leaves a clear trace of your transaction, since Mt. Gox know who you are and who you paid. Alternatively you can transfer your bitcoins to a digital wallet on your personal computer, which means that Mt. Gox no longer know where the money is.

To do that, you need to setup your bitcoin wallet on your personal computer.

3. Creating your Bitcoin digital wallet

Download and install the latest Bitcoin client from http://bitcoin.org

For the following examples I will be using Bitcoin-Qt version 0.6.2

Please note that there is a 8+ hour startup time for this client, as it synchronises with the global transaction database. Once it’s up and running (and fully synchronised), you’re good to go.

Click on “Receive coins”. You will there find your digital wallet’s address, which will look like a string of random characters similar to this:

1ES2sNEfjmCZJt3yE6jdE31L1QgqnrVcmn

4. Transferring Bitcoins to your wallet

In your Mt. Gox account, choose “Funding Options” and then “Withdraw funds”.

Enter the amount you want to send to the wallet on your computer, and your wallet’s address (which you found out above).

After confirming the transaction, the Bitcoins should appear in your computer’s digital wallet within a few seconds.

5. Sending money to another Bitcoin user

So you have bitcoins on your computer now. How do you send them to other people? Simple, all you need is their bitcoin address. Ask them for it, check their donations web page etc – you’re looking after a bitcoin address that looks similar to yours (a long string of random characters).

Once you have the address you want to send the bitcoins to, click the “Send coins” button in the bitcoin application, enter the amount and address, and click “Send”.

That’s it, the money has been transferred!

If you want to let them know it was you who send them the money, you might want to send them an email notifying them – otherwise from the bitcoin transaction alone they won’t know.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s