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[–] Woodsap 0 points 1 point (+1|-0) ago 

My wife and I have been following Bitcoin since shortly after its inception in 2009 and have been actively using it since 2013 (some small purchases, some large purchases, and some investments).

Here are some opinions that I have formed for myself over the years - take them as you will.

And please pardon the GIANT wall-of-text that follows:

How does it work?

You either buy Bitcoins from other individuals or entities through an exchange or you 'mine' them from the blockchain which essentially 'creates' them at a measured pace governed by a fairly complex mathematical formula. You store these Bitcoins in a 'wallet' that you can create for yourself or pay someone else to host and manage for you.

Exchanges:

Bitcoin exchanges are fairly straight forward institutions and work in much the same way that other traditional currency exchanges work the world over. Sellers and buyers both show up looking to trade, and prices are dictated strictly by supply and demand. Examples of some of the larger / more reputable exchanges out there include Coinbase - US Dollar, Kraken - European Euro, and BTC China - Chinese Yuan.

Wallets

I like to think of my Bitcoin wallets the same way that I think of any other traditional checking or savings accounts. I can choose to either create my own wallet, or I can hire a third party to create and host one for me. When I generate my own Bitcoin wallet using software like Armory I am given both a public and a private key. Both of which are required to spend any bitcoins in the wallet. The process is roughly the same for Wallets hosted by other businesses with the one caveat being that the businesses will likely charge you a fee for hosting your wallet. You are completely free to generate or open as many wallets as you feel inclined to. Wallet or account balances and transactions are stored on what is called the Blockchain.

The Blockchain

The Blockchain is simply a public ledger that tracks and stores every Bitcoin transaction that has ever taken place since the first Bitcoins were spent back in 2009. In fact anyone can view it at any time and access all the data through sites like Blockchain.info. The blockchain is something that a lot of Bitcoin enthusiasts like to point to as one of the components that make Bitcoin 'revolutionary'. It's proponents say that it is fully public, fully decentralized, and fully secure, I personally say that it's only mostly decentralized and mostly secure. In any case, I do feel that despite it's current faults it is already much better then anything banks or financial markets have come up with to date. And like most software, design flaws and bugs are popping up all the time but because the whole thing is open source vulnerabilities are publicized very quickly as are fixes for the problems.

Mining

Now let's talk about Bitcoin 'mining'. This is something of a mystery to most new people wanting to research the topic. From a miner's perspective, mining is a simple trade proposition. It states that if you have some computational hardware that you are willing to dedicate to solving a portion of the complex mathematical operations that bitcoin has to deal with you will be rewarded with some amount of the currency for producing a successful result before anyone else can. All of this may initially sound like a pretty good deal right? You might think that all you need to do is download some software and let your PC start crunching numbers for a bit and it will start popping out bitcoins for you to trade in for real cash - current exchange rate in USD right now: 1 BTC = about 289.00 US. But Bitcoin has a few tricks up it's sleeve to keep all the miners from mining up all of the bitcoins overnight -- thus removing all perceived value of the currency.

Remember when I mentioned that the Blockchain was completely decentralized, and secured? As you imagine it would take a lot of computational hardware to store and process every single Bitcoin transaction in the world every minute of every day. That's where the miners come in to play. By becoming a miner you are essentially offering up your personal storage and computational power to become part of the network that does exactly that. And as the network grows the algorithms at the core of the Bitcoin software constantly watch the network grow in processing power and increase the difficulty or processing power required to solve these mathematical problems proportionately.

Example:

So let's say it's mid 2010 and you happen to notice bitcoin, and it grabs your interest. You learn enough to set up a miner and start mining it in a background window on your PC and make a couple of Bitcoins (or BTC) each day. That's all well and good, but in 2010, at the end of July each Bitcoin was worth just about 8 cents - even if you saved up a few bucks worth you would be very hard pressed to find a place to spend them.

Fast forward 5 years to present day and everything has change. The network of Bitcoin miners has continued to grow at an unfathomable rate, as has the difficulty and computational power required to solve one of these problems. It's gotten so complex any more that a regular CPU (Intel/AMD or otherwise just can't compete) in fact it's gotten so difficult that the chances of you solving even a single problem with even the highest end CPU would likely cost you 100's of times the amount in electricity bills then the value of the Bitcoin reward you received for your effort.

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[–] Woodsap 0 points 1 point (+1|-0) ago 

So why or how do people keep on mining?

Bitcoin spurred on a few an advances in social and technical engineering. In the beginning when solving these problems was easy, bitcoin was still minuscule and limited in use. There were very few transactions that needed to be validated and stored in the Blockchain, so it didn't require much horsepower to handle. But as the currency grew in popularity it's value started to raise, pretty soon it was worth a dollar, then two, then twenty-five dollars. (Hell, when my wife and I mined our first BTC I think it was still hovering around $30.00 per coin.) As the reward started increasing more and more people started joining the growing number of miners and the overall power of the network increased right along with it. As I mentioned above, the Bitcoin software is always watching the total strength of the network and increasing the difficulty of the problems which the miners must solve to get the reward. So, the mathematical problems got harder and harder to solve and each individual miner made less and less cash until they upgraded their systems to make them better at solving bitcoin problems.

Fun History:

Once traditional CPUs proved insufficient at solving the encryption problems that Bitcoin presented, Miners did a few things to try and address the problem. Some of them figured out that specialized high end Video card GPUs were much better at solving these particular types of mathematical problems then regular CPUs - which tend to be more general purpose in nature. So they downloaded special software that would allow them to preform the calculations directly on their GPU and this initially provided a huge increase in the amount of problems that they could solve over time.

Other's decided to band together and to form giant mining pools of computers, where individual problems were broken into smaller parts and distributed among the participants - if the pool was successful in being the first to solve a problem the reward was then divided up among the participant at a rate based on their contribution. The more power you contributed - the bigger reward you got. These pools are still a big force in bitcoin mining today - you can see their distribution at Blockchain.info.

In Bitcoins's current state, the difficulty of solving even a single block is so high that you can only really be competitive if you spend a great deal of money on hardware specifically designed to do just one thing - solve Bitcoin math. That's it... that's all it's good for. These machines are commonly called ASICs (Application Specific Integrated Circuits) by the mining crowd. And even then - you still have to either put down several million dollars to have enough computational power (commonly referred to as hash rate) to be competitive, or you have to join one of the mining pools that I mentioned above.

And to make things even more risky - the technology is still advancing at such a quick pace that the equipment you spent thousands of dollars on last month may be worth nothing, 3-6 months from now. Granted the past 6 months have seen a bit of a slow down and even a stalling of the mining network difficulty - this is most likely due to Bitcoin's recent price drops - from over $1000 per coin to it's current state hovering between 200 and 300 dollars per coin. The reward decreased, so some players simply got out of the market - which had the overall effect of decreasing the rise in difficulty. If you are interested some of the better known manufacturers of this equipment, they include: Bitmain's Antminer Line, and KNCMiner.

It's pretty safe to say that profitable Bitcoin mining at this point has moved out of reach of the typical hobbyist.

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[–] Woodsap 0 points 1 point (+1|-0) ago 

Closing thoughts:

Bitcoin has had quite an interesting start in life:

It's open source nature and the disruptive way it approaches currency attracted the techies, investors, and speculators

The fact that anyone in the world with only a smartphone and an internet connection can send or receive it - with no banks or money transfer services involved, provide an opportunity for the billions of people on the planet that don't have access to a modern banking system to participate in a global economy.

It's decentralized and uncontrolled nature tended to attract people who don't like central governments meddling in a nations monetary policy - in the US Libertarians.

It's unregulated status was pretty sweet looking to the people wanting to launder money or to outright sell illegal goods and services to the public.

It's novelty and complexity opened the door for rip off artists, con men, and incompetents.

In response to all of the reasons listed above and Bitcoin's continuing popularity, governments across the world are now starting to take a look at it, and are beginning to impose their own regulations on the use and exchange of the currency. Some are choosing to restrict the anonymity inherently provided by the currency, while some want to limit it's use and potential impacts on their own state run currencies, and others would prefer to ban it out right, while some have decided to embrace it, and still others are sitting back and taking a wait and see attitude.

You can see a neat summery of Bitcoin legality by country here.

I want to believe in the promises bitcoin holds, but am also fully aware of all the challenges it has to overcome, so I limit my investment, purchases, and risk to something that I can personally accept.