Bitcoin is the most famous of what is known as cryptocurrency. Bitcoin was introduced in 2008. The currency is created by powerful computer servers and are transfered online. The currency has no central authority as the coins exist and are mined solely online. There is a finite number of bitcoins that can be mined based on the protocol that allows for their development. Mining will end in 2140 when Bitcoins will have reached a maximum of 21 million coins.
A simple analogy to explain transactions, anonymity, and coin production.
Let's say there’s a room that anyone can access. The room has security cameras that anyone can view, and every second of recorded footage is available online forever. The room is filled with indestructible piggy banks made of transparent plastic. Naturally, these piggy banks have coin slots, and everyone can see which coins are in which piggy bank. These piggy banks can never leave the room.
Each person has a key that can open their piggy bank. Let’s say I want to buy a pair of alpaca socks, and you want to sell them. First, you tell me which piggy bank is yours. Then, I walk into the room with a ski mask on. Anyone in the world can see me on the security cameras, but not my face.
Next, I unlock my piggy bank, take some coins out, then put them into your locked piggy bank. I leave the room. Now, everyone in the world knows that your piggy bank has coins that were previously in my piggy bank. This is the case with every transaction, so everyone knows the history of every coin.
“So where do the coins come from? How did it start? Who got the first coins?”
There’s a robot in the room that runs lotteries. Every so often, this robot randomly chooses a piggy bank in the room, and puts 50 coins in it. When it first started, there weren't many piggy banks in the room since nobody knew about it. Back then, it was easy to win the lottery. Today, there are millions of piggy banks in the room, so your odds aren’t very good.
“Ok, couldn’t someone make their own fake coins?”
No, because everyone has records of every coin in the room, and they know when the robot hands new coins out. If a fraud were to put fake coins into his own piggy bank, everyone would know that those coins were never handed out by the robot, and wouldn’t accept them.
“Who made the robot..?”
Supposedly it was a super genius Japanese man named Satoshi Nakamoto, but nobody knows for certain. Since the security camera footage is available from 2009, we can see that the robot was putting coins into a piggy bank since day 1. We assume it’s Satoshi, but that’s about all we know.
Now...the robot is the system itself. Getting coins into your piggybank from the robot (the lottery) is mining for coins realtime, using powerful computers.
You don't need an ultra complex rig (but you kind of do if you want to make any money, because others are using complex rigs and you are competing with them). The rigs you see are really just many GPUs being daisy chained together. GPUs can do multiple calculations in parallel, while CPUs tend to do one thing (but very quickly). Bitcoins are "mined" by solving a hard math problem. This math problem is such that it is easily broken down using parallelization, hence the use of GPUs.
When you download the standard Bitcoin.org application, there is an option to start mining, but it uses your CPU and will bog down your computer. There are more advanced and efficient (unofficial) miners that take advantage of GPU computing.
Note that the chance that you will "win" by solving the problem (and get 50 BTC) gets logarithmically harder over time. Currently, the only way to be profitable (with regards to the electricity bill you'll be paying) is by joining a mining "pool" with other miners. Basically, you contribute your computing horsepower to the pool, and when somebody in the pool wins, the bounty is shared among the members, proportional to how much work they put in.
When you download the standard Bitcoin.org application, there is an option to start mining, but it uses your CPU and will bog down your computer. There are more advanced and efficient (unofficial) miners that take advantage of GPU computing.
Note that the chance that you will "win" by solving the problem (and get 50 BTC) gets logarithmically harder over time. Currently, the only way to be profitable (with regards to the electricity bill you'll be paying) is by joining a mining "pool" with other miners. Basically, you contribute your computing horsepower to the pool, and when somebody in the pool wins, the bounty is shared among the members, proportional to how much work they put in.
Watch this :
There are no Bitcoin banks; all US banks deal with US currency, not Bitcoin. Paypal works with USD too. They've probably never heard of it, just kidding. But you are your own bank. This is what makes Bitcoin awesome: all the benefits of digital transactions without the banks. Your bank is on your hard drive: where no one can steal it (hopefully), or gamble with it on your behalf. Though in the future, there may be Bitcoin banks for those who want to generate some interest.
There are online Bitcoin wallets, that will store your Bitcoin for you, but none of them have a reputation yet (and you will not generate any interest).
If you want to buy Bitcoins, you must use a Bitcoin exchange, just like you would for any other currency. There is a couple out there.
https://en.bitcoin.it/wiki/Categ...
The most popular is Mt.Gox
If you want to buy something with Bitcoin, most services are virtual, like web hosting, but there is a sandwich shop in NY that will let you buy in Bitcoin.
If you are hacked, you can lose all your money. There are ways to encrypt the bitcoin "wallet" file that holds your private keys. But risk comes attached with all kinds of precious entities. Bitcoin, too.
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