Bitcoin

Cryptocurrency 101: Breaking down the Bitcoin business

 

 Featured Image: FortuneDotCom

 

An Internet currency. A new kind of money. An uncharted territory. A mystery. These are the sort of answers you might get when you ask a layman what Bitcoin is. The dictionary offers a wordier definition – “Bitcoin: A type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.” However, it still doesn’t quite explain the concept, at least not in terms that we understand. In this brief guide, we attempt to decipher this definition and discover the best way to engage with the business of Bitcoin. To understand what Bitcoin is, one must first understand what a cryptocurrency is.

 

Simply put, a cryptocurrency is a digital currency that involves cryptography, which uses encryption techniques to protect confidential information and ensure that they remain undecipherable to any unauthorised third parties. It allows digital monetary transactions to be secure, and also manages the creation of new digital coins (which are also stored in digital wallets).

 

The traditional currency we’re familiar with is issued by government-run central banks that hold a fair amount of control over your money (for instance, they can freeze your bank account and charge extra fees for certain monetary transactions). Cryptocurrencies, such as Bitcoin, Ethereum and Litecoin, operate on a virtual level without a central authority. These digital accounts and monetary transactions don’t have the same restrictions, and can go from individual to individual, business to business, or individual to business. In other words, cryptocurrencies put the power entirely back into your hands. And while traditional currencies that are attached to various countries can be affected by political and economic collapses, digital currencies remain unscathed.

 Image: Dascoin

 

On To Bitcoin

 

Invented by an anonymous individual who goes by the pseudonym “Satoshi Nakamoto”, Bitcoin was first introduced and described in a research paper as a peer-to-peer electronic cash system, possibly revolutionising monetary transactions by getting rid of the middle man (i.e. banks). That was about nine years ago. A lot has happened since then. For one, an Australian entrepreneur, Craig Wright, has emerged claiming to be the man behind the moniker. What’s more, the Bitcoin has substantially risen in value since its salad days. According to reports published on 22 May, $100 of bitcoins in 2010 is worth about $73 million today. Don’t be mistaken though because this digital currency is still wildly volatile. The value of a single Bitcoin could be worth $1,000 one day, and half the sum the next, only to rise back up again on the third day. Of course, it’s more likely for such fluctuations to occur over months and years.

 

 

Bitcoin transactions are completely anonymous, and thus, cannot be taxed, tracked or reversed. To use bitcoins, one must install a Bitcoin wallet on one’s computer. It will then generate a Bitcoin address that works like a bank account number, to which money can be sent. For the sake of security, a new address can and should be generated for every new transaction. Each transaction is also recorded with a block chain (a shared online public ledger) kept by all users, and updated by a number of volunteers who can earn bitcoins for their work. If everyone has the same log, discrepancies on certain individual logs (due to hackers trying to use the same bitcoin twice, for instance) will be obvious.

 

Because there’s only a fixed amount of bitcoins (about 21 million) in the world, their value will continue to increase over time. This also makes it easy to notice when some of the bitcoins goes missing. Additionally, every bitcoin comes with a unique and complex ID that’s quite impossible to steal, and makes duplicating bitcoins a futile, fraudulent affair.

 

Mining Bitcoins

 

 

 

 Image: Coindesk

 

There are many straightforward ways to get bitcoins, such as receiving them as payment or using regular paper currencies to buy them through digital asset platforms like Coinbase. And then, there’s mining. Bitcoins are mined by solving complex mathematical problems. This can be done by downloading a mining programme, and getting your computer to work through the calculations. Serious miners invest a great deal of money in computer equipment and gadgets such as gaming graphics cards and specialised chips that significantly speed up the mining process. As it usually eats up a lot of electricity and produces a lot of heat, products like application-specific integrated circuit (ASIC) chips have been designed to combat such issues without compromising on mathematical capabilities.

 

The mining process works in a way where any amount of miners can compete against each other to solve a math puzzle. The first one to do so will earn the bitcoins. The more miners there are, the tougher the puzzles become. Likewise, the math problems get easier when there are few miners in the market. This ensures the bitcoins won’t be subject to inflations. As the difficulty of mining increases, individual miners have come together to form a collectively more efficient group. Known as pooled mining, each person gets paid according to the amount of work they (their computers) have contributed.

 

 

What Else To Know

 

Microsoft, Ebay, PayPal and Amazon are among the largest names that accept payment in bitcoins. However, the majority of companies are still reluctant to embrace this digital currency. Due to the anonymity Bitcoin grants its users, it has attracted quite a few egregious exchanges as well. For instance, some have used bitcoins to buy illegal goods and services from online black markets such as The Silk Road, a “dark web” site known for unsanctioned drug trades, which has since been shut down by the authorities. So far, Bitcoin has proven to be as hyper-secure as it sounds, but that doesn’t mean there won’t be hackers in the future who have evolved alongside the Bitcoin technology. When the system has been hacked successfully and bitcoins stolen, it would be hopeless to retrieve them or expect a refund.

 

 

 Image: Coindesk

 

In spite of its seemingly clear advantages over regular, physical money, experts say Bitcoin won’t become a mainstream currency anytime soon. On top of being far too volatile, there are still kinks to be ironed out in the arena of cryptocurrencies – regulatory, tax and legal considerations that vary from country to country – and much to discover about the unpredictable Bitcoin system. At the very least, bitcoins probably won’t be used by regular individual consumers for everyday purchases (considering how most people still fail to grasp the concept of cryptocurrencies). It would make more sense to treat it as an investment, but that’s another article for another time.

 

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