All About: BITCOIN

Bothered by Bitcoin? Pressured by peer-to-peer payment plans? Confused by cryptocurrency? Do not worry. The rise of Bitcoin likely hasn’t affected you directly as yet but nonetheless, understanding the basics of cryptocurrency, Bitcoin and peer-to-peer (P2P) payment is something worth knowing. Many outlets are beginning to accept Bitcoin as a valid form of payment and there is a noticeable rise in the number of P2P lending facilities appearing online to assist those unable, or who do not want to borrow funding from traditional sources. However, this has also lead to the currency being linked with a number of high profile criminal cases. Bitcoin first arrived in a Crpytographic Mailing List paper in 2009, credited to pseudonym Satoshi Nakamoto.

What is Bitcoin?

Bitcoin, and its variants, functions as a peer-to-peer payment system; a digital currency founded using cryptography to control monetary value, transfers and creation. Bitcoin is digital by nature; there is no physical cash to hold and there is no central monetary agency to control the creation and distribution of ‘new’ money. This is instead mined by computer software harnessing the mathematical computation power of Graphic Processing Units to break algorithmic blocks containing bitcoins. GPUs are preferred over CPUs due to their enhanced number crunching abilities, their relative cheapness in terms of initial investment, replacement and return and ease of linking many together; this action creates a bitcoin farm, where thousands of GPU servers can combine for extreme computational output.

The currency was designed with a finite number of blocks – estimated at around 21million – and over time the algorithms protecting these blocks will become increasingly difficult, requiring more computing power to generate money. There a 25 bitcoin per block. Each time a block is broken, it is recorded on a public sequential record detailing all bitcoin transactions: new coins, payment processing and currency exchanges. Consequently there is no way to devalue the bitcoin by injecting additional currency into the system – this has also lead to extremely volatile fluctuations in bitcoin exchange price. Computers involved in mining processes constantly feedback to the block chain to verify the status of each chronological block, ensuring impartiality, and that each block is verified before being completely mined.

Once mined, each bitcoin is provided with a cryptographic hash that acts as its unique identifier within the digital payment world. Using public key cryptography, a private and public key are created and stored in the user designated digital wallet. The hash cannot be copied and will remain with the bitcoin when passed from vendor to vendor. Bitcoin works on this principle: private keys will remain private until the holder passes the digital certification to another vendor, thus a digital bitcoin transaction has taken place. If an individual compromises a home or work network containing private bitcoin hashes, they can spend whatever currency is currently available in the given digital wallet. Unfortunately, there have been several incidents of this nature due to the rising exchange price of bitcoin with the USD. It is widely suggested by security experts that the only way to remain truly secure is to remove the cryptographic hashes onto a secure external drive, or printed out on physical paper.

It doesn’t have to be as difficult as mining fresh bitcoin. You can sign up to one of the many online bitcoin exchanges and buy currency, similar to a traditional cash exchange. However, bitcoin has been marred by strings of volatile activities causing massive price fluctuations (it is usually measured against the USD) and its consistent link to criminal activities such as The Silk Road (deep-web black market, taken down by the FBI, 2013), as well as several cases of bitcoin fraud (some of which was conducted through The Silk Road). A number of Bitcoin Exchanges have also disappeared without warning taking their users bitcoin with them.

 

Financial Speculation of Bitcoin

The volatile nature of bitcoin makes it a prime target for financial speculators, predicting that as its popularity increases the value will follow. Both economists and software developers heavily involved in the processing and development of bitcoin have stated that there will be bubbles throughout the early years of bitcoin until there is uniform acceptance of the cryptocurrency as a genuine mode of purchase rather than digital novelty. Large financial institutions are seemingly undecided; some Wall Street firms are offering bitcoin futures contracts across multiple currencies whereas the Central Bank of China has completely barred the use of bitcoin in transactions.

 

Spending Your Bitcoin

Finally, where do you actually spend your bitcoin? Several retailers are now accepting bitcoin as a payment method: Overstock.com, TigerDirect and Zynga.com all accept bitcoin and there are plans for several other major retailers to being accepting the currency. There is also the age old human vice of gambling: SatoshiDice, PeerBet and Satoshi Circle name just a few of the current offering. As discussed above the current market volatility detracts from bitcoins potential value as a valid digital currency and until this aspect is controlled, it will likely remain a bear market to all those but speculators.

 

Bitcoin Terminology

Some additional Bitcoin related terminology you may encounter when interacting with digital currency:

  • Currency Exchange: Bitcoin currency exchanges facilitate monetary transactions concerning bitcoin. Mt. Gox is considered the largest, and is operated from Japan.
  • Transaction Fees: Each transaction involving bitcoin must be cryptographically validated by the block chain before completion. Transactions can pay a small handling fee for their transaction to be entered to the block chain quicker and therefore verified faster.
  • Mining Software: Specialised mining software designed to assist in the breaking of complex algorithms protecting the bitcoin currency.
  • Bitcoin and bitcoin: Capitalised ‘Bitcoin’ refers to the technology and network; ‘bitcoin’ refers to the currency itself.
  • Physical bitcoin: Physical imprint of bitcoin hashes designed to keep cryptographic hashes safe.
  • Double-spending: A flaw with digital currencies that enables a token to be used twice. Bitcoins’ block chain validation should remove this liability from the process.
  • Anonymity: Bitcoin provides its users a certain degree of anonymity by identifying transactions by bitcoin address rather than individual user name. However, tracking the flow of bitcoin can establish who owns them (IP tracking) whilst public bitcoin exchanges are usually required to collect private customer data by law.

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