It is likely that many of you would have come across the word “Bitcoin” at some point in your online life (whether you know it or not).
Maybe you were playing your favorite online video game or, like myself, simply happened to have run across it while surfing the web.
After hearing these Bitcoins being referenced to one too many times finally curiosity, as they say, got the better of me and I decided to look more deeply into the subject.
What I found in the end was that Bitcoins, if they succeed, may end up be the biggest revolution in commerce since the credit card.
What are they and where did they come from ?
Bitcoins are the mysterious invention of a man ( or woman ) who went by the alias of Satoshi Nakamoto and whose true identity and whereabouts are now unknown.
The Bitcoin is the very first attempt at what is referred to as cryptocurrency (a digital currency).
In 2009, the creator, as we will refer to him from now on, anonymously released the specification for Bitcoins in a cryptography mailing list as a proof of concept. Later, for an undisclosed reason, he decided to relinquish control over the project.
Subsequently, his invention, Bitcoin, was released to the world in the form of an open source project which it remains to this day. More recently an organization called the “Bitcoin Foundation” was formed in an attempt to stabilize the project for general consumer use.
How does it work ?
The creator of Bitcoin envisioned a currency invented for the web. A currency that by its very nature would be instant and decentralized but, at the same time, secure.
Without getting into the technical details, Bitcoins use a peer to peer network to facilitate the transfer of funds between users, all of which are required to have a Bitcoin “wallet” stored on their computer or mobile device.
When a user installs a wallet, a unique address is generated. The address is what is used to verify the “location” of the users wallet on the network. It is also this address that has to be disclosed (to third parties) for the transfer of coins to take place.
Similar to real life, users it seems, can own as many Bitcoin wallets as they so desire. In fact, spreading your Bitcoins among multiple wallets is recommended by the Bitcoin foundation in order for users to maintain an optimal level of security.
When Bitcoins are transferred from one wallet to another, an electronic signature called a private key, generated by the wallet at the time of address creation, is attached to the transaction and is then used for validation purposes in a process known a mining.
How are Bitcoins created ?
The same mining process that facilitates the confirmation of Bitcoin transactions are also responsible for the creation of new Bitcoins.
To “mine” Bitcoins users must install the Bitcoin client on their computer which, in turn, uses the power of their machine in an attempt to solve a extremely processor intensive mathematical equation.
Once solved, the miner is rewarded with a set amount of coins. The difficulty of the equation is automatically adjusted by the network to keep mining rates as steady as possible. There is also a set upper limit to the amount of Bitcoins that can be ever be created which, at the moment, is set to 21 million coins.
Bitcoin payments are, by design, extremely secure and it is virtually impossible for any third party to either intercept a payment or successfully trick the network.
With Bitcoins there are also no arbitrary spending limits and they can neither be seized or stopped by any external organization (unless you store your Bitcoins with them).
Bitcoins are stored distributively on every machine that is connected to the Bitcoin network. This ensures that no one person or organization has control over the flow of Bitcoins in the wild.
Bitcoin payments, due to the decentralized nature of the transaction, are publicly available and as a result, are easily traced by curious users. This poses a colossal problem for business or individuals who wish to remain anonymous with their spending.
Due to the relative youth of the Bitcoin economy, the value of Bitcoins tend fluctuate widely due to unpredictable market pressures. Because of this, unlike regular currency, Bitcoins are still considered to be a high risk asset.
Bitcoins are also coming under increased scrutiny by government authorities. The major concern appears to be related to money laundering, but protecting consumers against unknown risks is also an issue. How governments will respond to the growth of bitcoins, and how they might try to regulate them, is still an unknown.
Bitcoin, by its very existence, has revolutionized the way many now think about currency in the internet age. Bitcoins show that it is indeed possible to create a universal and relatively stable economy without the control of a centralized governing body.
I, however, would not advise anyone to convert their life savings into Bitcoins just yet – as it still has a ways to go to become feasible for long term use.