What is Bitcoin?
Bitcoin is a new monetary system that utilises tokens known as bitcoins as its unit of currency. It belongs to a newly emerging family of monies referred to as Crypto currencies, all of which are digital in nature,
A bitcoin is not a tangible thing. It doesn't actually exist. You cant see one. You cant touch one...and while there are ways to transfer its value to physical objects, simply speaking, bitcoins are nothing more than computer code, or software messages in "cyber space" and exist only as the result of a very clever computer program or algorithm.
How do you use a bitcoin?
After bitcoins are made or... mined ...they are, in a manner of speaking, "stored" on a participant user's computer via a specialised software application referred to as a "wallet". This wallet software provides interconnection to all other bitcoin users over a type of peer to peer network. Any amount of bitcoins can be transferred directly from one user to another user via the wallet software, so in this way Bitcoin can be used as a payment system for goods and services without the need for an intermediate service like a bank and as an alternative to traditional payment methods.
In its 9 years of existence, acceptance of Bitcoin has continued grow. Thousands of business's now accept bitcoin as a legitimate form of payment and more and more companies are appearing offering new and novel applications and uses of bitcoin and crypto-currencies in general.
How can Bitcoins have any real value?
Well, like most forms of modern money, Bitcoin is deemed to have value , simply because people decide that it does.
In times gone by, a countries money was tied directly to its gold reserve and the amount of money a country could have at any time was limited by the total sum of its gold and its relevant value at that moment. However, due to changing economic ideals governments began to "float" their dollars, or disassociate their monetary systems from their gold reserves.
Governments were now free to print as much or as little money as necessary in order to respond to various economic pressures. The value of a particular type of currency in this model is then largely determined by the money trading markets and governed by the most basic of economic principals , supply and demand . The more people there are, that want to use and posses a particular type of currency, the higher its value becomes. The same conditions apply to Bitcoin.
When Bitcoin began in 2008,its value was negligible. Regular trading markets didn't recognise it or deal with it, so Bitcoin enthusiasts set up their own trading houses and developed methods of purchasing Bitcoins with other traditional fiat currencies. These initial trading methods were very cumbersome. First you had to find another user who wanted to "sell" you bitcoins, usually on a forum and then you had to work out how to transfer money in the currency of his choice to him and then trust that he would transfer the agreed amount of bitcoin back to you and it generally took days to organise. It was very organic and just a little risky.
Now-a-days you can buy bitcoins with a Visa card from a reputable dealer. The transaction takes place at the current market price (plus fees) and the entire thing is over in minutes. In 2009 you could buy bitcoins from a trader for under 1 US dollar. Today 1 bitcoin is worth close to $10000 US. Bitcoins have become a desirable commodity as well as a viable form of money.
How can bitcoins qualify as real currency?
Bitcoins qualify as a currency for the same reason that they are deemed to have value...because people say so. People choose to use them.
They can be used to purchase goods and services and are now valuable in themselves. They have both the properties of a Fiat currency as well as those of a commodity currency like gold, in fact, in trying to understand Bitcoin, it actually helps to draw a comparison to a commodity currency like Gold.
The "rules of economics" tell us that in order to qualify as a viable currency, a commodity should posses 5 basic properties:
The commodity should not be overly abundant, making it more valuable to possess.
- Gold has value because it is relatively hard to find.
- Bitcoins are hard to produce and there is a finite supply. Only 21 million will ever come into existence
All versions of a substance are interchangeable ..i.e. 100 cents is recognised as being the same value as 1 dollar
- Gold is always gold in all of its forms
- All bitcoins are always coded numbers and completely interchangeable.
The commodity must be easy to transport and pass to other users.
- Gold is not particularly easy to cart around in some of its forms but it's ownership is easily transferred.
- Bitcoin can be stored in all sorts of transportable digital storage devices and carried from place to place. Bitcoin can also obviously be sent electronically from one place to another in relatively short periods of time
The commodity must be able to be divided into smaller usable pieces that have a directly proportional value relationship to all other pieces.
- Gold can be divided into smaller chunks to make it more convenient for transactions of varying sizes, each piece having the same relative value.
- Bitcoins are currently divisible down to 8 decimal places and referred to as Satoshis ( named after the apparent creator of the bitcoin system).
The commodity must be able to endure a long service life
-Gold is a natural element. It cant break down into anything else, it is always gold and therefore theoretically lasts forever. Artifacts made of gold, including coins will also last for very long periods of time
-Bitcoins will last as long as the system on which they are stored can last . However, in the event of system failure as long as the wallet software has been backed up the coins can be recovered. Having said that , it is possible for them to be lost forever, but then all forms of currency can fall victim to destruction or loss...(even gold...check the bottom of any ocean some time!)
Perhaps ironically, another similarity between Gold and Bitcoins is that they are both discovered through a mining process, although the mining methods are of course vastly different.
Can bitcoins be hacked?
Because of their physical nature, all familiar forms of monies, can be made secure from theft by simply locking them up in a vault or a safe away from wanton desire!...but how the hell do you secure a piece of code?
Fortunately , this is not a new problem and software Cryptography has provided part of the solution .
To keep everything secure in the bitcoin network, specialised sets of digital signatures, or keys, are applied to each user interaction or "transaction" by the wallet software. These keys are very large 32byte/256bit numbers. They are very secure because they are extremely hard to Guess or crack even using the most powerful of computers .
In fact, it has been calculated, that given current computing power, it would take approximately 1 billion, billion years for the most powerful computer on earth to crack just one private key address in a single transaction. Even when we consider that computing power tends to double every 1 or 2 years , it would still be 60 to 100 years before we even see a computer capable of such a feat .
Strictly speaking, apart form providing access to the Bitcoin network nodes, this is all the wallet software really does. It generates and stores the secure keys for each transaction. Sure ... It shows you your bitcoin account balance, giving you the impression that your coins exist inside your PC, but in reality, the coins aren't stored in your wallet at all. Remember we have established that they don't actually exist. Well its true. You never actually "hold" any bitcoins at all. You only have a claim on an amount of bitcoin that raises and lowers as you perform various transactions.
The authoritative record of the amount of bitcoins attributed to you actually exists as a balance on a massive digital ledger carried by the network and this ledger can be thought of as the second part of the Bitcoin security mechanisms and is really the foundation of the whole bitcoin system. Its called the "block-chain".
The block-chain is effectively a list of every bitcoin transaction that has ever been performed. It's made visible to and shared by all users via the wallet software. When you elect to participate in the bitcoin network you go through a process of downloading the block-chain, which can actually take several days due to its size .
Through the mining process, mentioned previously , the transactions that make up the Block-chain are checked and confirmed over and over again by multiple parties and the records are continuously updated and shared. Every time a user opens his bitcoin wallet, It synchronises with the network and downloads all the new transaction blocks that have been added to the block chain since the last time it connected . Because of this, the possibility of introducing fake transactions or hacks is almost negligible, as you would have to change the records in every wallet that connects to the network.
The distributed nature of the bitcoin network architecture, also helps prevent any single entity from gaining independent or even influential control over the currency.
There is no central authority . No node with any more power than another. No one group in control. This is why Bitcoin is often referred to as a de-centralised currency and it is this fundamental attribute that makes Bitcoin an attractive, viable alternative to the current world monetary systems that many authorities warn, are on the verge of collapse.
HOWEVER!!!!! BE WARNED
It is definietly possible to steal bitcoins!!
While there are literally trillions upon trillions of Private key combinations, It is possible to utilise some fairly basic mathematics coupled with readily avialable software to randomly search for vunerable private keys.
The sheer fact that the blockchain stores information on every transaction made on the network is helping to facilaitate another type of attack in which proponents use the information about transactions to reverse engineer vunerable users Private Keys and ultimately steal bitcoins.
How prevalent are these practices? They are pretty common actually. If you are unlucky enough to be "found" by persons using these techniques, you could loose your holdings. Fortunately the attacks are non specific, in that a specific individual is not "selected" and targeted. These attacks still rely on "exploits" of one type or another, but it is testimony to the fact that no monetary system is completely "safe".
Whenever we store our wealth in anything other than our own hand , there will be risk involved.
Digital money that doesn't exist?? That's too weird!
Consider how you handle your day to day finances now. We all use digital transactions these days and you rarely need to see your money. Your pay goes into a bank account electronically and your balance goes up . You verify this electronically, by viewing your account balance on line or through an App. and then you set about spending it .
Most of your spending is done via digital withdrawals against your bank balance ...eftpos, B-pay, direct debit, Visa debit etc etc . So how is that so different to a Bitcoin transaction?
Is it illegal?
NO!! ...Of course not!
It has had restrictive legislation applied to it in some countries where governments and BANKS fear the inability to exert control over it, but for the most part, in the free world, Bitcoin is completely legal.... albeit somewhat misunderstood and mistrusted.
It's had its fair share of bad press and been labelled many things...an internet scam... a Ponzi scheme...pyramid selling...drug money !!! ....but honestly, It of itself , is none of these things.
It is NOT illegal and it is not a sinister tool for use by criminals any more than cash is ! Like cash it can certainly be used to perpetrate many types of crimes, but its' primary purpose is to become a legitimate form of currency for use by everyone, everywhere
The truth is that people are wary of it because they may have heard of its use by criminals , but the reality is that most people mistrust it because it is new and different and just a little bit complicated.
"Ignorance is always afraid of change." Jawaharlal Nehru