Bitcoin is a digital crypto-currency that enables people to make near-instant peer-to-peer transactions and purchases via the web and mobile. Bitcoin is maintained and regulated by a global network of enthusiasts and is being used by people, businesses and even investors.
DKSDan commented on the appeal of the new currency:
“Bitcoin is not only a unit of account, it is an entire exchange protocol designed to allow the secure, simple, inexpensive, and irreversible transfer of value between potentially anonymous parties without the restriction of borders, interference from governments, or exposure to counter party risk. This is where Bitcoin’s intrinsic value lies.”
This map of Bitcoin Meetup Groups provides a glimpse at the global nature of the network:
Introduced four years ago, Bitcoin now sees $45 million of activity per day. There are currently 11 million Bitcoins in circulation, i.e., $1 billion worth of Bitcoin. At time of writing, one Bitcoin is currently worth an average of $96.
People purchase Bitcoins using their local currency at exchanges like Mt. Gox. In essence, each Bitcoin is made of a string of codes. With each transaction, a new code is attached. This makes it possible to trace all the exchanges of each Bitcoin in circulation and prevents the same Bitcoin from double-use.
People store their Bitcoins in wallets on their computer or mobile or on the web. Or, they store their private key on paper. People make payments by entering the peer or vendors’ public key, similar to how we send emails by entering an email address.
Blogger Ashutosh wrote:
“Bitcoins are kept in a digital wallet which you can keep in your computer, or on a website online,which will manage and secure your wallet for you. You can have as many wallets and bitcoin addresses (where you receive money from others) as you like.”
Below is a screenshot of what someone’s mobile wallet could look like.
Since data about every Bitcoin transaction is freely available online, experts encourage people to create and use new Bitcoin addresses for each transaction. This also prevents hackers from seeing how many Bitcoins are stored in each wallet.
This infographic explains how people buy, store and spend Bitcoins.
There are currently 11 million Bitcoins in circulations, and more Bitcoins are “mined” every 10 minutes to ensure a steady stream of fresh circulation.
TechHive’s Leah Yamshon explains:
“In order to buy, trade, or use Bitcoins, the units of currency have to first be introduced to the market… Bitcoin mining software runs the Nakamoto algorithm, searching for a specific chain of code. When that code is found, a block of Bitcoins is rewarded to whoever found it. Current blocks contain 25 Bitcoins, but the block size goes down by half every four years, making mining harder and less profitable as time goes on.
“Currently, there are roughly 11.4 million Bitcoins in circulation–that number will cap at 21 million in 2140, according to the algorithm’s limitations.”
Because of the rewards involved – 50 Bitcoin equals $4,800 – there is an active community of programmers who work part-time and full-time to mine new Bitcoins. There is also a universe of vendors that caters to these programmers with more efficient computer hardware.
The process of mining new Bitcoins is actually what keeps the network running. In the hunt for rewards, miners compute all the Bitcoin transactions and create up-to-date logs that trace each Bitcoin’s activity.
The Economist explains:
“The entire network is used to monitor and verify both the creation of new Bitcoins through mining, and the transfer of Bitcoins between users. A log is collectively maintained of all transactions, with every new transaction broadcast across the Bitcoin network. Participating machines communicate to create and agree on updates to the official log.
“This process, which is computationally intensive, is in fact the process used to mine Bitcoins: roughly every 10 minutes, a user whose updates to the log have been approved by the network is awarded a fixed number (currently 25) of new Bitcoins. “
CNN’s Stacy Cowley draws an interesting comparison to highlight the current scale of the Bitcoin mining network:
“The power of all the computers networked together to maintain the digital currency’s system far exceeds the combined processing strength of the top 500 most powerful supercomputers.”
The Verge’s Adrianne Jeffries explains the crux of this open source P2P network and how they regulate the currency:
“The fundamentals were strong: transparency created trust; a network of users substituted for a central authority; and built-in deflation canceled out any circumstantial inflation that might devalue the currency. Whenever a problem arose, members of the community worked together to fix it.”
For instance, there was a recent fork in the system and two different logs were created which allowed for double spends. The network immediately spotted the bug and within a few hours agreed on a solution and resumed operations.
Some people are excited about Bitcoin because it is a decentralized currency that cannot be affected by any one government’s actions. Some use it because it is a more effective form of exchange in a global and digital era.
The Economist pointed out one of the top reasons:
“Bitcoins (or fractions of Bitcoins known as satoshis) can be bought and sold in return for traditional currency on several exchanges, and can also be directly transferred across the internet from one user to another using appropriate software. This makes Bitcoin a potentially attractive currency in which to settle international transactions, without messing around with bank charges or exchange rates.”
Writer and Bitcoin enthusiast Kashmir Hill listed four reasons why people and merchants would opt to use Bitcoin
“(1) It lets you make digital purchases in stores without revealing your identity (by using a credit card with your name and number on it). It would let you do the same thing online.
“(2 )Merchants can avoid paying high transaction fees and don’t have to worry about fraudulent purchases that result in charge-backs. “When a transaction is done, it’s done.” If merchants were to offer discounts to Bitcoin shoppers, that would make the currency more appealing.
“(3) For spending internationally or while abroad, you don’t have to worry about converting your money to the local currency, and the conversion fees that go along with that.
“(4) It allows people to make purchases when they are banned by other traditional payment providers.”
Several people are also showing interest in investing in Bitcoin, much like they would in say, gold. This interest is part responsible for the fluctuations of Bitcoin, which at its highest traded at $230 per Bitcoin.
Many people believe that Bitcoin allows ‘anonymous’ transactions, but this isn’t necessarily true. Blogger Colin Neagle pointed out:
“Some simple research on Bitcoin shows that although transactions are conducted anonymously, they can be traced. The Block Chain logs and displays all Bitcoin transactions. Starting there, anyone interested enough to see where the Bitcoins used to make one transaction could follow its trajectory from its origins.”
Many people also believe that Bitcoin allows people to engage in criminal activities like purchase of illegal items (e.g. drugs) or tax evasion. Governments are however beginning to introduce legislature that applies to Bitcoin exchanges and vendors that use Bitcoin. The U.S. government has also used Bitcoin to trace illegal activity and conduct a raid on the online drug haven Silk Route.
Merchants are accepting Bitcoin for a first mover advantage, to cater to tech savvy people or to capitalize on the opportunity to create new services. Several entrepreneurs have created services that enable Bitcoin enthusiasts to spend their Bitcoins to buy things like Zara clothing.
Here are some reasons why merchants should accept Bitcoin, according to Bitcoin.org:
“Bitcoin is an emerging market of new customers who are searching for ways to spend their coins. Accepting them is a good way to get new customers and give your business some new visibility. Accepting a new payment method has always shown to be a clever practice for online businesses.”
Thinkers, bloggers, the media and Bitcoin enthusiasts all have a point of view on the new currency, which range from the extreme ‘Bitcoin is a scam’ to ‘Bitcoin is the future of money.’ Several of these points of view are discussed in this LeWeb panel of Bitcoin.
Some thinkers question the ‘true value’ of Bitcoin and speculate that it may be the next Ponzi Scheme, or the newest bubble.
Vanity Fair’s Kurt Eichenwald wrote:
“In essence, the market is a fantasy. Once the hoarders stop buying, what buyers will step up to the plate to take their place? My bet? No one. There will be, at some point, a time when some hoarder decides to unload. Prices will drop. Other hoarders will get scared and start to sell. Prices will drop further. Before long, there will be a mass rush to the exits. And at that point, the illiquidity of the Bitcoin market will be apparent.”
Several thinkers believe that Bitcoin is a natural evolution of money, in keeping with the digital and global world of today.
Salon’s Kyle Chayka pointed out the need for this evolution:
“Cold, hard cash has inherent inefficiencies. It’s bulky and difficult to transfer between owners (wheelbarrows notwithstanding). These days, money is barely even paper bills—it’s just a number stored on a computer signifying credit or debit. Digital currencies take that idea one step further, creating self-regulating mediums of exchange through peer-to-peer networks.”
Tom Simonite, IT editor of MIT Technology Review speculated:
“Bitcoin could hit the big time as less an idealistic reinvention of currency and more a technology to move payments more efficiently than today’s systems.”
Meanwhile, Gavin Andresen, a lead developer on the Bitcoin project, cautions:
“Bitcoin is an experiment. Treat it like you would a promising Internet start up company: Maybe it will change the world, but recognize that investing your money or time in new ideas is always risky.”
It’s still too early to speculate on how Bitcoin could impact brands and organizations. The currency may have more of an impact on financial institutions as early adopters use Bitcoin as a way to avoid transaction fees, to make quicker international payments to cut costs associated with currency exchange.
Financial institutions should also note investor interest in the currency – especially as entrepreneurs propose the creation of a Bitcoin fund.
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