Saturday, 28 December 2013

So what is this Bitcoin thing then?

So what is this bitcoin thing then? And why and how do people mine it? And why has it become so exciting, so quickly?

It is a virtual peer-to-peer payment currency, ungoverned by any legislation and not underwritten by any banks or governments. Transnational and transcontinental, bitcoin is open-source, encrypted, and uses a public transaction log/network to track and record transfers, called 'the blockchain' (Walters, 28 December 2013; WeUseCoins, n.d.). 

The blockchain is the hub of the bitcoin currency web. When you pay for something using bitcoin, you update the blockchain, detailing 'who' currently owns which bitcoins, and 'who' owned them in the past. The blockchain doesn't allow duplicates, preventing one person spending the same bitcoin several times all at once. Maintained by 'miners' in a decentralised network, the blockchain verifies and timestamps all payments. The 'who' part of this is supposed to be so well encrypted that unless you have your bitcoin code, you can't access them. A bit like a Swiss bank account, I guess, but accessible without a trip to the bank... ie, not resident in a country in any physical sense, and no bankers but heaps of IT geeks creating more open source code. Hence the Welsh guy, who dumped an old PC containing his bitcoin 'wallet', is now $9m poorer (Walters, 28 December 2013).

Bitcoins, wallets and the blockchain are virtual. However, there have been some bitcoins minted with codes inside. You have to crack the coin like a fortune cookie to get your access code out though - so a bit pointless <ha, ha, s'cuse the poor pun> (Wikipedia, n.d.).

You can use bitcoin (allocated in currency parlance 'BCT') for any online transactions where your supplier accepts payment this way. More than 12,000 businesses worldwide, including Virgin Galactic, Walmart, WordPress, Reddit, Mega Upload and even a New Zealand winery accept bitcoin payment (Walters, 28 December 2013).

So why do people use it? Very, VERY low fees. Max Keiser, Journalist & TV Host, is quoted on the 'What is Bitcoin' page saying "It's the cheapest way to move money around". There are no exchange rates and no transaction fees to pay with it (unless you want to expedite a transaction). And it is like that Swiss bank account: pretty much untraceable. No tax. No customs. No mucky problems with divorce settlements. No police.

People who want to buy things overseas without traces love it. IT geeks love it. Conspiracy theorists love it. Money launderers love it. Criminals love it. Oops.

OK. So if you are with me so far, bitcoins are 'mined' by 'miners'. The network operators are called 'miners', a decentralised network of IT aficionados who create cryptographic hashes of transaction blocks (that form the blockchain) which meets defined criteria: ie, "hashing". Hashing is necessary to protect - encrypt - the identity of bitcoin owners and of all their transactions: the thing that makes the currency anonymous. Miners who successfully create a block are rewarded some bitcoins according to a preset schedule, so they have 'mined' a little more bitcoin (WeUseCoins, n.d.).

Of course, as the frequency of blocks appearing increases, encryption gets a little more difficult, the criteria are made more stringent; competition rises, the value rises, and more computer grunt is required and more complex algorithms are needed to create the next hash (WeUseCoins, n.d.). Cost:benefit is driving the rise and fall of bitcoin values. This is letting the market decide in its truest sense - open, global value, including black, grey and white markets all at once.

And how did this thing start? Well, apparently - according to Wikipedia anyway - the creator of bitcoin, one Satoshi Nakamoto, published a paper on metzdowd.com's Cryptography Mailing list. In this paper 'he' outlined his digital currency idea for Bitcoin. Then in 2009 'he' released the first Bitcoin software, which in turn launched the network and so the first currency units. There is a lot of speculation that 'he' is actually a collective, or is a Brit or of Commonwealth origin. But no one knows for sure (Wikipedia, n.d.).

So why the excitement? Well, like Google, Facebook and so many other virtual phenomena, Bitcoin has grown hugely in popularity and value. BCT went from US$0.01 at the outset in 2009 to US$1242 last month. This week they were back down to US$375 (Walters, 28 December 2013). Volatile, but still valuable.



References
  • Walters, Laura (28 December 2013). Bitcoin: Beauty or bubble? NZ: Dominion Post. Retrieved 28 December 2013 from http://www.stuff.co.nz/dominion-post/business/9559503/Bitcoin-Beauty-or-bubble
  • WeUseCoins (n.d.). Your portal into the world of Bitcoin. Retrieved 28 December 2013 from http://www.weusecoins.com/en/
  • Wikipedia (n.d). Bitcoin. Retrieved 28 December 2013 from http://en.wikipedia.org/wiki/Bitcoin (yeah, yeah, I know. I used Wikipedia!)

Sam

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