What is bitcoin?
Bitcoin is an open source digital currency, or ‘cryptocurrency’. It differs from other currencies because it is not issued or managed by a bank, and there’s no body that governs it. Users make transactions peer-to-peer, without an intermediary. Bitcoin offers more anonymity than a bank, as it’s possible to use while disclosing few personal details.
The value of bitcoin depends on what people are prepared to pay for it. For example, one bitcoin cost US$13 at the start of 2013, but by the end of the year the price rose to US$1000. At the end of 2015 the value hovered at US$400 per bitcoin. Curiously, the bitcoin founder’s identity has been shrouded in mystery, known only under the pseudonym Satoshi Nakamoto. Since Nakamoto released bitcoin in 2009, many people have tried to unmask the technical whiz. In 2016 Australian entrepreneur Craig Wright claimed he was the founder, but some in the bitcoin community have questioned the claim.
Where do bitcoins come from?
Whereas most currency is printed and distributed by banks and governments, bitcoin is different. The currency is generated when people complete mathematical tasks, known as ‘bitcoin mining’, and are issued bitcoins in exchange for their work. This creates an incentive for people to solve the tasks, but as more people mine bitcoins, the tasks become increasingly difficult, making them harder to get. Miners are also required to approve bitcoin transactions, creating a secure, peer-governed network of currency.
You can also purchase bitcoin from people who own them, or through exchanges such as Coinbase, paying for them using cash, credit or other cryptocurrencies.
Further reading: bitcoinmining.com
How do you use bitcoin?
Bitcoin has been infamously used as payment on illicit online marketplaces such as Silk Road, where people anonymously buy and sell products, including pharmaceutical and recreational drugs. But you can use bitcoin to buy a huge range of legitimate goods and services online, with more and more companies getting on-board from Microsoft, Reddit and Expedia to OKCupid. It is also possible to buy gift cards from giants like Amazon, and then use them to make purchases.
Before you can complete a transaction, you need to install a bitcoin ‘wallet’ on your phone or computer. Once you have a wallet you’ll receive an address that you can share with your transaction partners. Software known as block chain is used to record all the transactions that occur. This public ledger is shared with everyone in the bitcoin network.
Further reading: coindesk.com
What are the advantages of using bitcoin?
Since bitcoin is (largely) a secure and trackable currency that can be used around the globe, it enables large international exchanges. International money transfers don’t incur high bank fees and can be made quickly, saving those that make regular international deals a lot of money.
Bitcoin makes it easier to avoid credit card fraud – it’s much harder to steal payment or identity information from merchants. It is particularly useful for those interested in gambling, with sites such as Betchain drawing punters because the currency is encrypted. It’s also an attractive alternative for people who don’t trust their banking system or fear financial collapse. Because the bitcoin currency is decentralised, you own it, so banks or governments cannot take it away if the system has a meltdown.
What are the dangers of using bitcoin?
While there are plenty of reasons to trust in bitcoin, there are still some dangers. Bitcoin transactions are irreversible so there’s no way to get your bitcoins back if you’ve sent them to someone fraudulent. There is also bitcoin-stealing software out there. In addition, the companies running bitcoin wallet firms could shut down, like Bitcoinia did in 2012, leaving many of its customers disgruntled when their funds went missing. So it’s essential to know the recipient of your payment is reliable. However, bitcoin developers are establishing multi-signature transaction options to make transaction approvals safer.
Further reading: forbes.com
Are transactions anonymous?
Using bitcoin enables stronger anonymity than a traditional bank because there are many ways for the user to disguise their identity while making transfers from one bitcoin address to another. There is no guarantee of complete anonymity, but bitcoin provides these tips for securing your wallet.
Because of the strength of the block chain ledger of transaction, sources of exchanges can ultimately be traced. Block chain is the software that enables the bitcoin network of transactions to function. While banks also have sophisticated transaction networks, block chain is successfully operating without an overarching authority approving transactions. Because there’s no manual verification involved, transactions are faster and cheaper. Block chain is the first software that is so secure that there’s no middleman required to ensure that money isn’t traded twice. The technology could revolutionise the way that banking institutions manage their operations in the future.
Further reading: wired.com
What does the future hold?
It’s hard to say what will happen to bitcoin, but the block chain technology behind it could definitely transform global financial services and enable more advanced cryptocurrency operations to launch. According to Professor Yang Xiang, director of the Centre for Cyber Security Research at Deakin University, bitcoin and its associated software are positive innovations, but he says that as the technology becomes mainstream, ‘the model could introduce huge security problems’. He highlights a tool called ransomware, which allows criminals to lock your computer and demand a ransom if you want it unlocked. ‘We will see more cryptocurrency in the future, but cyber criminals will also develop more sophisticated tools,’ Prof. Xiang concludes. Overall, because of the inconsistent value of bitcoin, the security risks, and the lack of widespread acceptance of the currency, there is still more work to be done before it becomes a serious alternative to traditional currency.