We’ve been hearing a lot about Bitcoin, from high-tech heists to people who became overnight virtual currency millionaires. But what is it exactly?
Bitcoin is a peer-to-peer crypto-currency. This means that no particular central authority such as a banking institution prints money or tracks any of the electronic transactions that take place. This has a huge implication since governments and financial authorities have no control over how this currency is operated.
Bitcoin payments don’t need any third parties such as banks to process transactions. Traditionally any online purchase has to be facilitated by a banking institution, credit card company or a licensed intermediary like Paypal, which normally charge. However, this is not the case with Bitcoin as any payment is directly sent over the internet from buyer to seller.
The original idea was conceived around 2009 by Satoshi Nakamoto, who wrote a paper describing how Bitcoin should work and created the first open source software. Nevertheless it is not yet clear if Nakamoto is a real person, a fictitious character, or a group of individuals working under an assumed identity.
The Bitcoin network needs a number of electronic data-miners to process and encrypt transactions. For this reason the system rewards such data-miners with a payment of newly generated Bitcoins which is set to reach the maximum milestone of 21m bitcoins in 2140.
Individuals or companies using Bitcoin may opt to sign in for an online virtual-wallet or keep one on their hard disk. An individual may hold an infinite number of such wallets and since transactions are encrypted and secure, governments may never know exactly the amount of Bitcoins held by anyone.
This has created a number of problems during the last years, as some shady characters used Bitcoin to deal illegal activities. The European Central Banking institution and the US Government started trying to regulate the use of Bitcoin transactions, albeit somewhat unsuccessfully as the US Government only managed to regulate banking institutions offering exchange from Bitcoin to US dollars and vice versa.
The fact that Bitcoin is being used by some unscrupulous individuals for illegal trade does not make it wrong or intrinsically immoral. In fact, various high profile individuals are backing the use of Bitcoins, including former US vice president Al Gore.
Many agree that Bitcoin is the next step in the evolution of our capitalist society since government control on currency and payment transactions will be reduced significantly, thereby leaving all trade under the control of market forces.
At time of writing, one Bitcoin is equivalent to around €314. However, this currency has still not stabilised and heavy fluctuations mean that some people are afraid to start using it and are only investing small amounts at a time. During 2012, one Bitcoin reached the record value of around €800 per Bitcoin and many started speculating in this currency. Some early adopters of this currency became extremely rich. Bitcoin evangelist Roger Ver was an early investor and back in 2010 invested thousands of dollars, at a time when $1 was still equal to one Bitcoin. Today his capital increased dramatically and he openly discusses his Bitcoin wealth and actively promotes the virtual currency.
The website www.mtgox.com was one of the first and largest companies that started trading and holding Bitcoin wallets for around 70 per cent of its users. Earlier this year, this Tokyo-based company filed for bankruptcy as 850,000 Bitcoins went missing. Since then, 200,000 bitcoins were ‘found’. It is not yet clear what happened exactly but many are suspecting that a group of hackers might be responsible for the missing Bitcoins.
This means that Bitcoins are still vulnerable and can be stolen in a high-tech heist. However, while many predicted that the www.mtgox.com incident would result in the downfall of the Bitcoin network, this incident actually sparked more interest and usage increased considerably this year.
Presently websites like www.over stock.com and www.newegg.com are accepting Bitcoin payments. Earlier this year the Apple store unexpectedly started accepting Bitcoin transactions on its networks. This sparked high hopes among the Bitcoin community and many are eager to see Ebay following suit. The Bitcoin currency would gain massive worldwide recognition if this happens. Yet to date, Ebay hasn’t released any official statements.
The best way to learn more about the Bitcoin phenomenon is to get some and experiment. You can check the live quoted prices on www.preev.com.
Ian Vella is a search engine optimisation specialist.
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