The question that many people are asking themselves right now is: “Why didn’t I get myself some bitcoins when they were cheaper?” Suddenly, the digital currency that threatened to become irrelevant is back in the news for succumbing to market dynamics like all currencies. So does this mean that bitcoin will soon be as mainstream as the US dollar or the Euro? Not exactly, but after a seriously high value of $260, the currency has now fallen to a low of $70 (at the time of this writing). The largest bitcoin exchange in the world, MtGox is still reeling from the hack attack, and there’s a bitcoin-generating malware that’s spreading across Europe via Skype. So naturally, all attention is now focused on bitcoins. But before you start looking for ways to get some in your digital wallet, let’s see what bitcoins are all about?
Will you take the bitcoin plunge?
What makes bitcoin special?
To put it simply, bitcoin is a currency for the digital world. Shortened to BTC, bitcoin is an algorithm-based unit of measurement invented to quantify value. It is the most widely used open-source peer-to-peer currency that can be used without a bank or a middleman.
It’s like any other currency, with the exception that bitcoins are decentralised and not regulated by any authority. The original bitcoin algorithm was created by a developer or a group of developers under the name Satoshi Nakamoto, but the currency itself is created, traded and controlled by bitcoin users, rather than by a central authority like a bank or a government. Unlike other currencies, bitcoins are completely digital and you will most likely never see a physical version even though they do exist. Ultimately, a bitcoin is just a number associated with an address. A physical bitcoin is just an object like a coin or a piece of paper, with the number carefully embedded on it.
So, unlike any other currency, bitcoin is not guaranteed by gold ingots or the likes. Bitcoins are by design in limited supply. The algorithm that drives the Bitcoin network forward is designed to generate only 21 million bitcoins, and the algorithm automatically maintains itself to make sure bitcoins grow at a steady pace. At the current rate, all 21 million bitcoins are expected to be generated by 2140. In fact, since the bitcoin network prides itself on its openness, it tracks and records every bitcoin transaction, so anyone can check exactly how many bitcoins have been created till date. There are several websites, blockchain.info being one, that monitor the network and host wallets, the containers used to store the digital wealth.
It’s safe to say that at the moment, the bitcoin buzz is at its peak. Bitcoin has always been a very volatile currency and the price of bitcoins tends to fluctuate greatly and quickly. For instance, before the high of $260 this past week, bitcoins were valued at $15 in January. So if someone bought a few BTCs in mid-January, then today that sum is worth more than five times that price. And a few days ago, it was close to 20 times that price. It only serves to underline the mercurial nature of the currency.
Physical versions of the bitcoin are available at Casascius (Image credit: Casascius)
Where to get?
If you have been keeping a track of all the bitcoin buzz lately, then you would have heard the term “mining” being used a lot. A great USP of bitcoin is that you don’t need to put any physical money on the line to get a few BTCs, although that route does exist for someone wanting to go down it. Instead, if you have the hardware for it, you can “mine” bitcoins by putting your PC to work. High-end hardware, that is normally not seen in consumer PCs, can crunch code on the bitcoin network and if you’re lucky, you could score some BTCs through the process.
Let’s take a look at how it works: Miners for bitcoins are rewarded with batches of the currency when they install and run a bitcoin client on their PCs. The client uses the processing power from the CPU and GPU to solve very complex mathematical problems. The solutions to these are shared with the bitcoin network. Even though they are extremely complex problems, solutions can be easily verified to see if they are right. The solutions incorporate logs of transactions on the bitcoin network, so miners track and verify bitcoin payments as they work.
The first to solve a given block of transactions is awarded 25 bitcoins. Of course, rewards only come in once the work is verified by other clients on the network. The amount of the reward is halved every four years, until at some point no more new bitcoins can be created. When Bitcoin started, the first to solve transactions was given 50 BTC as a reward. If all this sounds too simple to you, then do consider that ordinary PCs, even those rigged for gaming, cannot match the hardware requirements for mining bitcoins. There are already groups of bitcoin miners investing in ultra high-spec'd computers and server farms to mine faster and more efficiently. As mining becomes more and more competitive, unearthing actual bitcoins has become more difficult.
For those looking to get a taste of the action, the best way to do so is at a bitcoin exchange. Alternatively, there are various ways in which one can earn minute amounts of bitcoin for viewing ads, movies etc. For ways to mine, win or earn bitcoins, refer to this guide at the Bitcoin Wiki.
Where to spend?
Even if you did have Bitcoin riches, most major retailers don’t yet accept the currency. Bitcoin is still nascent, but the list of businesses that accept bitcoins is growing rapidly and would grow even faster now that it has garnered some more mainstream attention. Naturally, you are more likely to find takers for bitcoins online rather than at your neighbourhood mall, but brick-and-mortar establishments are also slowly starting to realise the actual value of bitcoins. The Bitcoin Wiki also has a helpful map of actual stores that accept bitcoins, or you could check out any number of online establishments listed in their database.
An infographic by Bitdata on how bitcoins work
Is it safe?
Transactions on bitcoins are irreversible, so it can’t be taken back once it is broadcast to the bitcoin network. Theoretically speaking, a hacker who can access your bitcoin wallet on a PC can spirit away your fortunes and you can’t do anything about it, unless your wallet is being hosted by a third party with insurance. Recently, Instawallet, a wallet hosting service, shut itself down after a devastating hack compromised a number of accounts. The service provided refunds to those who had lost 50 BTC or less. There are illegal ways of acquiring bitcoins such as physically stealing someone’s private key, which is independent of their public key, or by creating a new block chain, i.e a new transaction database. While stealing a private key requires physical access to it, creating a new block chain would require considerable expertise and a great amount of processing power. Not to mention the fact that getting bitcoins is going to become harder as time passes.
Bitcoins aren’t the first virtual currency to come to our world, and they certainly won’t be the last to emerge. However, it is the most successful virtual currency we’ve ever seen. Past efforts like e-gold and Facebook Credits have tried to build viable virtual currency system but failed badly. Bitcoin has succeeded because it is decentralised and transparent. It can’t be shut down by anyone and indeed will shut itself down in a few years when all the bitcoins are out. Theoretically speaking, a hacker could destroy the network by tampering with the code, but that has never happened in the four years since its advent. It has proven to be an unbreakable code.
That explains why a number of other virtual currencies such as TerraCoin, Ripple and PPCoin have taken up the open source code on which bitcoin is based and are looking to launch soon. However, it would be wise to not take the plunge into virtual currency just yet. As technology has often proven, what’s great one month could very well become outdated the next.
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