The term Bitcoin has been springing up all over the place this month for a whole host of reasons and I thought it may be beneficial to try and throw together a simple explanation of what Bitcoin is and a round-up of what has happened with the currency recently.
Boiling the concept down to its most simple form Bitcoin is an online peer-to-peer currency established in 2009 by developer Satoshi Nakamoto, which is believed to be a pseudonym.
You can buy up Bitcoins using traditional money, which are then stored on your computer in your ‘wallet’, and use them to pay for goods and services from certain online traders by transferring them these Bitcoins.
Sounds simple right? What is all the fuss over this seemingly in-complex concept? Well, unfortunately, it is impossible to just look at Bitcoin by this simplistic definition, the online currency has far-reaching implications and for better or worse refuses to play by the rules.
What makes Bitcoin so unique is that unlike any other currency it has no central bank or authority, in layman’s terms this means that the virtual money is unregulated, resulting in massive fluctuations in what the Bitcoin is worth against standard currencies.
This is why you’ll hear so much about national governments opposing Bitcoin, an unpredictable, global and impossible to control currency has the finance men in governments panicking, which is why the US has been waging a war on Bitcoin for a while now.
It is this mistrust from more traditional avenues of power that has made Bitcoin so popular, it is adored by hackers and embraced by those who dislike or distrust governments.
An example of the aforementioned unpredictability in value can be seen when considering how much the price of one Bitcoin has changed just this month, it reached an incredible $266 at one point before falling over to $150 in one day. The Bitcoin also hit a record low of $70 at one point this month, in fact the price of a Bitcoin may be changing as I write this sentence. To clarify the price of a Bitcoin at time of writing stands at $136.
This volatility is dangerous to those who deal in Bitcoin, as in the time it takes to buy up Bitcoins and trade them the price may have changed considerably meaning either the consumer pays too much for a product or a trader may end up not receiving less than the full amount for their services.
To try and combat this there has been calls to tie the Bitcoin to the dollar, which would make the currency more stable, but doing so would sacrifice what makes Bitcoin so unique. It is delightfully anti-state and the developer that started it all has said the reason Bitcoin first begun was because of personal mistrust in traditional financial institutions.
Moving away from the more politically charged aspects of Bitcoin (which I did try and avoid, after all this is a tech site, but it does seem impossible to mention the controversial e-money without at least some politics in there) and back to exploring how Bitcoin works, let us explore the more complex inner workings of the currency.
The simple explanation presented earlier hopefully provided what Bitcoin does, but the question remains, where does it come from and how does it work?
Producing Bitcoins, which is referred to as Bitcoin mining, is different to that of other currencies because of the lack of central bank that can simply print the currency.
Essentially Bitcoins are produced using a complex piece of software used by Bitcoin miners. The program presents the users’ computer with a complex mathematical equation, the answer to which is always a 64 digit number, and when this is solved the owner of the computer is rewarded with 25 Bitcoins.
Obviously the more powerful the computer the quicker the solution is found, similarly some opt to connect a network of computers to solve the equation and split the Bitcoin reward amongst the owners of the computers.
Much like other currencies price fluctuations can be determined by the amount of Bitcoin in circulation, the more there is the less it is worth, to try and combat this the software automatically adjusts itself to constantly make the mathematic equation more challenging. Despite this it is predicted that a 25 batch of Bitcoins is made every 10 minutes by the collective mining community.
The amount of Bitcoins that can be produced is limited, it is not an infinite resource, which has led some to say it is more like gold than cash.
This limit is 21 million Bitcoins, so that is the most that will ever be in circulation, it is predicted that currently there is around 11 million Bitcoins floating around the internet.
To curb the flow of Bitcoins and ensure the limit isn’t reached too hastily the amount of coins produced each time miners do their work is set to be lowered, initially to 12.5 in 2016 and then 6.25 in 2020.
So there is the basics of what Bitcoin is and how it works, but now let us look at some of the reasons the value of Bitcoin has increased by almost 1000 per cent since the start of this year.
Firstly there is the dire state of economies and banks worldwide, many people have decided to put their trust in the open source peer-to-peer network because of how poorly banks are doing around the world. Especially following the whole debacle in Cyprus when banks actually stopped customers accessing their accounts, Bitcoin is controlled by the community that uses it, putting the power in the hands of the masses.
Secondly there is a large increase in the amount of traders that accept Bitcoin, back in 2009 it was confined to the likes of Wikileaks, now however there is well over 1000 merchants that accept the online currency. It has even moved offline, with shops in a progressive Berlin street accepting Bitcoin as payment.
This has brought Bitcoin well into the mainstream and features such as the impossibility to counterfeit the e-money and the anonymity of payments has meant it is desirable to those who don’t want banks and officials know what they are spending their money on.
What is interesting with Bitcoin is when it features in big news stories, such as last year when Australian cops busted a drug deal that was paid for using Bitcoins.
In what has been a busy month for the online currency there has been some bad news as the fourth biggest Bitcoin-exchange, Bitfloor, announced that it was ceasing operations indefinitely due to their US bank account not being able to keep up with their busy activity. This is the same Bitcoin provider that hit headlines last year after hackers stole off with 25,000 Bitcoins, which would be worth around $2 million at current exchange rates.
So there you have it, there’s your guide to what a Bitcoin is, how a Bitcoin is born and some of the circumstances that has benefitted the e-money greatly this year. I’d love to hear whether you’ve dealt in Bitcoins before, or whether you are considering it, and what sort of experience you had with the online currency in the comments below.