Bitcoin (sign: and code: BTC or XBT) is the first decentralised, digital currency designed around the idea of using cryptography and math to control the creation and transfer of currency. Bitcoins are digital coins that have the advantage of being able to be transferred through the internet from person to person, avoiding the necessity of going through a bank or clearing house with their associated fees. The system relies entirely on software code and math instead of the ideas of politicians and central bankers. The concept was introduced in 2008 by a developer under the pseudonym “Satoshi Nakamoto” but is run collectively by the users; and any changes to the Bitcoin system have to be approved by the majority of users before they can be implemented. Bitcoins can be used in every country by anyone and there are no pre-requisites or limits for using them.
Anyone can send and receive Bitcoins by using free open source software called a Bitcoin Client. Bitcoin Clients are customised to fit different niches and they automatically create wallets to store bitcoins. The original software written by “Satoshi Nakamoto” is called Bitcoin-QT Client (downloadable at http://bitcoin.org/) and is a good choice for all kinds of users.
Wallets can also be acquired online and with this option you don’t need to install software… but you are trusting a site to keep your wallet safe! Recent headlines highlight there are risks involved since bitcoin theft has and does occur so be sure to use service providers that offer good levels of security including insurance against theft and loss.
Bitcoin Client software and online sites generate Bitcoin account numbers, also known as addresses, and their corresponding mathematically related Bitcoin private keys (this is the cryptography part). A Bitcoin account/address consists of random letters and numbers (e.g. 31uEbMgunupShBVTewXjtqbBv5MndwfXhb) as does its corresponding private key. It is this keypair, the Bitcoin public account half with its corresponding Bitcoin private key half that is stored in your wallet, and necessary to send and receive bitcoins. A person can have many different Bitcoin accounts/addresses in their wallet and in fact a different account/address is necessary for each transaction since it is the only way to know where the bitcoins have come from and what they have been received for. However, your private keys should be kept securely since whoever has them, has access to spend all the bitcoins associated with those keys and addresses.
Advice is not to store private keys on an Internet connected device as despite the Bitcoin technology having a strong security track record, its vulnerability lies in human error regarding the storage of the private keys. Also, losing a wallet has the effect of creating dormant bitcoins including losing money as there is no way for anybody to find the private keys. With Bitcoin although your account and its balance are public for everyone to view, since it is created devoid of names etc no one knows that you own that account. It is this feature of anonymity that has made the system attractive for illicit dealings such as those associated with the Silk Road website. However, money has always been used for both legal and illegal purposes and other forms of currency outstrip the Bitcoin system in terms of their use to finance crime.
The Bitcoin system can be thought of as a public database containing a list of accounts, each with a balance of bitcoins, which people have started valuing due to their limited amount. The number of bitcoins in existence will never exceed 21 million due to Bitcoins’ monetary policy: the inflation rate is halved every four years so there are continuously fewer and fewer new bitcoins issued, converging towards 21 million bitcoins. So they have gained value through supply and demand. Each of the 21 million bitcoins can be split into 100 million pieces allowing the system to scale up to become a large economy. The current market price for a Bitcoin is always changing due to supply and demand.
To see how many Bitcoins are in circulation, please go to: https://blockchain.info/charts/total-bitcoins. The conundrum though is that bitcoins don’t exist anywhere, even on a hard drive. You cannot point to a digital file and say ”this is a bitcoin”. Rather, there are records of transactions between different addresses with balances that increase and decrease.
Transactions are created to send bitcoins from your account to someone else’s account and they are irreversible. Transactions have three pieces of information: an input, an amount, and an output. The input is the record of which bitcoin address was used to send the bitcoins. The amount is obviously the amount of bitcoins being sent, and the output is the bitcoin address the amount is going to. When sending bitcoins, messages containing the input, amount, and output are sent to the wider Bitcoin network signed with the private key. Bitcoin mining then occurs, which is the process of verifying transactions and adding them to the public ledger known as the blockchain, which is a permanent record of every transaction.
This payment processing is done within the network of private computers operated by individuals known as miners and requires specific hardware and software. Cryptography controls these transactions and ensures double-spending (using a digital token such as bitcoins twice) doesn’t occur. Bitcoin protocol is set so that each block (recent files of Bitcoin transactions) takes approximately 10 minutes to mine. Miners are rewarded with minimal transaction fees, and newly issued Bitcoins. Most bitcoin users do not mine - bitcoin mining is a business in its own right.
So what is the case for bitcoins? No one knows really… but the innovation is being compared to that of the Internet.
When Tim Berners-Lee created the new Internet application called the World Wide Web, within a few years thousands of people had begun building Web sites and offering web-based services. Bitcoin is the world’s first completely open payment network, and it works like the Internet in that there are no restrictions so it could trigger the same type of bottom-up innovation. It is growing fast and as far as is known Bitcoin has not been made illegal in any jurisdiction; and there is an increasing number of businesses and individuals using Bitcoin including restaurants, law firms, and online services.
One can only speculate as to whether its just a matter of time before further innovations push Bitcoin into the main stream.