What is Bitcoin?

What is bitcoin?Bitcoin is the name of probably the best-known cryptocurrency or digital currency or digital gold or virtual money. A cryptocurrency is a medium of exchange, such as the US dollar, but is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds. Blockchain is the technology that enables the existence of cryptocurrency.

Occupy Wall StreetThe cryptocurrency has populist roots. It made its debut in relative obscurity at the start of 2009, when the great recession  financial crisis was still raging. A person or group of people known as Satoshi Nakamoto purportedly created the bitcoin protocol and reference software. The populist ideology behind Bitcoin is to take power out of the hands of the central bankers and governments who usually control the flow of currency.

Bitcoin is both a digital currency and a payment system. The basic idea behind Bitcoin is that you can use it to pay for things without a third-party broker, like a bank or government. The value of a bitcoin depends on the bitcoin market at the time. One bitcoin = 100,000,000 Satoshi like 1 dollar = 100 cents. There are no transaction fees and no need to give your real name. Merchants have to pay a transaction fees on each credit card sale of 2.5% to 3.5% to the likes of Visa, MasterCard or Discover.

Accounting ledgerThink of Bitcoin like one big ledger shared by all the users: When you pay for something with bitcoin, or get paid, then your transaction is recorded on the ledger to ensure there is no double spending of the currency.

Members of the network collectively contribute processing power from their computers to maintain Bitcoin’s integrity. And every time a transaction is made, a record of it is sent out to be recorded in a public ledger where the transactions are effectively set in stone. Anyone can download and install the Bitcoin software for free so these records are distributed permanently across the entire network. This publicly distributed ledger is called the blockchain.

Peer to peerIn order to get more Bitcoins, computers running bitcoin software compete to confirm the transaction by solving complex cryptographic equation, and the winner is rewarded with more bitcoins. Currently, a winner is rewarded with 25 bitcoins roughly every 10 minutes. The process is known as “mining”. Don’t get too wrapped up in Bitcoin mining because only the computer powerhouses get their bitcoins this way.

The Consumerist explains that Bitcoin mining math is complicated and hard to forge, so the block chain stays accurate. Because anyone can download and install the Bitcoin software for free, the payment processing and record keeping for Bitcoin is done in a widely distributed way, rather than on one particular server.

Bitcoin miningWhen block chains are created, so are new bitcoins — but there’s a hard limit to how many will ever exist. The system was designed to create more bitcoins at first, then to dwindle exponentially over time. The first set of block chains each created 50 bitcoins. The next set each created 25 bitcoins, and so on. New block chains are created roughly every 10 minutes no matter what; when more computers are actively mining, the program they’re running gets harder (and therefore slower) to compensate. The Bitcoin FAQ estimates that the final bitcoin will be mined in the year 2140, bringing the permanent circulation to just under 21 million. (Currently, there are roughly 15.8 million bitcoins in the world.)

In order to use Bitcoin You’ll have to install a “bitcoin wallet” app on your phone or computer, and then buy them from a bitcoin exchange. A bitcoin digital wallet is a kind of virtual bank account that allows users to send or receive bitcoins, pay for goods or save their money via an exchange of public and private security keys. Bitcoin wallets can exist either in the cloud or on a user’s computer. The wallets have all of the risks of any other app on your device or in the cloud. Unlike bank accounts, the FDIC does not insure bitcoin wallets. CNN Money points out some of the risks in using bitcoin.

Bitcoin miningIn order to buy bitcoins you have to use a marketplace called a “bitcoin exchanges” allow people to buy or sell bitcoins using different currencies. These exchanges have dubious history.

Bitcoin exchanges are vulnerable to hacking, collapse or a ”run on the bank.” A run on a bank occurs where customers are scared and demand to withdraw their deposits so fast that the bank makes payments and shutdowns. If something like that happens, good luck getting your money back: This isn’t like an FDIC-insured bank account.

Bitcoin can be used in a few places; Marketwatch says there doesn’t seem to be much rhyme or reason to where you can use Bitcoin:

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Bitcoin in DetroitThe use of bitcoins in Michigan has not really taken off. Last summer, according to the FreeP, there were only a handful of businesses in metro Detroit that took bitcoin included:

Ralph Bach has been in IT for fifteen years and has blogged from his Bach Seat about IT, careers and anything else that catches his attention since 2005. You can follow me at Facebook and Twitter. Email the Bach Seat here.

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