Bit by Bit

5 Jul
The bitcoin logo

The bitcoin logo (Photo credit: Wikipedia)

So I’m going to introduce you to something. I am reckoning that half the people reading this (just judging by my family here!) will not have heard of this and of those that have a few may not know exactly what it is or how it works. I’m talking about Bitcoin.

It’s a bit new, a bit radical and a bit crazy in a crypto-digital-techno kind of way.

So now you’re asking, what is Bitcoin? Well, Bitcoin is a currency, a cryptocurrecny to be precise, which means it exists purely in an encrypted, digital form. In that way, Bitcoin can be a hard concept to get your head around because you cannot physically handle it but these days so many of our transactions are done electronically and by card, we never really see our money anyway. Bitcoin is just as functional as regular fiat currency (such as dollars, pounds, euros etc.) Yep, it can be exchanged, traded, bought and spent just like those other currencies. In fact hundreds, no, thousands of outlets and businesses now accept Bitcoin for purchases. You can buy your coffee, get your haircut, do your weekly grocery shop and fill up your car using Bitcoin. Even wordpress accepts it!

So how do you get it and where does it come from? Here’s where you have to get your head around ‘the science bit’. Bitcoins are generated by people known as ‘miners’, the term used for the techno-wizards who periodically release Bitcoins into the system. It is done through running sophisticated software to solve a series of complex algorithms, and the mathematical process is known as ‘mining Bitcoin’.

This network of people use their computing power to keep a record of every Bitcoin transaction. It is known as the Block Chain… (Stay with me.) In essence this is just an ever-growing electronic ledger of every Bitcoin transaction ever made. Each time a Bitcoin is spent or exchanged, a new ‘block’ is added to the chain. This ensures Bitcoins are transferred to and from the right people and cannot be duplicated or spent twice. If you are interested take a look at blockchain.info and if you are so inclined, sit and watch it for a few minutes to see transactions happening and the blockchain growing before your eyes.

The reward these people get for monitoring this block chain and using their computers and power is a few Bitcoins and so every ten minutes or so, extra Bitcoins are mined into existence.

Are you following so far? I shall go on.

Really, the above is just the technical detail behind how Bitcoins come into existence and ensure the transactions are secure. The big difference with Bitcoin is that it is decentralized – no big banks or governments control it. This is why it is known as a peer-to-peer currency because it is collectively managed by the aforementioned network of miners. Understandably this sends some people running scared, although let’s face it, governments don’t have a great recent track record when it comes to managing economies; the global financial crisis, multi-billion dollar bailouts of entire countries, need I go on…

Apart from anything, the value of a regular currency depends on governments and how much they keep pumping into the system. (Quantitative Easing being a common monetary policy in recent years.) In effect they could just keep on printing the stuff and then, without wanting to insult anybody’s intellect here or embark on a high school economics lesson, the value of that currency decreases and you get inflation, where to buy anything, you need a lot of that currency, as its value is so low.

One of the ideas behind Bitcoin is that it eliminates this inflation risk. With Bitcoin the supply is finite. There will only ever be 21 million Bitcoins in existence and by 2040, they reckon all of those Bitcoins will be in circulation. Furthermore, one Bitcoin can be subdivided down to eight decimal places so there could be over 100 million smaller units.

Everyone who owns Bitcoins keeps them in what is known as a ‘wallet’, which is accessed by computer and each person has their own personal key with which to access it, which acts as their signature. As long as no one else knows the key, your money is safe. Transactions can be made simply by providing the wallet’s public key, a series of digits, in some ways similar to a bank account. The difference is that it is anonymous and of course, as it is not held by a third party, no account or hefty transaction fees.

The downsides? Well, of course, there are a few right now as you can imagine. Bitcoin is a currency but with no central authority setting its value and with its limited supply, is traded like a commodity. It is currently very volatile with its value soaring up last April to a spectacular high only to come crashing down again. It is relatively new (launched in 2009) and with all things new, there are risks involved. There has been plenty of criticism but also plenty of support – I won’t link to every article ever written about it here but there are lots as you will find with just a google search.

Ok, so now you’re wondering why I bothered to tell you all this (and to be honest, there is a lot of detail I have missed out and I am sure an expert could pick apart my explanation) well it is because it has something to do with a new business I have got involved with. I am just planting the seed and will tell all in the near future. But things are moving along and progress is happening bit by bit….

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