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Until recently not many had heard of Bitcoins. Barring a few geeks, not even the economists were clued into the Bitcoin economy. But over the last few months, grand questions and answers are being sought of this virtual currency.
Can Bitcoins save the Global economy? Will it be the global economy’s last safe haven? How is it that a geeky, virtual currency, has suddenly become mainstream? To start with, what is Bitcoin? Who uses it? How does it work? NextBigWhat takes a look at the Bitcoin phenomena in a series. To start with, here are the basics.
What are bitcoins?
Bitcoin is a peer-to-peer virtual currency born out of the concept called crypto-currency, hence being a decontrolled currency of the Bitcoin virtual markets. The Bitcoin concept was designed and formulated by a group or a person who goes by the pseudonym Satoshi Nakamoton, he left the community towards the end of 2010. His identity is still a big mystery. The Bitcoin community has been developing and evolving since 2010.
The value of a Bitcoin fluctuates mainly based on market demand & speculations. Bitcoins are created, traded, and controlled by bitcoin users. The Bitcoin transactions are conducted using public key cryptography making them very secure, but due to high value of Bitcoins, hackers often try to get access to these public keys in order to steal them.
In September of 2012, the Bitcoin Foundation was created in order to standardize, protect, and promote Bitcoin.Mt.Gox is one of the largest and oldest exchanges dealing with Bitcoins. They host a trading platform using which Bitcoin users can exchange or trade them for real world currencies. Other famous Bitcoin exchanges include BTC-E and Bitstamp .
How do I get bitcoins?
A Bitcoin wallet, used to store Bitcoins digitally, is available for Windows, Mac and Linux on the desktop, and for Android on the mobile platform. Once you have installed the wallet on the device of your choosing, the app starts syncing your wallet with the network. It does this by downloading a block chain, which is nothing but transaction histories. Once the download is done you will get your Bitcoin address using which you can start using your wallet to transact your Bitcoins. The desktop Bitcoin wallet app has retained the original name of the project ‘Bitcoin-Qt’
As Bitcoin is released under the terms of the MIT license, it is open source.
You can get the source code here.
Where do Bitcoins come from?
Bitcoins are generated by Bitcoin Miners around the world using Mining softwares. The computers running the mining software crunch mathematical algorithms and get remunerated in Bitcoins depending on the amount of data crunched. The amount of Bitcoins that can be generated in the network is controlled by an algorithm.
The easiest way to get Bitcoins is through Bonus Programs, these programs are run by websites and they reward you in Bitcoins on successful completions of tasks like surveys, visiting referred websites etc.Another way you can get bitcoins is by a process called mining. The process is very processor centric and involves processing large blocks of data using mathematical formulas. Mining is time consuming and a lengthy process and are better performed by GPU’s than CPU’s as the latter is better at parallel processing making the whole process faster. Nowadays companies also manufacture bitcoin miners that are specifically built for the task of mining Bitcoins.
You can also get your hands on physical Bitcoins from websites like Casascius & Bitbills. They come in the form of coins or cards with a Bitcoin address and a “private key” embedded on the inside. Due to their offline state, they tend to be safe from digital attack and hackers. These come with security holograms making them pretty much impossible to counterfeit.
The clockwork behind Bitcoin Wallet
Now that you know how Bitcoins are manufactured, let us see a bit about what happens behind the scene.
Once you install the Bitcoin wallet in your system it starts downloading a Block Chain in order to sync your wallet into the Bitcoin network. The file is pretty big a can take some time download as it is a couple of GBs big. If you live in the US, there is an option to ship a DVD with the block chain file to you, this way you can avoid the long time a large amount of data required to sync your wallet with the network.
The block chain is a file containing the transaction database, containing the history of all transactions that were ever conducted on the Bitcoin network, and is shared among the systems, based on the Bitcoin protocol, on the Bitcoin network. BitCoin uses the SHA-256 hash algorithm in order to generate the block chain. The block chain is broadcasted to all the systems on the Bitcoin network using a flood protocol.Once the sync is over you receive a Bitcoin address which is need for sending and receiving Bitcoins. More addresses can be generated as and when required. Once a Bitcoin transaction is initiated, the wallet attaches a private key, a secret information kept with the wallet, to the transaction, which has to be authenticated by a miner. Once the authentication is complete the transactions is added to the block chain. Only after the authentication does Bitcoins you buy/sell get added/deducted to your wallet.
This process of authenticating and adding the transactions to the block is called mining and it is carried out in a chronological order on the block.
You can read about the detailed process on the working of Bitcoins here.
Who accepts bitcoins?
Today Bitcoins are accepted by a huge variety of ecommerce retailers. They range from lifestyle stores to web design and hosting services. Unlike other payment methods, Bitcoin transactions are free as they are don P2P without any intermediaries like banks. The important thing is that Bitcoin transactions are irreversible.
You can visit here to see a list of sites that transact or retail in Bitcoins.
The security surrounding Bitcoins is still an issue for some. Your whole wallet is just a file resting on your system, somebody capable of breaking into your system can steal your wallet. Hence it is highly recommended to move the majority of your Bitcoins onto another device like a flash drive and just leave the required Bitcoins on the system. Encrypting your wallet with a password is highly recommended. Your wallet (Bitcoin File) is your responsibility, don’t let it lying around like your wallet as anybody with access to your computer can steal it. Another important factor is backing up your wallet, because if the file gets corrupted or deleted you end up loosing all your Bitcoins.
Even though Bitcoins have been around for some time, their infrastructure is pretty low. It will be some time before things start picking up and more and more people will gain confidence and start trading in Bitcoins. For all you know in the future there can be virtual Banks that will safely and securely store your Bitcoins for you.