Bitcoin: A guide to the future of currency

Bitcoin: A guide to the future of currency

Summary: Bitcoin could just become the virtual equivalent of gold. Now worth considerably more than the USD, it may be worth your time to learn about this new form of global currency.

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Bitcoin

Bitcoin. You have undoubtedly seen this word as of late, but what is it? Where did it come from and why is it all the rage in the news right now? How does it work, why is it so complex to understand for the average person, and how is it that 1 BTC (shorthand for "bitcoin") is currently worth considerably more than the USD and Euro? Why should anyone care about Bitcoin? Well, if the U.S. Government cares enough such that the Principal of Bitcoin, Gavin Andresen, was asked to give a presentation to the CIA about Bitcoin this week, then there is plenty of reason for care and concern. Additionally, many people see Bitcoin as a huge money-making opportunity and the next big thing to shape the world of currency. And I when I say many people see it as "the next big thing," I mean as in what Microsoft was to computers or like what Google was to search engines. All of the aforementioned and more will be addressed throughout this definitive guide about Bitcoin: the world's first global currency that may just stand a chance to succeed and thrive.

Bitcoin: What it is

Simple Explanation: Bitcoin is a new form of currency that was once worthless, yet now has grown to be worth considerably more than the U.S. dollar. One bitcoin is currently worth ~$15 USD at the time/date of this post. Rather than a replacement for the U.S. dollar, the Euro, or other government currencies, bitcoins should be thought of like gold or silver where 1 oz. is equivalent to X amount of dollars. In that sense, Bitcoin is more like a commodity than a currency. Granular Explanation: Bitcoin is a global, decentralized virtual currency that first began in 2009 by its creator, Satoshi Nakamoto. It operates on a vast P2P network which is currently comprised of thousands of systems. Its aim is quite ambitious: to solve many of the issues with currency today, such as providing near-cash anonymity with online transactions, governments being able to create their own money whenever they want, transfer fees associated with transactions, and more. No banks, no fees, and no traces. As a currency, Bitcoins are currently divisible down to 8 decimal places. What this means is that products or services that accept bitcoins as payment may accept .025 BTC, .00000643 BTC, etc. Once again, the comparison to gold and silver are applicable here. As opposed to a currency, bitcoins operate more like a commodity. Watch the official Bitcoin promotional video below to get a basic visualization of how it works:

 

Now, after seeing a general overview, the next step to grasping some of the finer details of how Bitcoin works is to watch the next video. In it, Gavin Andresen gives a more focused overview of what Bitcoin is and how it works:

 

Lastly, for a much more extended dive into Bitcoin, here is an hour-long interview with Gavin Andresen and Amir Taaki:

 

Now that you have a fairly good idea about what Bitcoin is, the next issue to cover is how bitcoins are made and how to go about obtaining and using them.

How bitcoins are created

This is the most complex part of Bitcoin for most to grasp. Put simply, coins are created through the solution of extraordinarily complex mathematical problems. These problems are so involved, that your average computer would take years to solve just one -- resulting in merely one single bitcoin. The primary reason for such a complex system is to prevent the creation of bitcoins on an as-wanted or as-needed basis, thus making them a prized possession. And to maintain their prized status, a grand total of 21 million bitcoins will be all that is ever made. For a more extended dive into the mining of bitcoins, refer to "mining" in the section below.

Mining, trading, buying, and selling bitcoins

Bitcoins exchange hands through a number of ways. Though there is a currency exchange rate for bitcoins, their value is still highly subjective due to sharp market fluctuations. Additionally, the utilization of bitcoins is left completely up to interpretation by any given party. Once you have bitcoins in your possession, it is up to you as to how you want to use them. See below. Trading: One of the more cost-effective and popular ways of obtaining bitcoins, people offer goods, services, and information in exchange for bitcoins. Some people are even asking for donations in the form of bitcoins as opposed to Paypal or other popular donation platforms. Buying and Selling: Since bitcoins now have a monetary value attached to them, there are exchange markets available that allow you to sell your bitcoins for cash; however, such markets are not necessary to leverage since anyone can set up the buying or selling of bitcoins via any avenue they choose. Mining: This is the the most involved method of obtaining bitcoins. It requires one to have a computer to dedicate solely to the mining of bitcoins. And if you think your hot new Xeon processor is going to get the job done, try again. GPUs are where it's at since they are ultra-superior in how fast they perform mathematical calculations. And if you think your hot new gaming rig is going to make you rich, take a look at the types of bitcoin miners people are constructing:

 

That's a lot of horsepower running there and a lot of money being put into something that many consider to be a fruitless endeavor. People like in the video above play a major role in the bitcoin ecosystem currently, and the hope is that those who amass large quantities of bitcoins will engage in the exchange of them; much like the selling and trading of collectibles and precious metals, like gold and silver, thus stimulating the Bitcoin ecosystem. You can either build your own Bitcoin miner, purchase a pre-configured Bitcoin miner, rent a Bitcoin farmer for a fee, or just take part in a pool.

Opinions and Criticisms

In this section, I'm going to give my personal opinion on the matter, as well as cover general criticisms and concerns to be considered. While there is certainly much to be excited about, there is also plenty to be cautious about. Bitcoin is essentially a risk, first and foremost. Once that fact is accepted, a user can then go about using Bitcoin however they so choose -- be it simply collecting them or mining them. My only fear of investing in bitcoins is not that the idea won't succeed, but rather, that the current vehicle of Bitcoin may fail since it's the first of its kind -- thus, the amount of worldwide scrutiny that will befall it as governments realize the potential it has to damage their economy. As I noted in the introduction of this article, the Principal of Bitcoin is giving a presentation at the CIA this week, so I think that's a pretty telling signal that Bitcoin isn't just a revolutionary idea, it's a revolutionary idea with traction. Head on over to the next page where I continue with the opinions and ramifications, as well as provide an array of additional resources and ultimately conclude the article.

Why the CIA cares, fears of a cornered Bitcoin market, and more... »

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So why would the CIA be concerned with Bitcoin, anyway? Well, to start, Bitcoin prides itself on being an almost completely anonymous method of exchanging currency. In and of itself, the network is totally anonymous; funds don't come from one central location and they're exchanged through the network via public hashes, not first and last names. The only ways a person can be tied to the funds right now is if they purchase something with bitcoins that gets shipped to their physical address, if their computer gets confiscated by authorities, or if their computer gets hacked. Naturally, what follows from there where governmental interest is concerned are money laundering issues and the ease of anonymous funding for terrorist organizations. While some people are alluding to Bitcoin having the potential to collapse economies, I disagree with this based on the fact that the value of a fully-matured Bitcoin ecosystem will never be enough to exist as an alternative to current tender. Could it disrupt an economy? Sure, but to what extent is unclear. Another significant consideration pertains to the health of Bitcoin ecosystem. What if the market becomes cornered by entities with massive server farms? Here's a scenario for you to consider: governments around the world utilizing massive server farms filled to the brim with GPUs to mine untold numbers of bitcoins in boss-like fashion. While the bitcoin network limits the number of coins mined so as to keep results predictable, people will faster set-ups will have a major advantage. Likewise, what if they added to that, an effort to buy up enough bitcoins such that -- in conjunction with the bitcoins they mine --they completely disrupt the Bitcoin ecosystem and bring the whole thing to a halt of epic worthlessness. With the threat Bitcoin shows to disrupt a shaky U.S. economy, such efforts would probably yield quicker results than what Bitcoin is ultimately going to bring about from legislation! Hacked systems are another concern. Just recently, someone's computer was hacked into and the hacker stole some 25,000 BTC from the user. At the current worth of $15 USD for 1 BTC, that's $375,000 worth of currency stolen! With that in mind, I got to thinking on a couple of Google queries that could come in handy down the road if Bitcoin takes off: intitle:index.of wallet filetype:dat intitle:index.of "wallet.dat" While those serve no purpose now, someone who ignorantly stored their BTC wallet on their Website could be in for a world of disappointment if their site was crawled by Google. Lastly, one of the major turn-offs to Bitcoin for people is the fact that it's the donation platform of choice for rogue hacker groups like Lulz Security; the people who have hacked Sony, PBS, the U.S. Senate, etc. Interestingly enough, though, it is through their activities alone that I personally think Bitcoin has gained the immense traction that it has in the media recently. What makes me say that? Well, Lulz Security began posting their shenanigans on May 7, 2011, as seen on their group's release list. With each of their subsequent releases, their popularity has grown exponentially. Now, compare that with the following graph from one of the more prominent Bitcoin markets, bitcoinmarket.com:
Bitcoin Market Graph

Bitcoin Market Graph

There we see Bitcoin growth in value aligning perfectly with the growth in popularity of Lulz Security's exploits. Perhaps that's just a coincidence, but I'm sold on the comparison. Obviously, there are many individuals out there who are pulling for Bitcoin to succeed. They have invested in it and they're going to ride it out. Though it's risky and there are obstacles-a-plenty in the path ahead for Bitcoin, nothing with such a potential for reward comes without risk. And if things do happen to fall apart with Bitcoin, all of those GPU hoarders will be left with some SERIOUS gaming rigs.

Conclusion and additional resources

Well, I hope you have found this post to be useful and informative! If you're still confused, please make sure you watch the videos I linked to above. Hearing Gavin actually talk about Bitcoin is the factor that really made all of this gel for me. Once you have that base understanding, reading through the technical details of it are much more facile. With that said, I'm going to close out here with links to a bunch of resources. If you made it this far, I'm going to be linking out to a couple of real treats -- such as how to construct your own Bitcoin miner. This is all excellent material, so have it, thanks for reading, and good luck with your Bitcoin endeavors! Resources: -The Official Bitcoin Website -Build a Cheap Bitcoin Miner (AWESOME site!) -Mining hardware comparison -Bitcoin.org Forum -Bitcoin Wikipedia Page -Bitcoin Introduction Wiki -Bitcoin Faucet: Free bitcoins from Gavin Andresen! -Bitcoin Consultancy -Bitcoin Monitor (Watch Bitcoin transactions in real time!) -A great article about Bitcoin -A great audio interview with Gavin Andresen -Stephen Chapman SEO Whistleblower Related Stories:

Topics: Government, Banking, Google, Hardware, Networking, Processors, Servers

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67 comments
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  • You'd think people would learn, tulips anyone?

    Though those using indebted currencies like the USD and EURO have little to lose;-)
    Richard Flude
    • RE: Bitcoin: The ultimate guide to understanding what it is and how it works

      @Richard Flude
      wow, this is just another example of how simple minds blow up over complex problems...bitcoin...love it! retards unite!
      we simply need to value the dollar at 10 times what it is today, pay off all debt, put the value back to a more reasonable level and move on...too easy? oddly, yes it is.
      then take away the currency valuation power from the current pervs and make it a transparent algorithm. not based on some goofy metal or vapor, simply a fiat system like it is today, but a fiat that is determined by a non exclusive pseudo elite (your time has ended) group of pervs
      DiggityDoug
    • Read this

      @Richard Flude

      It's the best explanation of what bitcoins are and why the tulips analogy doesn't work.

      http://www.economist.com/blogs/babbage/2011/06/virtual-currency
      intman
  • RE: Bitcoin: The ultimate guide to understanding what it is and how it works

    I don't see how this can work as a commodity. A commodity has value because it is something tangible and physical. Precious metals, cattle, pigs, cotton, etc. Bitcoins are bits on a comuter and there's therefore no tangible, physical object to hold value. This would be like calling WoW gold a commodity. Yes, there are some people who will buy/sell WoW gold with real money, but it is nothing like a commodity market.
    swmace
    • Definition of commodity

      @swmace There are forms of intangible commodities, the defining characteristics are demand and fungibility. Keeping the supply limited helps create a demand for a commodity, meaning that it can be traded for money or other valuables. Fungibility means that all bitcoins are the same and can be used interchangeably without needing to go through a central party like a bank or clearing house. Hard currencies are a form of commodity, just like precious metals. <br><br>Like any other currency, bitcoins can be valuable as long as there is no viable method of counterfeiting them. There must be a sense of confidence that a bitcoin will retain its value and liquidity, otherwise it is truly just vapor.
      terry flores
      • Commodities are GOODS

        @terry flores Demand and fungibility are what differentiate commodities from other GOODS, not the sole definitive characteristics of commodities. Bitcoins are not goods, they are CURRENCY ONLY, so they are NOT commodities. They are useless for any purpose other than as a currency, so the day that people don't value them as such they have no value whatsoever, even if they never do get counterfeited. Gold and silver, to which this moron or snakeoil salesman Stephen Chapman keeps comparing bitcoins, are used as currency because they are highly desirable in their own right. Likening bitcoins to vapor is an insult to vapor...likening them to gold or silver is sheer idiocy.
        swoods@...
      • Commodities are more than just goods.

        @swoods While I appreciate the fact that you think likening bitcoins to gold/silver is sheer idiocy per your definition of "commodities," your definition of "commodities" sorely needs updating.

        The comparison to gold and silver was strictly to serve as an example of a more appropriate perception of bitcoins.

        They're being touted as a currency currently, but the end result of them cannot be as such. A world-wide currency would imply the whole world being able to use them as currency. The total number of bitcoins in the end will pale in comparison to all the people in the world. This is why, even if they're being used as currency *now*, I feel it's a fallacy to ultimately view them as such.

        Of course they're not valuable or tangible like gold or silver; it's simply the perception I wanted to convey through the comparison.

        -Stephen
        StephenChapman
      • Not enough supply?

        @StephenChapman there will be 2.1 Quadrillion units once all are mined. How is that not enough? Worldwide GDP is between $61-$74 Trillion. Even accounting for 100x fewer units to account for "cents" (in dollar terms) that's 21 Trillion. I don't think anyone is advocating or believing for 100% of worldwide GDP to be in bitcoins. 21 Trillion BTC units should meet demand. Consider there are only around 4 Billion ounces of Gold in the world.
        hawks5999
      • Ah, yes.

        @hawks5999 Good point. There are plenty of factors for me to learn about Bitcoin still where the math is concerned, but the complexity of this as a currency is part of what I think will make it more of a commodity than a currency -- even if it was created to be utilized as a currency. With that said, I've no problems adopting bitcoins if they become ubiquitous. Thanks for the perspective.

        -Stephen
        StephenChapman
      • uBits, Bitcents, Mbits, oh my

        @StephenChapman
        Yeah, there is a learning curve, but it will be common parlance before too long. Ask about a Terabyte to _anyone_ in 1995.

        Here are some thoughts from the project on what to call small units.

        https://en.bitcoin.it/wiki/FAQ#What_do_I_call_the_various_denominations_of_Bitcoins?
        hawks5999
      • RE: Bitcoin: The ultimate guide to understanding what it is and how it works

        @hawks5999 Thanks for the resource. Seeing it, I recall that I did run across that section while studying it early yesterday, but that was at a juncture when it all had yet to really sink in. lol. Anyway, something to keep an eye on, for sure. I'll keep reading up on it in the mean time!

        -Stephen
        StephenChapman
      • RE: Bitcoin: The ultimate guide to understanding what it is and how it works

        @terry flores
        As far as I can tell, the defining characteristic of a commodity is something that has use as something other than currency. That's why it's valuable. Sure, those things may not always be physical, tangible things (though I would argue they generally are). The difference between a commodity and a currency is that I can use a commodity for something other than purchases. Though, to be fair, I'm not in any kind of financial industry nor am I a financial expert.
        swmace
      • Commodities you can't touch...

        @swoods@...

        When was the last time you physically held labor power? Arguably, labor power - denominated in time is the most valuable of all commodities.
        hawks5999
      • If it's not a good, it's not a commodity

        @StephenChapman I need to update my definition of commodity?! Seriously? What definition of commodities are you using? Did I say that commodities must be touchable? Labor is a good...it has value...it can be used to build or to destroy. Bitcoins "are being touted as a currency currently", BECAUSE THAT'S THEIR ONLY POSSIBLE USE.

        The fact that gold and silver have intrinsic value is the only thing that makes them worth mentioning in a discussion of this sort. Especially with a summary that says "Bitcoin could just become the virtual equivalent of gold."

        If all you wanted to do was say that BTCs are divisible like an ounce of gold, then you'd have been fine...except of course that your statement that this makes bitcoins more like commodities than currency shows a profound ignorance of what makes a commodity a commodity rather than a pure currency...divisibility does not a commodity make. Indeed, some commodities are counted in indivisible units (tulips come to mind) and currencies are as divisible as their sovereigns decide to facilitate...the dollar is easily divisible down to the hundredth.

        But you went past that in more than just the summary. You said in the body that the hope here is for these to be traded "like collectibles and precious metals", which are traded as valuable things specifically because of their non-trade use; when in fact there is no hope for the use of bitcoins, ever, as anything but currency. They can never be traded in the same way a precious metals, because unlike precious metals, they have no use but in the trade itself.
        swoods@...
  • RE: Bitcoin: The ultimate guide to understanding what it is and how it works

    You want more details see
    http://www.grc.com/securitynow.htm
    BitCoin CryptoCurrency
    mrlinux
  • RE: Bitcoin: The ultimate guide to understanding what it is and how it works

    Ponzi scheme, look it up.<br><br>And if someone manage to decrypt everything in a decade or so, all your transactions are public.
    Tommy S.
    • RE: Bitcoin: The ultimate guide to understanding what it is and how it works

      @Tommy S. maybe you should look up Ponzi Scheme
      mrlinux
    • Decrypt in 10 years? Doubtful.

      @Tommy S. 63.157 PetaFLOP/s in the BitCoin Network compared to 9.324 PetaFLOP/s in the worlds most powerful supercomputer makes the concept of decrypting everything a little moot. Besides, all transactions are public anyway.
      hawks5999
      • RE: Bitcoin: The ultimate guide to understanding what it is and how it works

        @hawks5999 Even if it takes 20 years, the point is that all your transactions will be public when/if the encryption is cracked.
        Tommy S.
      • It won't be 20 years either. And you are arguing the wrong scenario.

        @Tommy S.

        They are public already. See them here: http://bitcoincharts.com/bitcoin/ or on IRC freenode #bitcoin-watch

        The concern with decryption is that you could produce more coins than 21 MM. There is a network that is 7x greater in compute power than the worlds greatest supercomputer. The network is growing at a rate much higher than super computers. And assuming you could control 7 units of the world's single fastest supercomputer to try to counterfeit a bitcoin, you would only have a slightly improved chance of creating a coin. However, the network would likely reject the coin because of it's age in the block chain. You are presupposing something that was designed for in the algorithm.
        hawks5999