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.
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:datintitle: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
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.