What is a Bitcoin?


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What is a Bitcoin?
Bitcoin is a decentralized digital currency, made up of a block of encrypted data. This currency exists purely in electronic form, and exchanged through a secure peer-to-peer file transfer system. Bitcoins are considered to have value because they are accepted as payment by a number of online vendors.

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What is a Bitcoin?

  1. 1. Bitcoin Accepted Here! By: Ahmed Banafa, Distinguished Tenured Staff | Faculty | SME | E-Learning Expert | Four-time winner of instructor of the year award What is a Bitcoin? Bitcoin is a decentralized digital currency, made up of a block of encrypted data. This currency exists purely in electronic form, and exchanged through a secure peer-to-peer file transfer system. Bitcoins are considered to have value because they are accepted as payment by a number of online vendors. Bitcoin‘s value, is determined by supply and demand in the market, much like gold or any other traded commodity. It‘ is subject to the same volatility and sometimes irrational performance. Paula Rosenblum explained it well in her article in Forbes :It‘s a cross between a stock and a form of payment. It‘s a form of payment because you can use Bitcoins to pay for things. You can also send small amounts of currency to people in other countries, without worrying about exchange rates or currency conversion fees. It‘s a stock because there‘s a fixed number of ―Bitcoins‖ in the universe. The value of each Bitcoin fluctuates based on the law of supply and demand. The more people that want to use them, the higher their value. Bitcoin was envisioned as a peer-to-peer trustless exchange. In plain English, that means I want to do a transaction with you, but I don‘t trust you with my credit card number or other personal information. I don‘t care what country you live in, who you are, or what you do. I understand that any transaction we enter into will be irrevocable. That means I can‘t call someone to say
  2. 2. ―Stop that payment.‖ Payment is made immediately. If you have a dispute, it has to be with the party you made the arrangement with. Information on every Bitcoin is recorded in what‘s called a ―ledger.‖ Think of it as the equivalent of the book and page number of the title to your house. The book and page number didn‘t change, only the owner of the title. When you sell your house, the ownership was transferred to someone else. The book and page number remained the same. Similarly, when someone pays for something with a Bitcoin, that spot in the ledger is transferred to the buyer. But no one knows who the current owner of that spot is, or who the seller was. That information is encrypted. In fact, it‘s very hard to separate Bitcoin, the currency, from Bitcoin, the technology. They‘re inextricably linked. One could not exist without the other. Problems with Bitcoin Bitcoin as a currency is completely unregulated Bitcoin‘s value is not backed by anything real or tangible. Bitcoins are not so easy to buy. How can I get Bitcoins? Buy on an Exchange : Several marketplaces called ―Bitcoin exchanges‖ allow people to buy or sell Bitcoins using different currencies. Transfers : People can send Bitcoins to each other using mobile apps or their computers. It‘s similar to sending cash digitally. Mining: People compete to ―mine‖ Bitcoins using computers to solve complex math puzzles. Bitcoin Mining A common analogy for Bitcoins is gold: like gold, they have value only because people want them, the supply is limited, more Bitcoins are created only by ‗mining‘ for them and the difficulty in mining grows as they are mined. But rather than being stored in underground vaults Bitcoins are simply entries in a notional ledger held across many computers around the world. The actual mining of Bitcoins is by a purely mathematical process. A useful analogy is with the search for prime numbers: it used to be fairly easy to find the small , but as they were found it got harder to find the larger ones. Nowadays researchers use advanced high-performance computers to find them. For Bitcoins the search is not actually for prime numbers but to find a sequence of data (called a ‗block‘) that produces a particular pattern when the Bitcoin ‗hash‘ algorithm is applied to the data. When a match occurs the miner obtains a bounty of Bitcoins (and also a fee if that block
  3. 3. was used to certify a transaction). The size of the bounty reduces as Bitcoins around the world are mined. Is Bitcoin secure? Bitcoin is referred to as a cryptocurrency because it relies on cryptography for security. Bitcoins are cryptographically signed each time they are exchanged, which requires that each Bitcoin user have both a public and unique private key. These transactions are maintained in a master registry called the blockchain, which is maintained by all of Bitcoin‘s users. Despite these measures, however, Bitcoin is still vulnerable to hacking, largely because Bitcoins are stored on individual users‘ PCs. Digital Wallet Bitcoins are stored in a ―digital wallet,‖ which exists either in the cloud or on a user‘s computer. The wallet is a kind of virtual bank account that allows users to send or receive Bitcoins, pay for goods or save their money. Unlike bank accounts, Bitcoin wallets are not insured by the FDIC. Though each Bitcoin transaction is recorded in a public log, names of buyers and sellers are never revealed – only their wallet IDs. While that keeps Bitcoin users‘ transactions private, it also lets them buy or sell anything without easily tracing it back to them.
  4. 4. The Future of Bitcoin? As Marc Andreessen mentioned in his article : Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. Bitcoin shares this network effect property with the telephone system, the web, and popular Internet services like eBay and Facebook. Bitcoin is a four-sided network effect. There are four constituencies that participate in expanding the value of Bitcoin as a consequence of their own self-interested participation. Those constituencies are (1) consumers who pay with Bitcoin, (2) merchants who accept Bitcoin, (3) ―miners‖ who run the computers that process and validate all the transactions and enable the distributed trust network to exist, and (4) developers and entrepreneurs who are building new products and services with and on top of Bitcoin. One immediately obvious and enormous area for Bitcoin-based innovation is international remittance.Switching to Bitcoin, which charges no or very low fees, for these remittance payments will therefore raise the quality of life of migrant workers and their families significantly. Here in the United States, a long-recognized problem is the extremely high fees that the “unbanked” — people without conventional bank accounts – pay for even basic financial services. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low-fee services to people outside of the traditional financial system. A fascinating use case for Bitcoin is micropayments. Micropayments have never been feasible, despite 20 years of attempts, because it is not cost effective to run small payments (think $1 and below, down to pennies or fractions of a penny) through the existing credit/debit and banking systems. The fee structure of those systems makes that nonviable. Think about content monetization, for example. One reason media businesses such as newspapers struggle to charge for content is because they need to charge either all (pay the entire subscription fee for all the content) or nothing (which then results in all those terrible banner ads everywhere on the web). All of a sudden, with Bitcoin, there is an economically viable way to charge arbitrarily small amounts of money per article, or per section, or per hour, or per video play, or per archive access, or per news alert. Another potential use of Bitcoin micropayments is to fight spam. Future email systems and social networks could refuse to accept incoming messages unless they were accompanied with tiny amounts of Bitcoin – tiny enough to not matter to the sender, but large enough to deter spammers, who today can send uncounted billions of spam messages for free with impunity. Some prominent economists are deeply skeptical of Bitcoin, even though Ben S. Bernanke, formerly Federal Reserve chairman, recently wrote that digital currencies like Bitcoin ―may hold long-term promise, particularly if they promote a faster, more secure and more efficient payment system.‖ And in 1999, the legendary economist Milton Friedman said: ―One thing that‘s missing
  5. 5. but will soon be developed is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A – the way I can take a $20 bill and hand it over to you, and you may get that without knowing who I am.‖ Of course there is a dark side of all this , including illegal activities like drug trafficking, money laundry , and more . But nothing is pure evil or pure good, regulations will evolve with this technology to minimize the dark side of Bitcoin. References http://dealbook.nytimes.com/2014/01/21/why-bitcoin- matters/?_php=true&_type=blogs&_php=true&_type=blogs&smid=tw-share&_r=1 http://www.forbes.com/sites/paularosenblum/2014/01/27/bitcoin-the-currency-of-the-future/ http://www.businessinsider.com/how-bitcoins-are-mined-and-used-2013-4 https://bitcoin.org/en/faq http://money.cnn.com/infographic/technology/what-is-bitcoin/