Bitcoin in a nutshell

Bitcoin has almost become a household name with increasing media coverage, and it’s fair to say that its notoriety continues to rise. So why all the fuss? Bitcoin appeared around 2009 as a new form of digital currency and was developed from scratch as open source by a smart guy named Satoshi Nakamoto. We are told that his true identity is ‘shrouded in mystery’ as if he were some kind of Marvel superhero, I suspect this simply means that he is a super nerd, but there is no question, he is certainly a pioneer …

So what is this all about?

Bitcoin is a form of currency just like any other, yet it is not under the control of any government or financial institution. The premise is that it is owned and managed by its own community. Bitcoin is decentralized and managed by peer-to-peer members who participate in new transactions and store previous activity in what is known as ‘blockchains’. This means that a complete ‘copy’ of all transactions is stored locally and used to verify, among participants, new activity, thus preventing anyone from misforming, adding or creating fake transactions within the blockchain. This ‘consensus’ approach protects the security of Bitcoin transactions.

Bitcoin works similar to PayPal in that you have a digital wallet with a unique address where people can send you Bitcoins. You can simply install a wallet on your device, or you can download the full Bitcoin wallet and participate in the network as a node.

The value of Bitcoin is largely a supply and demand effect with risky investors betting on the highs. Currently a single Bitcoin (shown as 1.0000000) is worth £ 573 or $ 935. You can buy Bitcoins in any of the 8 decimal places, so for example 0.0100000 would cost you £ 5.70 and 0.1000000 would cost you £ 57.00, it is not! no wonder Bitcoin got its name!

Well, where do I buy Bitcoins?

Unless you have some Bitcoins on the way through a payment, you will need to buy Bitcoins in your current currency. Buying is all about trust as it is unregulated, however, this is how eBay started, where users trusted each other to pay and ship items, and they have done quite well for themselves …

The face of Bitcoin’s coal

Bitcoin mining, as it is known, is the process of generating (and securing) Bitcoins and a small payment is paid in the form of units of Bitcoins for the time and effort that your hardware is used and your level of participation. This is done through a number of methods, from using your own PC’s CPU or GPU (not unlike other network-based BOINC projects like Seti @ Home) to using ASIC miners (circuits application-specific embedded devices), these are designed for the singular purpose they are built for, which in this case is generating Bitcoins. Unless you have a significant investment to buy powerful ASIC miners, like the ones from butterflylabs.com, which can run at 600GH / s (Hash per second), you will have to look for USB ASIC miners like the popular BlockErupter that generates 336MH / s. With BlockErupters you can create your own USB hub-style rig by running many of them at the same time.

However, the reality is that it may be too late in the game to make big money mining Bitcoin. The complexity (hash rate) of the blockchain is now such that even joining and contributing to a mining pool, where the miners work together and share the profits, will likely see more spent on electricity than on any actual financial return. There is also a maximum limit of 21 million Bitcoins and it is currently approaching 12.4 million and as more miners join, the faster this limit will be reached. Now you are more likely to make money buying Bitcoins themselves than generating them.

The future of Bitcoin …

Bitcoin is an emerging technology so the price has been volatile, however it has recently started to stabilize as the user community grows. As of this writing, Bitcoin is seeing the number of transactions hit 100,000 per day. While banks and large companies have yet to consider whether Bitcoin is a threat or an opportunity, there is no doubt that they are beginning to sit down and take notice of this new digital currency that continues to grow its user base on a daily basis.

Interestingly, our mysterious Satoshi, the inventor of Bitcoin, is believed to own, depending on fluctuations, a billion dollars in Bitcoins. Wouldn’t we all wish we had an idea like that …

ITwaffle.com Copyright © 2014 Gareth Baxendale

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