Bitcoin: what you need to know
Is Bitcoin a virtual goldrush or a new bubble waiting to burst?
In recent weeks the term bitcoin has gone from a little-known internet payment system to being discussed on mainstream TV and radio shows. So what is it and should you take any notice?
Bitcoin can be described as a decentralised, peer-to-peer, virtual, cryptographic currency. Far more easily you can just think of it as an online currency and the first of its kind.
The story behind Bitcoin is as odd as its concept. It was envisioned, created and launched by someone called Satoshi Nakamoto, but this is believed to be a pseudonym and whoever is actually behind the name has subsequently vanished.
That in itself is an irrelevance to bitcoin, as the system doesn’t require a central minting or controlling authority.
It’s run between people’s systems as a peer-to-peer network in an entirely anonymous system. While every bitcoin transaction is publicly available, no one ever knows who is making them.
To some this makes it very desirable, as it’s outside the legal control of any one country and all transactions are untraceable.
While this has drawn criticism for its use to potentially buy illegal items and money laundering, these are things that have always blighted real currencies.
How does it work?
Transactions themselves are done with Bitcoins and Bitcoin wallets. A wallet is like an email address with money sent or received from it or to it. Bitcoins themselves are “mined” over time by computers cracking exceptionally difficult calculations. This process is called Bitcoin mining and can be done by anyone.
It’s complex to get started, you need a powerful PC with a dedicated graphics card and be part of a mining pool, and even then you could be limited to earning just one or two pounds per day. The program GUIMiner is one such mining program but you’ll need to join a suitable pool such as BITCOINCZ.
The side of Bitcoin that seems to be gaining the most attraction is trading it, as you can any other currency. Websites like Mt. Gox enable you to sell and buy bitcoins, potentially buying low and selling at a high.
Back on 10 April a Bitcoin was worth as much as $250, but two days later this value had crashed to as low as $54. The currency is currently bobbling along just under $100 a Bitcoin, which is far below the $140 or so at the start of April. This volatility not only affects trading but what you can buy with it too.
Beyond just the volatility of the value of a Bitcoin is the possibility of hacking, not just of your personal wallets but of the entire Bitcoin system. Personal attacks are potentially easier than stealing bank account details, but the idea the entire Bitcoin system being hacked can’t be dismissed.
A hacking event in 2010 saw someone creating millions of fake Bitcoins within the system, this was spotted within hours and the vulnerability was patched. To date this has been the only security issue to affect the entire system but potentially something similar could happen again.
Normal currencies are backed by governments along with established legal and physical frameworks. While many currencies and shares do exist in a virtual state they’re always grounded in reality. Bitcoin does offer many of the characteristics of a mature currency, but being so new and volatile for the vast majority of people it shouldn’t be anything more than a curiosity.
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