Bitcoin

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There is so much information about Bitcoin, yet most of it is written by techies – who get it. So here’s everything you need to know to about Bitcoin – for the rest of us.


Why Bitcoin?

pigFrom a young age, when we first received pocket money, we immediately understood the value – and thrill – of earning our own money. Our spending habits may have evolved from mixed lollies to superannuation, but one need remains the same; knowing our piggy bank is safe.

Unfortunately the big piggy banks practice a system called “Fractional Reserve Banking” – lending 9 times the value of money they hold in reserve. At best it creates a dangerous debt bubble – at worst it decimates the value and security of our savings.

Imagine an alternate example:

$21 million exists in the world – you own $2.
A global, public ledger is maintained.
You spend $2 and update your ledger.
Everyone updates their ledger.
Can you print more? Spend more? Lend more?

 

This is the model at the heart of Bitcoin – the Blockchain. A global, transparent, public ledger.

Bitcoin: a distributed, digital currency.

Released in 2009 as open source software, Bitcoin is a digital currency; both an asset and payment system.  Although it is known to be created by “Satoshi Nakamoto”, this is merely a pseudonym – no one knows the true identity of its creator.

Bitcoin is unique because all Digital Currency attempts prior have failed to overcome two significant obstacles. Firstly, information stored digitally can be replicated indefinitely – how do you prevent users from duplicating their money? Computer science refers to it as “The Double-Spend problem”.

Secondly, currency must be stored securely to prevent theft, yet backed up independently to avoid loss in the event of hardware failure.

Bitcoin solved both challenges, with a safe and secure “Blockchain”.

The Blockchain: a global, transparent, public ledger.

To keep Bitcoin independent numerous people need to store the ledger; yet the hardware required to run the Blockchain is expensive. To encourage people, a reward system was established. Freshly minted Bitcoins and transaction fees are “mined” and distributed to holders of the Blockchain: “Miners”.

Mining: a reward system offered to individuals who run and maintain the Bitcoin Blockchain.

The Blockchain and Mining

Miners across the world contend to update the Blockchain. First they must prove they are legitimate holders of the software by solving a complex computer algorithm that could only be proved with the equivalent computing power required to run the Blockchain.

Once the algorithm is solved and all miners have agreed upon the solution, a miner is selected to update the Blockchain. The entire Blockchain is refreshed and the miner receives freshly minted Bitcoin and the transaction fees paid from all of the Bitcoin trades.

Allocations of new Bitcoin slowly decrease in time until all 21 million has been distributed. In parallel, Bitcoin transaction fees increase due to the rising number of Bitcoin transactions. At present, there are approximately 250,000 Bitcoin transactions per day worldwide.[i] Eventually, when all 21 million Bitcoin has been minted, miners will receive transaction fees only.

Bitcoin is trusted

For a digital currency to be trusted it must be un-hackable. In 2011 Bitcoin faced its ultimate test from leading Internet-security researcher Dan Kaminsky[ii].

In 2008 Kaminsky famously discovered a fundamental flaw in the Internet which would have enabled a skilled coder to hack any website or shut down the entire Internet. Kaminsky alerted the Department of Homeland Security, executives at Microsoft and Cisco and worked with them to patch it.

When Kaminsky turned his attention to Bitcoin, he identified nine ways to compromise the system. When he launched his first attack, he immediately received the message, “Attack Removed.” Every attempt yielded the same result.

“I came up with beautiful bugs, but every time I went after the code there was a line that addressed the problem. I’ve never seen anything like it. Nakamoto understands economics, cryptography, and peer-to-peer networking. Either there’s a team of people who worked on this, or this guy is a genius.”[iii]  – Dan Kaminsky

Challenges

New ideas, by default are difficult to understand. This creates an opportunity for early adopters.

llegal usage

Unfortunately Bitcoin is criticised in the mainstream media for its use by criminals. Because of it’s anonymous, independent platform it is the perfect payment system for illegal behaviour. The spirit in which Bitcoin was created was to liberate people from the oppression of existing financial, legal and political institutions. Regrettably there will always be individuals who use tools of good, for not so good deeds. Criminals also use mobile phones to conduct business, but we still need ours.

Bitcoin Trader does not support the use of Bitcoin for any illegal behaviour. We voluntarily observe “Know Your Customer” protocols and comply with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

The Value of Bitcoin

In 2010 Florida programmer, Laszlo Hanyecz, exchanged 10,000 Bitcoins for two pizzas. At today’s value, of approximately $US700 per Bitcoin, it equates to about 7 million dollars. Is Hanyecz bitter? “It wasn’t like Bitcoins had any value back then, so the idea of trading them for a pizza was incredibly cool.”