Should We care about Bitcoins?

What is Bitcoin? That is the question everyone is asking, including CES 2014. Many call it fake money. Some say it is virtual money with no backing. The reason Bitcoin is hard to understand is because it is truly revolutionary. Paper money must have been seen the same way when it replaced Gold coins.

But Bitcoin is different. Bitcoin is Cryptocurrency. It is a type of virtual money created and maintained Cryptographically. It has no Central Authority or Bank. People or Companies can exchange it directly with one another from anywhere in the world. In 2009, under the false name of Satoshi Nakamoto, an open source software was released. It was the beginning of Bitcoin.

Bitcoins’ main goal is to be a global currency that is not controlled by any person or group. It does this by being Decentralized. Financial institutions need massive computational power. A record of all transactions need to be kept. Also it has to perform transactions and create Bitcoins.

This is done by “Miners.” Miners are individuals or groups who run the bitcoin software on their own hardware. By doing this, they generate new bitcoins by lending their hardware for solving complex cryptographic equations. They also help keep the records of all transactions. No one can spend the same bitcoin twice. For their troubles and cost of electricity and such, the miners are rewarded with a percentage of the bitcoin generated and the transaction fees.

When Bitcoin was young, the average person could make quite a few bitcoins with a standard home computer. But now resources are pooled into “swarms”, so that equations can be processed faster leading to better chances of earning. The number of Bitcoins generated are regulated. You cannot create unlimited number of bitcoins. For bitcoin to have value it must be limited, similar to gold. Bitcoin mining will go on decreasing by half every year. Till it reaches the limit of 21 Million Bitcoins. There can be no more bitcoins after that. This helps regulate Inflation.So why should you care about this Virtual Currency? Someone described it as a Financial Revolution. It gives people freedom to do business with anyone in the world, without any middle man. No excessive transaction cost, no hassles. But apart from that there are many practical reasons for investing in bitcoin. The first is security. The strength of the encryption is equal to the number of computers connected to the “swarm”. So if someone has to crack it, they have to have more computational power than many googles. And that would only give them a hypothetical possibility. The software is open-sourced. All unwanted software is immediately seen and removed. But your name and private wallet are not revealed. You can make completely private transactions with a pseudonym. Everything else can be seen by anyone. This ensures transparency in trading while protecting privacy of the users.

Most bitcoins are stored digitally in wallets. But many have made bitcoins of paper, wood and metal. All have a sort of digital storage whereby data can be scanned.

How do we get hold of a bitcoin? You can “mine” it, sell goods and services online for bitcoins or purchase it for money. But this is controversial. How much does a bitcoin cost?

Mt.gox and BTC china are the two largest exchanges. You can exchange money in return for bitcoins. Bitcoins are not regulated and as such the currency fluctuates considerably from one exchange to the next. But mostly people deal in terms of dollars. The latest price of 1 bitcoin is ~850 dollars, though it rises and falls. Many say that it is natural because bitcoin is a new currency that has not yet matured.

Bitcoin has not been smooth sailing. Recently there was a sharp drop in prices due to the Chinese Government banning the exchange of Bitcoin for money. There was also a drug dealer site called silkroad.com that traded in bitcoins. The privacy policy of bitcoin didn’t allow tracking. This darkened the name of bitcoin as a legal currency.

On the positive side, the Federal Reserve of USA issued a statement that bitcoin is “legitimate”. Many other governments have issued similar statements. Recently more individuals and companies have started accepting bitcoins. Reddit and Zynga games are an example.

Bitcoin has no central authority which makes many governments uncomfortable, as they cannot control it. But it is slowly gaining recognition steadily building up momentum. It may be a good idea to start investing in it. However, be careful about malwares and theft. With new technology comes new problems.

All things considered Bitcoin has a lot of promise. It is a risky enterprise, with prices rising and falling. But it a virtual currency that is completely in your control, to do as you please. The only limitation at the moment is that it is very bound to the virtual space, though this may change in the future. And change is right around the corner.