Bitcoin for beginners
The real deal on the virtual currency phenomenon
A new form of currency is riding the planet’s copper cable and phone lines in the form of digital pulses that are turning certain savvy scientific investors into millionaires overnight. These binary bills, known as Bitcoins, have sent the financial world into meltdown as they appear to break all the rules of global finance; the main one being that they’re a truly global currency that can effortlessly cross borders and is not tied to or limited by any particular country’s economy.
The Australian Government has been an early adopter, giving the go-ahead to Bitcoin-derived companies and staying one step in the race to convince not only investors but the wider population about the credibility of digital currency. You can read more about that here [link to July’s Bitcoin blog]. But what about getting back to square one on this computerised cash and asking a few pertinent questions? What is it and how does it actually work?
We wired ourselves to the main frame and entered this monetary matrix in an attempt to explain all, in language you don’t need to be Bill Gates to understand.
What are they?
Okay, down to the real basics. Bitcoins are a digital currency, created and stored electronically. Bitcoins aren’t printed, like dollars or Euros, so you’ll never actually see one as they don’t physically exist. Sound weird? It’s not that much different from the way banking is working already. You’re probably already paid electronically, check your balance online and then pay for your morning latte with your debit card. Same thing really. You’ve never actually had the folding stuff in your hand but you’ve been using it as currency all the same.
How much are they worth?
This month (August 2014), the price of a Bitcoin is around $634 though the price has hit highs of $1000 in November 2013 and trading began at lower than $1 in early 2011.
Who invented it?
Bitcoin was invented way back in 2008 by Satoshi Nakamoto, an elusive chap (or group of people if rumours are to be believed) who created the Bitcoin idea and software. His real identity remains unknown, as does his nationality. Is he real? Is he a pseudonym? Does the name actually represent a group of people? Whether he (or she) is a megalomaniac sitting in a hollowed-out volcano or a group of geeks in a suburban bedroom, Nakamoto is currently understood to be in possession of roughly one million Bitcoins which at August 2014 price is the equivalent of $634 million.
Who makes them?
This is where things do take a rather radical departure from normality. Bitcoins are produced by people running computers all around the world, using advanced software that solves even more advanced mathematical problems. It’s the first example of a growing category of money known as cryptocurrency that wouldn’t sound out of place if it was in the dashboard coin tray of the Death Star.
How does it work?
Bitcoin is online money. It’s based on a cryptographic protocol, which is why it is also referred to as a cryptocurrency (keeping up at the back?). The protocol creates unique pieces of digital property that can be transferred from one person to another.
This makes Bitcoin a token of value but also a method for transferring that value, with transactions taking place in what is known as the blockchain, a secure way of recording your purchase publicly and permanently.
People usually buy and sell Bitcoins through exchanges, though these are not highly regulated. Appealing to some, who’d rather hide their transactions, but making it a lot easier fall prey to dodgy types. A bit like changing your money in that dark alley behind the bank rather than in its brightly lit and secure interior.
How do you own them?
Proving ownership of Bitcoins associated with a certain Bitcoin address means using the private key. Not a real one (nothing actually exists in the world of Bitcoin) but a secret number that allows Bitcoins to be spent. Every Bitcoin address has a matching private key, which is saved in the wallet file of the person who owns the balance.
For the owner, it is important to protect the private key from loss or theft. If a private key is lost, the user cannot prove ownership by other means. The coins are then lost and cannot be recovered. Because anyone with knowledge of the private key can take ownership of any associated Bitcoins, theft can occur when a private key is revealed or stolen.
If you write this key down or store it on a local drive, you can also trade a Bitcoin simply by passing that key to someone else.
How do you spend them?
When you want to sell, you make sure your wallet is loaded with your Bitcoins, and pretty much all you have to do is click ‘sell’.
This year, the currency looks like it’s made the transition into the mainstream with more and more big businesses accepting it as payment in exchange for goods and services. You can now spend your Bitcoins with famous names like Dell and Reeds Jewellers in the US, plus a host of well-known leisure and retail names who have come on board. Find out more about who accepts them here.
The future?
As a new currency, it looks like Bitcoin will be accepted by more and retailers and also users who appreciate its abilities to cross international borders without penalties. However, its current growth seems to driven by financial speculation, which makes the risk averse a little nervous to say the least when it comes to trading in trusted currency like the good old dollar for this digital upstart.
Whatever transpires, it looks like this new online coinage is gaining credibility by the day and will definitely be around for a bit longer.
Blog post originally written for Fair Go Finance and appeared on their website in 2015.
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