10 things to know about virtual currency Bitcoin
Virtual currency initiative Bitcoin is slowly sneaking up on unaware internet users across the globe. We take you through 10 questions that can help increase your knowledge about the fast-growing technology.Updated: Mar 30, 2014 11:10 IST
Virtual currency initiative Bitcoin is slowly sneaking up on unaware internet users across the globe. We take you through 10 questions that can help increase your knowledge about the fast-growing technology.
What is Bitcoin?
Through its network, Bitcoin acts as a payment platform that functions on completely digital currency. The company says it is the first decentralised peer-to-peer payment network that is powered by its users with no central authority or middlemen. In other words, Bitcoin is cash for the internet.
How does it work?
"Bitcoin is nothing more than a mobile app or computer programme that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them. This is how Bitcoin works for most users," bitcoin.org says. The Bitcoin network has recorded details of all transactions ever made. A transaction's authenticity is ensured through digital signatures. "All users have full control over sending bitcoins from their own addresses… Anyone can process transactions using the computing power of specialised hardware and earn a reward in bitcoins for this service."
How did the digital currency network come up?
Though there were reports of Satoshi Nakamoto being the man behind Bitcoin. The Japanese national, however, has denied any involvement in the project. The first Bitcoin specification and proof of concept was published in 2009. "The Bitcoin protocol and software are published openly and any developer around the world can review the code or make their own modified version of the Bitcoin software… As such, the identity of Bitcoin's inventor is probably as relevant today as the identity of the person who invented paper," the website says.
Read: Bitcoin is property, not currency, rules US revenue department
Is it really popular?
Several online firms such as WordPress, Namecheap, Reddit and Flattr are already using Bitcoin. It is a new concept, but it is picking up fast. "At the end of August 2013, the value of all bitcoins in circulation exceeded $ 1.5 billion with millions of dollars worth of bitcoins exchanged daily," according to bitcoin.org. A few small physical stores are also accepting the digital currency.
How can I acquire bitcoins?
The system was designed to reward computers that do the crucial work of verifying transactions with the occasional payoff of new bitcoins in a process known as bitcoin mining.
Other than mining, you can purchase bitcoins from a Bitcoin exchange or you can provide services in return for the virtual currency.
How do you store, trade and spend bitcoins?
Bitcoins are held in virtual wallets with unique keys. Transactions are made by sending bitcoins from one wallet to a unique key associated with another wallet in a cryptographic process that is verified by computers across the bitcoin network.
Bitcoin wallets can be stored offline or online at exchanges such as Bitstamp and BTC-E.
Read: Bitcoin becoming a bit too big; regulators scramble for norms
Is it safe to use the technology?
"The Bitcoin technology — the protocol and the cryptography — has a strong security track record, and the Bitcoin network is probably the biggest distributed computing project in the world. Bitcoin's most common vulnerability is in user error. Bitcoin wallet files that store the necessary private keys can be accidentally deleted, lost or stolen. This is pretty similar to physical cash stored in a digital form. Fortunately, users can employ sound security practices to protect their money or use service providers that offer good levels of security and insurance against theft or loss," bitcoin.org says.
However, a Tokyo-based bourse halted withdrawals earlier this month after detecting "unusual activity". It later abruptly stopped trading. An unverified document circulating on the internet purporting to be a crisis plan for Mt. Gox said more than 744,000 bitcoins were "missing due to malleability-related theft."
Mt. Gox began as a website for exchanging trading cards before turning to Bitcoin.
Are you part of an unlawful plot?
Doesn't seem like it. According to Bitcoin, the technology has not been made illegal by legislation in most jurisdictions. There are, however, places such as Argentina and Russia that have restricted.
"Regulators from various jurisdictions are taking steps to provide individuals and businesses with rules on how to integrate this new technology with the formal, regulated financial system," the firm says.
Critics, however, say Bitcoin is too volatile to be widely adopted. They warn of its lack of regulation and its use to pay for illegal drugs and other nefarious transactions.
Read: First US bitcoin ATMs to open in Seattle, Austin
Is failure a possibility?
Several virtual currencies such as Beenz, Flooz and internetcash.com have failed in the past. Real currencies such as the German Mark and Zimbabwean dollar have lost the plot too. "Although previous currency failures were typically due to hyperinflation of a kind that Bitcoin makes impossible, there is always potential for technical failures, competing currencies, political issues and so on. As a basic rule of thumb, no currency should be considered absolutely safe from failures or hard times."
It is still experimental
There are many who question the feasibility and infrastructure of Bitcoin. The technology is in an experimental phase and still needs to grow a lot if it desires to become an actively and widely used currency. It is still too early to say whether the technology is a hit or a miss. From the horse's — bitcoin.org — mouth: "Bitcoin is an experimental new currency that is in active development. Although it becomes less experimental as usage grows, you should keep in mind that Bitcoin is a new invention that is exploring ideas that have never been attempted before."
(With inputs from Reuters)
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