So What Are Bitcoins Anyway?

We take a look at where bitcoin came from, what creates them, what gives them value and what y
you can do with them.

Unless you’re used to owning and shopping with a virtual currency it can be somewhat of an odd concept to get your head around. It has no physical manifestation, you can’t jingle it in your pocket nor flip it to see who kicks-off, it has no large institutional backing and seems to just magically appear from the ether of the internet. How can this have value? How can mere long strings of numbers represent something of worth in of themselves? Just whose idea was this in the first place and isn’t bitcoin just a bit of a con really?

Well one has to admit that the actual origins of bitcoin are about as mystical as the modern techno-world gets, since the paper that outlined it as a system, “Bitcoin: A Peer-to-Peer Electronic Cash System” was posted on the net in 2008 by a person called Satoshi Nakamoto. Mystical because no one actually knows who Satoshi Nakamoto is despite fingers being pointed at several notable experts on the early ecash protocols. All those accused of being Satoshi Nakamoto have denied it completely and continue to do so today.

Whilst an anonymous birth seems perhaps a tad ignoble for a currency and it is often cited as one of many reasons some have difficulty trusting it as a system of value transaction or storage. However the concept was so good that it was only a year later that the first open source bitcoin client was issued and the first bitcoins were issued. The ghostly figure that is Satoshi Nakamoto actually mining the very first block for 50 bitcoins.

These days bitcoins are accepted far more places than might instantly be imagined. Whilst the media tend to focus on the untraceable nature of transactions, implying that all bitcoin users are online criminal drug dealing terrorists who donate to Paraguayan death squads, the reality is that bitcoins have leaped from the electronic clutches of the internet and into the real world with bars and coffee shops accepting them as payment but it might be a while before you’re paying your stake at a blackjack tournament in them.

Hi Ho, Hi Ho, Hi Ho

The basis of Bitcoin as a virtual currency is the generation of a unique piece of digital property that is so complex as to be impossible to replicate making it of a value in of itself. The process of creating these pieces of digital property is called mining and can’t be done with regular computers but requires specially built machines that compute away to solve complex mathematics problems, or hashing, each time you solve one of the problems you create a block and for that block creation you are rewarded with bitcoins.

This, of course, makes it sound easy but is very akin to someone being told the way to mine gold is to dig a hole and look for the shiny stuff. These blocks are added to the Blockchain which is the public record of bitcoins, and each one has the hash of the previous block, which makes a record of transaction or transfer, creating a public record in chronological order. It is this that makes it of value because each block, each bitcoin, is unique and can’t be copied by anything that couldn’t just create more unique bitcoins.

Of course with no central control over the currency there are some interesting limits on the number of bitcoins that can be mined. There is a built-in limit of 21 million bitcoins and as more and more enter the system it becomes more and more difficult to mine them. The math problems get harder, the rewards for block production are frequently cut by half, there is a decrease in the rate at which this currency is created as more of it exists.

These smart strategies for controlling the overall market for bitcoins haven’t entirely avoided some wildly fluctuating values over the intervening years with some people getting exceedingly rich from speculating in this still oddly geeky system of finance. The bitcoins one gains from block creation consist of a public address, a spot on the chain, and a private key, so the vault of gold that once backed the now fiat currencies so commonly used, has been replicated, the only difference is you know which bit of gold is yours and no one else does till you tell them by handing it to them.

Can Online Currency Flourish?

Being barely six years old you would expect bitcoin to still be floundering on in the teething stages of infancy and whilst there are still some issues surrounding it, a great many have accepted or adopted it as a method of payment. Today you can use it on things as diverse as the online service OkCupid and to pay your tuition fees at the University of Nicosia. Popular platforms like Zynga are trialing it as an in-game purchase method and the D Las Vegas Casino Hotel and Golden Gate Hotel Casino both accept them as payment.

Although you’ll not see the correct use of bitcoins enter the lexicon of casino table manners just yet, that such financially focused bodies are willing to adopt the currency has done much for its reputation, as has a Federal Judge, Amos Mazzant, ruling that bitcoins are a “a currency of form of money” and the Finance Ministry of Germany considering it a “unit of account”. However not everyone has been so happy about bitcoins existence.

The Thai Foreign Exchange Administration and Policy Department decided in July of 2013 that bitcoin lacked any legal framework and therefore would be illegal instantly banning any trade in the currency within Thailand. This may show the unease that some governments have with relinquishing their control over people’s finances, and indeed it is thought the greatest hurdle the bitcoin faces for acceptance is that of China and whether it will ever accept something so decentralized.

Bitcoins might seem a bit of a mysterious beast that is overly complex compared to the cash and cards we’re all used to using, there have been notable security issues with it, albeit it briefly, but then banks have queues and are sometimes robbed. What makes bitcoin different is that it is largely unregulated which frees it from charges and monitoring, but also makes it less secure and more prone to fluctuation, but then the wild frontier of technology has always been a strange and worrying place.

Read more about Bitcoin, currency of the future.