What Is Bitcoin? (Part 1/3)

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It’s been a while now that I have been following the media buzz around Bitcoin, this digital currency that has gained in tremendous value over the last couple of months.  I thus decided to write a thorough review about this disruptive technology, whose design might very well shape the future of finance. So if you want to understand what Bitcoin is about and how you can benefit from it, you MUST read all three parts of this article. In addition, if you have already bought some Bitcoins, this series of articles will help you understand the risks you are exposed to in order to protect your money. So let’s get started!

What is Bitcoin?

A Bitcoin is a digital currency that allows individuals to transact online directly with one another without having their transaction go through processing intermediaries like banks. Bitcoin is a crypto-currency, which means its design is based on a branch of mathematics called cryptography, and it makes use of computer science to secure information by making it nearly impossible to decipher. Common applications of cryptography can be found in e-commerce, ATM cards or military intelligence.

What can you buy with Bitcoins?

On the Internet, you can use Bitcoins to buy almost every retail products from electronic items, to hardware or clothes. Although few services are payable with Bitcoins today and very few physical stores accept Bitcoins as a form of payment, there is a growing community of merchants around the world willing to transact with Bitcoins.

Where do Bitcoins come from?

The concept behind Bitcoins was initially introduced in 2009 by Satoshi Nakamoto, which is a pseudonym referring to a person, a group of people or an entity that nobody knows or has located. The currency became popular among techies because of the ideology underneath its creation, based on the ideas of real free-market and open-source platform. This decentralized system of payment quickly gained in popularity among Millenials and anarcho-capitalists. Early investors who bought Bitcoins at their inception, when a unit was worth few cents, are now millionaires. Indeed, the exchange rate has since spiked up to $1200 for 1 BTC in November 2013, before going back down to $695 as of the date of this article.

How are Bitcoins issued?

Bitcoins are generated by people called ‘miners’, who use special software and very powerful machines to solve complex mathematical equations. Whenever an equation is solved, the miner is rewarded with Bitcoins that he or she can now keep, exchange or transact with. Everybody can become a miner, provided they have the skills and resources to crack the codes. This system is completely liberal, in a way traditional capitalism does not allow for, because of regulation and centralization.

How to start using Bitcoins

  1. Download the Bitcoin software
  2. Get an electronic wallet from one of the providers like Coinbase.
  3. Purchase Bitcoins from one of the several Bitcoin exchanges where you can change your Dollars or Euros for Bitcoins (and vice versa)
  4. Start buying items and transferring money to third parties from your wallet to other people’s wallets.
  5. You can cash out your Bitcoins by converting them back to dollars or any other major currency on Bitcoin online exchanges like MtGox.com.

Is Bitcoin good or bad?

So beyond a rising popularity, why should you care about Bitcoins instead of sticking to existing forms of payments like Cash, Paypal, debit and credit cards? In short, because Bitcoin transactions are cheaper, faster and global. However because the Bitcoin system is unregulated and decentralized, the macro and microeconomic implications of massively spreading this digital currency under its current design could be dramatic. For example, in a system where every miner gets to be his own bank, how can we control the supply and demand of the currency to avoid inflation? How can the currency’s hyper-volatility be reduced in order to stabilize its exchange rate? How would fluctuations in interest rates be controlled if people start lending and borrowing in Bitcoins? How can the Government tax revenues generated in Bitcoins if they can’t trace your e-wallet? How do we protect the consumers from Bitcoin counterfeit and fraud? How can authorities track transactions to fight money laundering and illegal businesses?

Read ‘Bitcoin Review: Pros and Cons (Part 2/3)’, to better understand the advantages and disadvantages of Bitcoin. In the meantime, the following sites may help you get started: Weusecoins, Invest in blockchainBitcoin MagazineBitcoin Foundation and Bitcoin Wiki.

 

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