A cryptocurrency called bitcoin increasingly becomes a hot topic of conversation around the globe, on television or the Internet, and yet the very essence of this phenomenon is still far from being accepted common knowledge. So what actually is bitcoin, and what makes it a point of keen interest of several countries?

Bitcoin: An Introduction

To get a grasp of what bitcoin is all about let’s get a handle of its basics first – what is, exactly, this thing called cryptocurrency? To put it simply, what we call cryptocurrency is electronic payment means which do not involve neither physical objects of recognized monetary value nor virtual equivalents of the money gathered on accounts of actual banks. It is virtual money you can not touch or see that is distributed and operated on virtually, through the Internet.

Сharacteristics of Cryptocurrency

Cryptocurrency is decentralized; there is no single center to collect or process data on its operations, everything is processed separately in various points which makes it impossible for state institutions (banks, courts, tax agencies and so on) to monitor data, interfere with transactions, trace participants, withdraw funds and perform other controlling and restricting functions. All funds are accessible only to direct parties of the transaction, via personalized keys. All information on all bitcoin transactions is open source, except for owner’s identity; to properly identify the owner one would need to gather a lot more additional information then is required to perform a bitcoin transaction. The uppermost level of total bitcoin emission is a point agreed upon and regulated by the development team of the network.

History of Cryptocurrency

The principle of cryptography behind bitcoin goes back to 1990s and the research of David Chaum, founder of DigiCash and International Association for Cryptology Research. DigiCash sought to establish and develop protocols for electronic money transactions, but their approach was still centralized and therefore traceable. In 1998 DigiCash declared bankruptcy and its founder left the company.

Chaum’s pioneering work was further developed and carried on by many researchers who remain unseen and unknown. Then, in 2009, the term cryptocurrency was introduced to the public, at the same time the BitCoin network was first launched. BitCoin was the brainchild of Satoshi Nakamoto. The name is there, but the actual person bearing it remains incognito; there are numerous speculations about Nakamoto’s identity, who, according to various sources, might actually be European, Australian, or in fact a whole team of developers, hiding behind a single makeshift name. The fact of the matter is that the BitCoin network had been in development from 2007 to 2009, and then its founder Nakamoto allegedly left the project after its launch.

Mistakes of DigiCash had been taken into account; the BitCoin network was created specifically to function without a single administrative body, so the cryptocurrency is decentralized. All further work concerning development and administration of the network is being undertaken by a British-based developer Gavin Andresen.

Some computing gurus believe that bitcoin is the most significant breakthrough in computer-based technologies, the result of years and years of research in cryptography and hard work by thousands of scientists. Let’s take them at their word at this point and move on from history of bitcoin to a better understanding of its nature.

What is Bitcoin

Bitcoin is virtual money present in the Internet that you can use to pay with, pass along to others or exchange for physical money. BitCoin is also the name of the computer network through which all bitcoin operations are performed, the cryptocurrency system that operates currency with the same name. A bitcoin transaction is in essence a process of exchanging encrypted data. The main feature of BitCoin is its lack of single administrative engine, the pros and cons of which will be inspected closer further on. The unit that stores bitcoin information is called a wallet.

Maximum total emission of bitcoin is not going to expand beyond the number of 21 million. By the beginning of the year 2014 there have been 14 million bitcoins already in circulation. There is an official graph created which established, based on the statistics of bitcoin increase, the epochal date of creation of the last, 21-million-th bitcoin.

Interestingly, the exchange rate of bitcoin to real currency grows simultaneously to bitcoin increase. For instance, in early 2013 one bitcoin amounted to 13 dollars, but by the end of the same year it was already worth more than a thousand. Even at that comparatively early point in bitcoin development history there were people lucky enough to successfully capitalize on such a significant rate growth.

Public interest in bitcoin grows steadily, as evidenced by equally steady growth in actual bitcoin transactions. Bitcoin is often compared to “virtual gold”, i.e. to something that becomes valuable mostly due to being in high demand. The difference is that actual gold has a physical form that can be interacted with while bitcoin remains completely virtual. It’s only a matter of convention, though; actual coins can be easily pressed if necessary.

Bitcoin is sometimes called currency of the future, but that is true only to an extent. While technologically this sort of assumption makes total sense, it remains to be seen when all countries of the world are ready to grant bitcoin the status of legally recognized currency. In Germany bitcoin is a recognized unit of account, the US Treasury recently classified bitcoin as a commodity, and Canada installed bitcoin ATMs. Yet in other countries, such as Russia and Thailand, bitcoin is outlawed completely. Rickard Falkwinge, Swedish IT entrepreneur, recently predicted a surge of bitcoin popularity by 2019, citing several examples of an average 10-year period separating introduction of a technology from mass acceptance of its use, like file sharing (from 1989 to 1999), blogging (1994 to 2004) and video streaming (2004 to 2014).

Bitcoin Mining

There is a process called “mining”, utilizing which it’s possible to actually obtain bitcoins, in an analogy with natural resources. Mining is not a hugely profitable and, many believe, wholly justified activity, yet there is a slim chance to earn something due to growth of bitcoin exchange rate. It used to be a little easier at earlier stages of bitcoin development, yet many enthusiasts continue to resort to mining. They can mine individually or unite in miners’ pools, to increase their collective computing capabilities necessary to mine bitcoins. To do that they install specialized software, that allows them to perform in essence a transformation of data into a bit line using special algorithm.

Bitcoin: Beginner’s Guide

To begin working with bitcoin you’ll need to first set up a bitcoin wallet. Let’s take a look at types of wallets available for a bitcoin user.

  • Desktop wallet:
  • It can be downloaded to or created on a personal computer. It’s completely secure and encrypted, it belongs to the user only and it’s impossible to steal or hack into, as the password is safe with the user. On the other hand, it’s too much of a responsibility – password can be forgotten, or a PC can be affected by a virus or physically broken.

  • Online wallet:
  • It is generated, naturally, online, can be immediately accessed from anywhere in the world and keeping it intact is not solely the responsibility of its user. At the same time it’s vulnerable to hacking as in this case all data is stored online.

  • Hybrid wallet:
  • This wallet is technically online, but the key is generated and stored by the owner’s PC.

Pros and Cons of Bitcoin

The main pro of bitcoin is of course its total anonymity. The network is completely decentralized, so it’s impossible to trace who it was who actually transferred or received bitcoin. No information is provided concerning the asset of transaction either. All bitcoin operations are performed openly, yet they remain completely depersonalized.

The other important point is the international nature of bitcoin. There’s no need to exchange currency according to the state you’re currently in or are performing financial operations with, as bitcoin can be simply transferred from wallet to wallet regardless of national identity of owners.

Bitcoin is also tax-free which allows for additional opportunities to save money. Bitcoin is not an official currency of any country, so commodities free of state taxation come significantly cheaper in bitcoin. Bitcoin cannot be used as a basis for debt liability so consequently it cannot be withdrawn or annulled due to any debt-based problems.

Another pro is virtual nature of bitcoin – you don’t need to carry actual physical money to use it, and it should be noted that the number of actual physical places and establishments outside the Internet that turn to bitcoin as accepted payment keeps growing steadily around the world. There are no political or other methods to control or otherwise influence the cryptocurrency circulation, as it remains a purely public way of payment and exchange. Bitcoin payments are also commission-free. No aspect of bitcoin transaction is additionally chargeable except for urgency of transferring; it still remains up to the user to pay commission for additional urgency and speed if it’s needed.

Bitcoin environment is also inflation-free! The increase in bitcoin numbers is predetermined based on algorithms of growth in gold reserves the world over, and the number of bitcoin to ever enter the circulation is also predetermined and finite. No change in political system or monopoly can influence that. To an extent, bitcoin is more reliable then gold as the predetermined total emission of bitcoin means there’s going to be an inevitable shortage of it in the future.

Each bitcoin is a unique unit that cannot be forged or spent twice – no bitcoin transaction can be double-billed, whether intentionally or otherwise. Bitcoin forging is theoretically possible yet unbelievably and ineffectively difficult; those truly interested and ready to invest time and effort into obtaining some free bitcoin are better off resorting to bitcoin mining.

Cons of Bitcoin

Safety is undoubtedly the number one concern of bitcoin circulation system. It might sound strange in light of previously discussed reliability of bitcoin, yet it’s true – the very anonymity and unofficial nature of bitcoin is also the Achilles heel of the cryptocurrency. Bitcoin circulation is not a law-backed system, so when a virus program charges your online wallet for something you didn’t buy or an exchange system cheats you out on exchange rate there is essentially no efficient way to bring perpetrators of that to justice, let alone get a refund.

The murkiness of official status of bitcoin circulation system combined with its provided anonymity and nonexistent traceability, both not coincidentally listed above as pros, make the system an ideal playground for all sorts of criminal activity carried out by shady characters of all kinds, from drag-traffickers to weapon smugglers to terrorists. That is precisely the reason why many countries still refrain from officially recognizing bitcoin; they’re reluctant to state they’re able to take control over a system that was created specifically to avoid control and comes with a long string of criminal activity attached to it.

Lack of official recognition might also affect the bitcoin demand, which for now remain the only thing that generates its value. Value drop is imminent if demand drops, which is all too possible in case many states choose to outlaw bitcoin altogether. Instability of bitcoin demand and insufficient currency turnover of the bitcoin exchange market BTC also make it vulnerable to manipulations based on the exchange rate fluctuations that can reach up to 50 dollars a week.

Safety Control

Let’s begin with an example – in 2011 Dan Kaminsky, an American expert in computer threats decided to test safety of the bitcoin circulation system in the simplest manner he knew; by hacking it. He failed. His failure made him realize that the system was created by serious specialists with a clear and thorough understanding of the threats their system would be facing. The code of the system itself is perfectly reliable, and minor glitches that do appear from time to time (due to software upgrades, for instance) are being kept in check.

To sum up the pros and cons inspection – no system is ideal in and of itself, but taking into account all the pros and cons one can ensure the safest possible experience. So, what are the right things to do to achieve that and minimize risks while operating bitcoin?

  • Know Your Server:
  • Never use unfamiliar server for bitcoin exchange. Reliability of the server can be determined by its longevity, customer feedback online and other signifiers of trustworthiness.

  • Hang On to Your Password:
  • This seems obvious but bears repeating – no one should have access to your password but you. If your password falls into wrong hands, there’s no returning your hard-earned bitcoins – the system doesn’t trace the address of the receiver regardless of whether he’s receiving a transfer honestly or not. So hang on to your password, scan your PC regularly for viruses and keep it in good working conditions.

  • Pay Attention:
  • Don’t be careless and plan all your operations carefully in advance – there’s no cancelling the bitcoin transaction once you’ve done it.