Bitcoin 101

I am sure you have used your credit cards for online shopping, you enter the card number and click submit. Some of you might even have a Paypal account in which you use your email to make a payment. Your Paypal account is again linked to your credit card or bank account.

There is still a centralised governance which is the bank. Every transaction goes through the banks. There is a central “ledger”. We “trust” the credit card company to keep the transaction and our details safe.

In 2008 an article was published by someone called Satoshi Nakamoto and Bitcoin was born. He/she/they proposed a relatively new system of currency and implemented that into a software system and then we heard nothing from them after 2010. They just vanished.

Bitcoin is a digital, de-centralised currency. What does that mean?

Well it’s digital so there is no physical money involved, and it’s de-centralised which means no bank or governing body controls it and it’s managed by those who use it. Nobody owns the Bitcoin network much like no one owns the Internet.

Instead of a bank recording transactions in a centralised ledger, all Bitcoin users keep the same copy of the same ledger; as a result it would be extremely hard to mess with the system because everyone has to be in sync.

This public ledger contains every transaction ever processed in the system and every user has a copy of that. It’s an example of triple entry bookkeeping system.

But how Bitcoin is generated?

Unlike real money that is usually backed by gold, Bitcoin is backed by supply and demand and is created using a process called “mining”. This is an analogy to gold mining in which you do work and get rewarded with gold.

Mining is the process of spending “computing power” to process transactions, secure the network, and keep everyone in the system synchronized together. Bitcoin mining provides a reward  in exchange for useful services required to operate a secure payment network. Anybody can become a Bitcoin miner by installing the correct software version.

So what’s Bitcoin good for? The following are some of the benefits of Bitcoin:

  • Cheaper to transfer money as it goes directly to another person
  • It can work across the globe. Not tied to a government or country
  • No currency conversion
  • Not affected by currency fluctuations
  • It has been designed to have a limited number of bitcoins (maximum 21 million) so there will be no inflation

From a user perspective, Bitcoin is nothing more than a mobile app 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.

There are different ways to obtain bitcoin:

  • Mining
  • Sell products and accept Bitcoin
  • Buy Bitcoin directly from Ebay

But Bitcoin is not without problems. Let’s look at some of its problems:

  • Degree of acceptance – Many people are still unaware of Bitcoin. The number of businesses using Bitcoin are very small compared to what it could be
  • Volatility – The total value of bitcoin vacillates a lot. The price went from zero in 2010 to 5600 USD few days ago
  • Still new and under development
  • Some have profited from being involved early – unfair advantage
  • It is legal at least in Australia as long as you declare your profit to ATO but it’s a perfect tool for criminals since it doesn’t need to be tied to a person.  But it has been used in criminal activities as much as credit cards have been used

Some people say bitcoin is the 21st century version of gold without storage costs. Some people call it a fad, hype or even fraud.

Bitcoin is a big deal in computer world and in ecommerce; everyone is jumping into it and it’s growing. But will it ever become a major payment network? If we could get bitcoin to work or something like it, if we could trust a digital currency, it has a lot of potentials to transform our economy for better.

In the meantime I urge you to try it for yourself.  Go ahead and install the bitcoin app, create your wallet or watch some Youtube videos about it. You can even buy some bitcoin from Ebay and see how it works.

It’s going to be fun!