Bitcoin is a consensus network that enables a new payment system and completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence.
Bitcoin is the first implementation of a concept called “crypto-currency”, which was first described in 1998 by Wei Dai on the cypherpunks mailing list, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions, rather than a central authority. The first Bitcoin was launched in 2009 by a mysterious individual or group with the pseudonym Satoshi Nakamoto, whose true identity is yet to be revealed and who left the project in 2010. It rocketed to prominence in 2013, when the value of a Bitcoin soared more than 10-fold in a two-month period, from $22 in February to a record $266 in April. At its peak, based on more than 10 million bitcoins issued, the cryptocurrency boasted a market value of over $2 billion.
Who controls the Bitcoin network?
Nobody owns the Bitcoin network much like no one owns the technology behind email. Bitcoin is controlled by all Bitcoin users around the world. While developers are improving the software, they can’t force a change in the Bitcoin protocol because all users are free to choose what software and version they use. In order to stay compatible with each other, all users need to use software complying with the same rules. Bitcoin can only work correctly with a complete consensus among all users. Therefore, all users and developers have a strong incentive to protect this consensus.
How does Bitcoin work?
From a user perspective, Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them. This is how Bitcoin works for most users.
Behind the scenes, the Bitcoin network is sharing a public ledger called the “block chain”. This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called “mining”. To learn more about Bitcoin, you can consult the dedicated page and the original paper.
Is Bitcoin really used by people?
Yes. There is a growing number of businesses and individuals using Bitcoin. This includes brick and mortar businesses like restaurants, apartments, law firms, and popular online services such as Namecheap, WordPress, Reddit and Flattr. While Bitcoin remains a relatively new phenomenon, it is growing fast. At the end of August 2013, the value of all bitcoins in circulation exceeded US$ 1.5 billion with millions of dollars worth of bitcoins exchanged daily.
How to transfer Bitcoins?
When you perform a transaction, your Bitcoin software performs a mathematical operation to combine the other party’s public key and your own private key with the amount of Bitcoins that you want to transfer. The result of that operation is then sent out across the distributed Bitcoin netwrok so the transaction can be verified by Bitcoin software clients not involved in the transfer.
How mining process of Bitcoin works?
New bitcoins are generated by a competitive and decentralized process called “mining”. This process involves that individuals are rewarded by the network for their services. Bitcoin miners are processing transactions and securing the network using specialized hardware and are collecting new bitcoins in exchange.
The Bitcoin protocol is designed in such a way that new bitcoins are created at a fixed rate. This makes Bitcoin mining a very competitive business. When more miners join the network, it becomes increasingly difficult to make a profit and miners must seek efficiency to cut their operating costs. No central authority or developer has any power to control or manipulate the system to increase their profits. Every Bitcoin node in the world will reject anything that does not comply with the rules it expects the system to follow.
Bitcoins are created at a decreasing and predictable rate. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence. At this point, Bitcoin miners will probably be supported exclusively by numerous small transaction fees.
What are the advantages of Bitcoin?
- Payment freedom
- Very low fees
- Fewer risks for merchants
- Security and control
- Transparent and neutral
- Degree of acceptance
- Ongoing development
What are the disadvantages of Bitcoin?
It’s Legal Status :
Bitcoin has not been made illegal by legislation in any jurisdiction. However, some jurisdictions (such as Argentina) severely restrict or ban all foreign currency. Other jurisdictions (such as Thailand) may limit the licensing of certain entities such as Bitcoin exchanges.
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. For example, the Financial Crimes Enforcement Network (FinCEN), a bureau in the United States Treasury Department, issued non-binding guidance on how it characterizes certain activities involving virtual currencies.
“The Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce,” Mythili Raman, acting assistant attorney general for the department’s criminal division, said in testimony before the SenateHomeland Security and Government Affairs Committee. She also said that while the anonymity of virtual currencies appeals to criminals and poses a challenge for law enforcement, U.S. authorities have “been able to keep pace with that, and we’ve been able to develop protocols and strategies to address it.”
Federal Reserve Chairman Ben Bernanke, who didn’t attend the hearing, said in a letter to senators that virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system.”
Bitcoin Scenario in India
Within four years of coming into existence, bitcoin has become the world’s most expensive currency and its per unit value soared past $ 1,200 level or about Rs 63,000 in November 2013. After slipping below Rs 50,000 level recently, the prices have again moved back to near Rs 60,000 a unit. There are already close to 70 virtual currencies available across the world with total market vaulation of about $15 billion, out of which Bitcoin is the biggest with close to $10 billion value. Bitcoins are fast gaining favours in India. It is estimated that India houses 30,000 Bitcoin owners who hold about 1 percent of the global circulation of some 12 million Bitcoins. But the new virtual currency is still in nascent stages in India and demands more awareness. The currency, have faced some uncertainty in the past one month after India’s central bank issued a public advisory highlighting the risks of virtual currencies, such as money laundering and cyber security, as such digital currencies are not backed by any assets or monetary authorities.
NOTE: An Interactive Session with Mr. Aaron Koenig, Bitcoin Evangelist, Organiser of the Bitcoin Exchange Berlin on ‘BITCOIN – it’s prospect in India’ will be held on 05 February 2014 at 10:00 a.m at the Chamber premises, Organised by the MCCI.
(MCC CHAMBER OF COMMERCE & INDUSTRY,15B HEMANTA BASU SARANI, KOLKATA 700 001)