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Bitcoin Basics: Make Sense of the Headlines

08/12/2017


These days, it is difficult the ignore the buzz around cryptocurrencies, especially considering the recent hypergrowth and hyper-volatility of Bitcoin.

Since its arrival, Bitcoin and other cryptocurrencies’ longevity and stability has been a source of debate. Yet it remains a growing force, gaining attention in the business world as demonstrable use cases and success stories emerge.

What is Bitcoin

While bitcoin is not the first digital currency, it’s the first cryptocurrency to utilize technology known as blockchain to allow it to function without the control of a central authority like a bank.

There are over 1,300 cryptocurrencies in existence, but bitcoin is the widest known and arguably widest used, created by the mysterious (and reclusive) Satoshi Nakamoto in 2009.

In many ways, it is like other currencies: it can be used to buy items locally and electronically and is accepted by more than 100,000 merchants worldwide and growing. However, bitcoin differs from conventional money in that it is decentralized and fully independent of any bank or government. No single institution controls the bitcoin network and it is not tied to a specific country, like other currencies such as the yen, loonie, or U.S. dollar are.

Why Use Cryptocurrency

The currency is attractive to a large number of people for a very diverse set of reasons:

The bitcoin network is decentralized and secure. No central authority controls bitcoin or its network of transactions. All bitcoin transactions are recorded in an online, distributed public log known as the bitcoin blockchain. The bitcoin blockchain is maintained by a global network of computers (currently over 10,000) who act as “miners”, each of which has a complete copy of the entire set of bitcoin transactions ever made and validate and process bitcoin transactions. Mining is misleading term; perhaps a better way of looking at the activity is validating and securing bitcoin transactions. If any changes are made to bitcoin by a developer or developers trying to hack the system, it is prevented because “miners” must agree on the validity of the bitcoin blockchain via consensus mechanisms. Hacking a network this large simultaneously is practically impossible and insures that, in theory, no individual can steal your bitcoins or create more.

Bitcoins can be anonymous, which has been attractive for people who want to mask their activity. Control and ownership of bitcoin are managed through public and private key cryptography. In this type of cryptography, public keys may be openly published, while private keys are known only to their owners. Every bitcoin (or fraction of a bitcoin) in existence is associated with a transaction and a public key, which is permanently recorded on the bitcoin blockchain. The owner of the corresponding private key, for any given bitcoin transaction, is the owner of those bitcoins. As such, bitcoin ownership is just the ownership of a private key, which is really a long string of numbers. To send, receive or use bitcoin, you must have a digital wallet, a software or hardware component that stores the addresses of the bitcoins associated with your keys. Your wallet can hold as many bitcoins and bitcoin addresses you like and you can own as many wallets you want. Whenever a bitcoin transaction occurs, the ownership is changed from one key pair to another and it is recorded in bitcoin blockchain. However, the names of buyers or sellers are never revealed, only the public keys associated with the parties to the transaction. Each wallet address is unique and can’t be linked to anyone unless the creator of that specific bitcoin address reveals themselves. In this way, the people or businesses involved in the transactions can make it difficult or impossible to be identified.

Transactions are transparent and unchangeable. As mentioned, each transaction is recorded in a public ledger, meaning anyone can view how many bitcoins are stored on a public address. Transactions cannot be changed or reversed – and are non-refundable. If you are hacked or get a virus, they cannot be replaced, so backing up your reserve is important.

Bitcoin transactions can be processed quickly and cost-effectively. Transactions fees are low in comparison and in some instances, they can be quicker. This is appealing for large businesses handling international transactions. Moving money through a traditional banking system can take weeks or months, whereas borderless Bitcoin transactions can be transferred in a matter of minutes and for a fraction of the fees charged by banks.

Increasingly, businesses are accepting bitcoins as payment for goods and services , with over 100,000 merchants worldwide accepting the cryptocurrecy as payment. In some countries, where the national currency and/or banking systems are unstable or corrupt, bitcoin is being readily accepted for transactions. Bitcoin is also accepted online and in-store in some cases in North America by Subway, Microsoft and Virgin to name a few.

How to Get Started Obtaining and Using Bitcoins

There are several ways to obtain bitcoins. First, individuals and businesses need to create a wallet and preferably have a disconnected hardware or software wallet to protect against hacking. Numerous wallets exist; ask a trusted advisor for some examples. Once a wallet is created, an individual can arrange for an account through one of many online bitcoin exchanges and convert currency to bitcoin immediately, often with direct connection to an existing bank account. Most exchanges allow you to trade Bitcoin with other cryptocurrencies and convert bitcoin to many traditional currencies.

Want to go deeper into Bitcoin and cyprocurrency? A series of more technical articles will soon be available on MNP.ca.