What is Bit coin and why you should bother ? – an Inquisitive Guide

Unlike most people, I had not really heard about the Bitcoin used at large. However, now that I think about it, I think I might have come across the BITCOIN phrase in passing when looking through the internet for some cracks, yes I did search and no I did not find what I was looking for. Getting back to the whole topic of Bitcoins. A couple of weeks back a friend Megha, posted the information about the BitCoins on facebook, and I have been reading about it from then, to get a good idea about BitCoins. Here is what I have found out, simplified for all.

Like everything on the internet, from the internet itself, this is revolutionary. It is a new form of currency, completely online and something that all of us can use. This post is an indepth guide to the Bit Coin and what you can and cannot do with it. Like everything on the internet, there is a major real difficulty among all people to accept it, there are discussions on the god and the bad of the BitCoin all over the internet at this time. So I will not divulge into that for now.

What is BitCoin ?

BitCoin is a new currency – it wants to shake the entire global economy. And some people think it might! It’s online money—an alternative to dollars and euros. Well what’s that mean? It’s complicated, but I will break it down over the next few posts. Yes, there are some simple infographics that help in making it easier to understand, I will add them here below. I will however tell you there is one part which is not so clear and that is how the coins are generated.

Bitcoin is underwritten not by a government, but by a clever cryptographic scheme. For now, little can be bought with bitcoins, and the new currency is still a long way from competing with the dollar.

Again, BitCoin is Digital ..

BitCoin is not real money. It’s an online “currency”—virtual tokens that can be exchanged for goods and services at places that accept it. The list of which is fast growing.

In 2008, a programmer known as Satoshi Nakamoto posted a paper outlining Bitcoin’s design to a cryptography e-mail list. Then, in early 2009, he (or she) released software that can be used to exchange bitcoins using the scheme. That software is now maintained by a volunteer open-source community coordinated by four core developers. Like real money, It does have a market where its value against some real world currencies are mapped against, check it out here http://www.bitcoinwatch.com/, while writing this post the value of a BitCoin was nearly $14.

The programmer Satoshi wanted people to be able to exchange money electronically securely without the need for a third party, such as a bank or a company like PayPal. He based Bitcoin on cryptographic techniques that allow you to be sure the money you receive is genuine, even if you don’t trust the sender.

If you look at the first video above, its from the four core developers and they are thinking big, they are looking at BirCoin as a way to revolutionalize finance, just as how the internet revolutionized publishing.

How do I start. I.e the Basics

Once you download and run the Bitcoin client software, it connects over the Internet to the decentralized network of all Bitcoin users and also generates a pair of unique, mathematically linked keys, which you’ll need to exchange bitcoins with any other client. One key is private and kept hidden on your computer. The other is public and a version of it dubbed a Bitcoin address is given to other people so they can send you bitcoins.

Crucially, it is practically impossible—even with the most powerful supercomputer—to work out someone’s private key from their public key. This prevents anyone from impersonating you. Your public and private keys are stored in a file that can be transferred to another computer, for example if you upgrade.

A Bitcoin address looks something like this: 1H4NSNzoP7eoYnL69HCvehVTZBPJoyMzK9. You can transfer a donation to me on the attached BitCoin Address. YOu can also go to some online stores where you can use these BitCoins to buy real world goods.

Transactions with BitCoins and how they occur

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 network so the transaction can be verified by Bitcoin software clients not involved in the transfer. [ This is important as this is the step where the internet and BitCoin software clients perform the function of banks where they confirm the person is you, such that your current value of Bit Coins is calculated and the balance given back to you]

Those clients make two checks on a transaction. One uses the public key to confirm that the true owner of the pair sent the money, by exploiting the mathematical relationship between a person’s public and private keys; the second refers to a public transaction log stored on the computer of every Bitcoin user to confirm that the person has the bitcoins to spend.

When a client verifies a transaction, it forwards the details to others in the network to check for themselves. In this way a transaction quickly reaches and is verified by every Bitcoin client that is online. Some of those clients – “miners” – also try to add the new transfer to the public transaction log, by racing to solve a cryptographic puzzle. Once one of them wins the updated log is passed throughout the Bitcoin network. When your software receives the updated log it knows your payment was successful. It takes a bit longer than banks in this step as the cryptographic puzzle that they solve is also part of the BitCoin universe, more on that later.

The nature of the mathematics ensures that it is computationally easy to verify a transaction but practically impossible to generate fake transactions and spend bitcoins you don’t own. The existence of a public log of all transactions also provides a deterrent to money laundering. The global public transaction register is a register that keeps track of the history of every single Bitcoin through that log, from its creation through every transaction. Yes there is a bit of a problem here.

Identity, since every BitCoin is tracked it would be possible to know how much money each person has in the system and who is performing transactions. I dont really think its a problem, In fact its better. Considering whats happening in India these days with corruption and black money, there will be none. Everyone will have as much money as they are worthy of, so this is really a blessing in disguise. However unlike the real world, it might be an issue to some, as very rich people can be targeted for crimes like kidnapping, extorsion etc. But hey, at least we can keep our blood sucking politicians at bay.

How are these coins created and how can you obtain bitcoins? 

Bitcoins are “mined”. When you set your Bitcoin client to a mode that has it compete to update the public log of transactions. All the clients set to this mode race to solve a cryptographic puzzle by completing the next “block” of the shared transaction log. Winning the race to complete the next block wins you a 50-Bitcoin prize. This feature exists as a way to distribute bitcoins in the currency’s early years. Eventually, new coins will not be issued this way; instead, mining will be rewarded with a small fee taken from some of the value of a verified transaction.

Mining is very computationally intensive, to the point that any computer without a powerful graphics card is unlikely to mine any bitcoins in less than a few years.

Other ways of obtaining BitCoins are exchanges like Mt. Gox, which provide a place for people to trade bitcoins for other types of currency. Some enthusiasts have also started doing work, such as designing websites, in exchange for bitcoins. This jobs board advertises contract work paying in bitcoins.

Money is made to spend right ? So, Where can I spend these coins ?

There aren’t a lot of places right now. Some Bitcoin enthusiasts with their own businesses have made it possible to swap bitcoins for teabooks, or Web design (see a comprehensive list here). But no major retailers accept the new currency yet.

My thoughts

The BitCoin is in its infancy, however it has corrected some of the loopholes that current fixed currencies have. However, at the end of the day this is the first of its kind in this space. However, like most software and services on the Internet (which is what I look at it now) it will evolve, and might come up with a new variation of this concept and that will be the one to look out for.

Current world currencies do not have to be threatened by this new currency. As financial masters and grand masters analyze and dissect this form of the currency they will point out some of its flaws and what will come out of it is a clean workable currency format that all of us can eventually use. For the time being it is a nice to know fact that there is an alternate currency that is not government controlled and neither bank influenced. This might just be the spark for the actual online currency to come into being. Lets hope it does.

Some Resources

BitCoin and What is it: http://weusecoins.com
BitCoin home page: http://www.bitcoin.org
Bitcoin Trade: http://www.bitcoin.org/trade
BitCoin Economy Watch: http://www.bitcoinwatch.com
Bitcoin Exchange: https://www.mtgox.com
Bitcoin escrow service: https://clearcoin.appspot.com
Bitcoin e-commerce platform: https://www.mybitcoin.com
Fun with bitcoin http://witcoin.com – the bitcoin q and a .