Bitcoin is based on a concept introduced in 1998 by Wei Dai, called crypto-currency. This concept described currency or money as a record or object that is widely accepted in exchange for goods and services.
Bitcoin works by using cryptology to manage the creation and transfer of money. This means that you no longer have to rely on central banking authorities to get this done. This also means that there are no money laundering checks, account limits or freezes.
This digital currency that can be transferred through the internet using top-notch methods of encryption. Just like banks, there are digital wallets where this digital currency is saved. You may recognize the transferring process if you have used online banking.
- This is an Open Source project.
- Every transaction is final and cannot be reversed.
- Bitcoins can also be transferred using the arbitrary nodes of a network.
- A transaction takes mere seconds to broadcast and can be verified within 10-60 minutes of it.
- A transaction can take place at all times, even if the receiver’s PC is turned off.
- To prevent double spending, the block chain method is used.
- A long block chain of over 186 blocks is used to process and secure the transactions.
Bitcoin network has been working for more than 3 years. The security features are tight and transactions are secure. Yet, Bitcoin Exchanges have suffered from hacking attempts. Just last year, Mt. Gox was forced to shut down because of a major security breach and some $8.75 million worth of Bitcoins went missing. A few months ago, Bitcoins faced a similar breach where 43,000 Bitcoins went missing. These incidents were promptly fixed at the time, but that does not mean that they cannot occur again.
Every Bitcoin network operates on certain economic rules just like the real money market. Some of those basic rules are:
- The total number of Bitcoins existing will never surpass 21 million.
- Bitcoin network operates on the theory of controlled currency supply.
- The supply of Bitcoins is controlled using a block creation mechanism.
- By the end of the year 2012 there will be 10.5 million Bitcoins in circulation.
- Each Bitcoin is divisible up to 8 decimal places. This means that even though the total number of Bitcoins will never go beyond 21 million, the fractional-reserve banking will result in an exceeding money supply of up to 21 x 1014 units of currency.
- Most transactions do not require any processing fee. In some cases small transaction fees are charged.
However, remember that there are other digital currencies that are using this technology as well. But, the Bitcoin economy rules will not apply to them as they create their own economic rules.
How to Create Bitcoins
Creating Bitcoins is really simple and there are no eligibility criteria. Here is the process of getting started with creating Bitcoins:
Step 1: Get Yourself a Digital Wallet
Download & Install Original Bitcoin Client
Just log on to Bitcoin official site and download the software that is available for Windows, Mac and Linux. Once you have installed it, it will create a digital wallet automatically and start downloading the transaction history. Every digital wallet gets a Bitcoin address that you can use for trading.
There are websites like MyWallet, InstaWallet or Flexcoin that allow you to create a digital wallet online. It’s like creating an email account that requires no installation. But, keep in mind that this option is riskier because you have to trust those sites with your wallet and Bitcoin information. Try to keep a secure password and you should be good.
Step 2: Get Some Bitcoins
Now that you have gotten your digital wallet, you can start receiving your Bitcoins. Here are some places where you can get them:
Some websites have bonus programs which include taking surveys, trying out applications, viewing advertisements, making references or making purchases. By completing these programs you can earn Bitcoins. But, only small amounts can be earned through such programs.
Find Bitcoiners in your area and buy them for cash. You will find websites that will list your nearest Bitcoiners near you. You will just have to Google it!
Buy Physical Bitcoins
This is a digital currency, but physical Bitcoins are also available from some dealers like Casascius. Each physical coin represents a number of Bitcoins, for example from 1 to 25. You can exchange the digital currency for these physical coins or buy them through a credit card using MemoryDealers.
Bitcoin on Currency Exchanges
There are currency exchanges like Intersango, Virtex, GetBitcoin, Bitcoinica, Mt. Gox that will exchange any currency for Bitcoins.
Using this feature you can directly buy Bitcoins from people, rather than use an intermediary.
Uses of Bitcoins
Bitcoins definitely have many uses and an equal amount of abuses. Let’s look at some ways in which they can be positively used:
- Many online marketplaces accept payment in Bitcoins.
- Many online products and software can be purchased for Bitcoins.
- Escrow payment systems on websites can be established using the Bitcoin network.
- Online auction housing and over-the-counter trading takes place to earn a profit.
- Discount coupons can be bought for restaurants, hotels, plane tickets, etc. using Bitcoins.
- Poker chips, gift cards, game coins can all be bought using digital currency.
Some Interesting Facts
- Six (6) blocks are created per hour.
- Currently there are more than 2 million Bitcoins in circulation.
- The total market cap on in terms on USD is over $62 million.
- The weighted market price is approximately $6.65.
- There are more than 700,000 locations all over the world that exchange cash for Bitcoins.
Using Bitcoins Illegally
Just like the money market, Bitcoins are also being used in illegal ways. Many incidents have popped up over the past three years that have raised the concerns of government officials. Digital currencies can be used just in the same way as government-backed currencies. No intermediary body means that there are no checks to verify the background of the sender and receiver. Hence, money laundering will become extremely easy. It can actually become a means for transferring black money around the world, without having to worry about meeting bank requirements or coming up in government checks on international money transfers. This potential has also been identified by the FBI in their current report.
In a recent FBI report regarding Bitcoins that was leaked on the internet, it is clearly mentioned that the cryptography makes it difficult to identify suspicious activity and illicit users. It is also allowing for the purchase of illegal drugs. Recently an underground website has been discovered by the name of ‘Silk Road’ (requires Tor) that is openly facilitating the buyers and sellers of illegal products and services online and accepts payments in Bitcoins because they are untraceable.
Where Are Bitcoins Used?
The list of marketplaces that accept Bitcoins is too long. Most people are interested in finding out real world marketplaces where they can be used. Here is a list of the most popular places where Bitcoins are used:
- BTC Gift Cards: Buy gift cards for some of the most popular stores around the world like Walmart, Target, etc. using Bitcoins.
- Bitcoin Deals: Best deals on more than 375,000 products that can be purchased using Bitcoins.
- Kinleaves: An online store that sells skins for cell phones, tablets, laptops, etc. also accepts Bitcoins.
- Btcfortune: An instant lottery playing portal.