John Roskelley | May 7, 2013

In 2008, Satoshi Nakamoto, the pseudonym used by a still-unidentified person or persons, first described Bitcoin as a peer-to-peer digital currency not managed by any central bank or government authority. In short, Satoshi was speaking of financial anarchy. There would be no central bank like the Federal Reserve, and there would be no government issuer, so there would be no means of tracking the anonymous transactions.

Initial prices were decided by individuals participating in various online Bitcoin forums, with future values to be determined by the overall Bitcoin marketplace.

“With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.”

Satoshi Nakamoto, Bitcoin developer

In 2009, the Bitcoin network came into existence; the first Bitcoins were created, issued, and denoted in shorthand as BTC.

With the recent media focus on Bitcoin, the average person looking at Bitcoins from a distance may have more questions than answers, the most pressing of which is what, exactly, is a Bitcoin?

About Bitcoin

The entire topic of decentralized, peer-to-peer virtual currency is not as complicated as it sounds, and at the same time it isnt particularly simple, either. When we think of money, it is often in personal terms. How much is in my bank account? What can I afford for lunch? How much will my vacation cost? Can I pay my house payment if I lose my job? Which bills will I shuffle this month?

We seldom stop to think about money in terms of where our particular brand of currency was created, what its really worth, and the governments role in the creation, issuance, tracking, and control over it. When we boil the issue of money down to its essence, however, it works out to something like this: Currency is any object of value that can be exchanged for other objects.

This is where Bitcoin derives its value. The people whove chosen to use it, and the people whove chosen to accept it for goods and services, have agreed that Bitcoin has value and can be used in commerce as a virtual currency. This is the not so complicated part about Bitcoin as virtual currency.

Where did it Bitcoin come from? How are Bitcoins created? Why does Bitcoin have any value whatsoever? How can I buy Bitcoins? These are the real questions, and fortunately good answers to these and many other common questions exist.

The folks at WeUseCoins.com put together a great video that covers the basics of Bitcoin.

Mining for Bitcoin

Bitcoins are not unlike gold in that they have to be located and extracted before they can be used. Golds value comes primarily from its scarcity as a precious metal, and secondarily in its uses once its been mined. Its finite nature is the reason it works so well as currency, and the very reason we dont use something like water, pebbles, or leaves.

Bitcoins are mined in a much different way, but the side-by-side similarities cant be denied. The Bitcoin network is a grouping of peer-to-peer computers each trying to solve a complicated mathematical puzzle, the answer to which is a 64-digit number.

The Bitcoin networks of personal computers, which anyone can join, is constantly solving these puzzles; continually looking for these 64-digit numbers. When the puzzle is solved, a certain number of Bitcoins are created. The person whose computer solves the puzzle gets half of those Bitcoins, and the rest of the network divvies up the other half.

The balance of Bitcoins not issued to the computer that solved the puzzle are issued to the rest of the network based on how much processing power, as a percentage of the whole, each individual computer contributed to solving the puzzle.

Each Bitcoin can be divided down to eight decimal places, which allows for fractions of Bitcoins to be issued. The smallest Bitcoin amount that can be transacted is 0.00000001. Bitcoin denominations are as follows:

• 1BTC = 1 bitcoin
• 0.01BTC = 1cBTC = 1 centibitcoin, referred to as a bitcent
• 0.001BTC = 1mBTC = 1 millibitcoin, referred to as an mbit (em-bit)
• 0.000001 = 1µBTC = 1 microbitcoin, referred to as a ubit (yu-bit)
• The smallest denomination is 0.00000001, and is referred to as a satoshi

“There are 3 eras of currency: Commodity based, politically based, and now, math based.”

Chris Dixon, Technology Investor

Why Bitcoins Cannot be Counterfeited

Its logical to raise questions about counterfeit Bitcoins. After all, were talking about a currency that is created entirely within networks of computers. Surely the worlds smartest hackers are burning the midnight oil creating their own cache of Bitcoins, right?

For reasons that are brilliant and cannot be replicated in the brick-and-mortar world, Bitcoins cannot be counterfeited or otherwise mined outside of Bitcoin networks. Lets start at the end of the equation and work backwards.

There will never be more than 21 million Bitcoins in existence. This is the limit set by Satoshi Nakamoto in the 2008 paper describing this decentralized currency, and will be fully realized in the year 2140. This relatively small, finite number will serve to satisfy the scarcity comparison to gold, and could ensure that Bitcoins will always have value.

Between now and 2140, Bitcoins are created at specific rates in four-year blocks. From 2009 until just recently, puzzles were solved at a rate of roughly once every ten minutes, with 50 Bitcoins issued each time a puzzle was solved. From now until 2017, puzzles are solved roughly every 20 minutes with 25 Bitcoins issued upon completion of each puzzle. Approximately 11 million of the total 21 million have been issued as of this writing.

Heres whats really happening and why its impossible to counterfeit Bitcoins. Every four years, to account for increased computing power and the sheer number of processors participating in the overall Bitcoin network, the number of Bitcoins that can be mined is halved and the amount of time it takes to mine them is doubled.

Throughout each four-year block, the puzzles become increasingly more difficult. The amount of computing power it takes on the last day of any four-year block will essentially be the same as what it takes on the first day of the new block of time. This ensures the process accounts for increased computing capabilities and larger numbers of computers participating, thereby creating harder and harder puzzles by the day.

Doubling of the amount of time it takes to mine Bitcoins is certain to happen because the puzzles that must be solved become increasingly more difficult as time marches on. By the time we reach year 2140, the process of halving the number of Bitcoins that can be mined every four years will effectively halved itself down to zero and no more Bitcoins will be available to be mined.

This approach to creating a virtual currency ensures that less and less will be mined over time; that it will take more and more computing power to mine fewer and fewer Bitcoins; and prevents the counterfeiting of Bitcoins because none can be generated outside the Bitcoin network, and none can be created at a rate faster than allowed by sophisticated algorithms to solve the puzzles.

How Do I Get a Bitcoin?

Bitcoin is a virtual currency, meaning its only value is what its users assign to it. At present, Bitcoins can be traded on a few currency exchanges, pegged against other currencies like the U.S. dollar, the Euro, and the British pound, but theres no hard Bitcoin currency because theres no central bank or government issuer.

Create a Bitcoin Account: Acquiring Bitcoins isnt particularly challenging, and there are a few different methods, but being online is the first step in the process. For most, it will start at Mt. Gox where Bitcoin user accounts are created. For complete registration, be prepared to verify your identity by provided scanned images of identity documents like a drivers license or passport.

While proof of identity is not required, there are several reasons it makes sense to do so if youre going to be serious about acquiring, managing, and using Bitcoins. Even if Bitcoins are only ever used online by a small segment of society, their acceptance and overall scarcity should make them a valuable currency. It could become very important to prove youre the rightful owner of the Bitcoins in your account.

Each account at Mt. Gox is assigned a unique address. This address directs the Bitcoin network to the right account, not unlike your street address directs mail and other deliveries to your home.

Note: It is extremely important you not lose this address. It is the only way Bitcoins can be traded, and if you lose this address it cannot be recovered. The Bitcoins will be lost forever, which in the real world is analogous to setting fire to your stacks of cash.

Bitcoin Donations: Each account is assigned a similar address, and each is unique. I use the following as my email signature, in my various social networking and media profiles, and just about anywhere else I can think to use it without feeling like a beggar, like buried in articles about Bitcoin:

Bitcoin Donation Address: 16B8hWyk3BnpCaPzcCB12aiHZZv72J1cAR

There are various Bitcoin donation resources on the Internet, and most of them have the familiar feel of ad-supported apps for our tablets and smartphones. In short, you jump through a few hoops, maybe watch a few videos or play a few games, take a few surveys, and the like. Upon the completion of each requirement, the promised Bitcoins are deposited in your Bitcoin account.

Ive participated in several Bitcoin donation sites and to date have received 100 percent of the Bitcoins offered for completing various marketing-related tasks. The transactions happened within minutes of completion.

Bitcoin transactions are anonymous, taking place between Bitcoin addresses. Bitcoin transactions are also not tracked by any government or issuing bank. This is peer-to-peer commerce, the value of which is decided by its participants.

Download a Bitcoin Wallet

If you would like to mine Bitcoins and have a more active role in the acquisition process, you can add your computer to a Bitcoin network, thereby adding your computers processing power to a network of computers trying to solve a puzzle. When your network is successful you will receive some amount of Bitcoins.

To take part in this, download a Bitcoin Wallet to your computer. The instructions for proper setup are easy to follow and shouldnt take more than a couple of minutes. It should be noted that using a wallet does not automatically turn your computer into a miner. You are free to use the wallet to manage your Bitcoins as you see fit.

To mine Bitcoins, join a mining pool or network. If you decide to go it alone and dont have a powerful computer, you can expect to see more frequent but smaller Bitcoin deposits, but could get lucky along the way and be the computer that solves the puzzle.

There is no shortage of mining pools to choose from, but far too many are overly complicated to join and have unrealistic requirements for the average person. After digging around a bit (pun intended), I found a network that is simple to join and participate in, called Slushs Pool.

Note: In the interest of full disclosure, I do not participate in this or any other mining pool, and have no other vested interest in this particular mining pool. Research led me to this pool and its simplicity to join is the sole reason for its inclusion in this article. If you know of other easy-to-join pools, please share them in the comments section.

By using a Bitcoin Wallet on your computer, tablet, and smartphone you now have a way to exchange Bitcoins with others who own the virtual currency. Youll also be able to find merchants and others who accept this form of payment.

Bitcoin Currency Exchanges

Bitcoins can also be purchased through various currency exchanges around the world, and will cost you real cash to purchase. Though not recognized as actual currency by SIX Interbank Clearing, the Swiss-based payment platform that clears payments for all of the worlds currencies, Bitcoins do have real-world cash value and can be purchased through online brokerage accounts or other investment services offered by a wide range of financial services companies.

Since the first Bitcoins were created, their value has fluctuated from pennies per Bitcoin to a high of $260 in April 2013.

Presently, each Bitcoin is worth approximately $120, which is enough value to generate a broad range of interest from an international audience. In fact, according to Reuters. employees of major banks including Morgan Stanley and Goldman Sachs in London and New York have visited Bitcoin exchanges as often as 30 times per day.

If you opt to participate, be prepared for a rollercoaster ride in the Bitcoin currency exchange markets.

Will the Value of Bitcoin Last?

It remains to be seen exactly how a decentralized, peer-to-peer, virtual currency will fare in the long run, but its certainly been setup for success well into the future. More and more merchants and consumers are choosing to use Bitcoins as their preferred means of commerce, and recent media coverage has heightened interest.

When you consider the true nature of money—value for value—it stands to reason peer-to-peer currency, or even currencies, will exist in some form or another. After all, this is the nature of the Internet. If you want to accept the form of payment Im offering in exchange for the goods or services youre offering, then weve completed a successful financial transaction and have mutually agreed upon the currency.

“We have elected to put our money and faith in a mathematical framework that is free of politics and human error.”

Tyler Winklevoss, Entrepreneur

Bitcoin is the ultimate form of barter, and when its all said and done and put into the simplest of terms, it is really no different than the traveling caveman who offered some of his fresh kill in exchange for a nights lodging and the protection of the larger group. The value of the transaction was agreed upon by the parties involved, each receiving fair dinkum for his part in the deal.

Betting on peer-to-peer commerce, particularly on one as well-planned and executed as Bitcoin, just makes sense in the 21st century.

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John Roskelley

John is a Microsoft Certified Systems Engineer and Certified Novell Engineer and has a strong interest in technologies that help businesses grow. When he isn’t reviewing apps for BusinessBee, he is watching hockey, camping, or fishing.

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