An Indepth Look: Bitcoin

bitcoin

We are starting a new feature here called “An Indepth Look,” where we break down some of the most controversial topics and emerging trends currently happening in technology and social innovation.

What is Bitcoin?

Bitcoin is a digital currency that was created in 2009 by pseudonymous software developer “Satoshi Nakamoto.”  There are other types of crypto currency like Litecoin, Namecoin and PPCoin, but Bitcoin is by far the most popular and valued.  As a matter of fact, this year Bitcoin’s value went up to US$2 billion.

How does it work?

A user would need to install on their computer or mobile a digital wallet or Bitcoin software, which will hold your Bitcoin addresses.  A Bitcoin address is a cryptic public key that is created by a vendor.  A user can get Bitcoins from a variety of places, such as a Bitcoin currency exchange or a fund transfer service like BitInstant.  Let’s say that you want to make an online purchase from Company X and the cost is 10 Bitcoins.  Company X creates a Bitcoin address and tells you to send your payment to that address.  You would then instruct your Bitcoin software on the computer or mobile to send 10 Bitcoins to that address from your digital wallet, which is called a transaction message.  Note that all Bitcoin transactions are publically stored and shared online to avoid fraud.  However, just like cash transactions, you are not required to reveal your identity and can remain anonymous throughout the whole Bitcoin transaction.  So anyone online can see that Company X received 10 Bitcoins, but they don’t have to know who made the purchase.

How is Bitcoin different from other types of money (cash, credit, commodities)?

  • Bitcoin is a decentralized currency – Unlike regular currency, Bitcoin is not regulated by a bank or a government.  All Bitcoin processing and transactions are maintained in a peer-to-peer (P2P) computer network.
  • Bitcoin is mostly digital – While there are physical Bitcoins available, Bitcoin for the most part is a digital currency.
  • Bitcoin acceptance is very limited – Bitcoins can only be accepted by other individuals, businesses or organizations that take Bitcoins.  The low acceptance is possibly attributed to its poor regulation and limited knowledge of the currency, which leads us to our next reason…
  • Bitcoin is misunderstood –  Crypto currency is a very complex topic that is understood mainly by those who have a higher knowledge of algorithms and computer science.
  • Bitcoin has a maximum limit of 21 million – Again, this is a very complex topic.  According to Forbes Magazine, “The Bitcoin “mining”3 process presently creates 25 Bitcoins every 10 minutes (the number created will be halved every four years), so that limit will not be reached until the year 2140. While Bitcoin critics argue that the maximum limit is not large enough, supporters maintain that since each Bitcoin is divisible to eight decimal places, the number of fractional Bitcoins (called “satoshis”) – at 21 x 1014 – will be more than enough for all conceivable applications.”  Unlike Bitcoin, there are no limits on issuing other types of money.
  • Bitcoin is not protected – Unlike money you might have at a bank which is insured by a central authority like the Federal Deposit Insurance Corporation (FDIC) in the United States in an event that your bank closes down, Bitcoin is not insured.  If your Bitcoin is lost because of computer failure, stolen by hackers or the Bitcoin currency exchange you use closes, there is not much legal recourse you can take.
  • Bitcoin takes a long time to process – It can take up to 10 minutes for a transaction message to be confirmed.  Transactions are also irreversible and can only be returned by the recipient.  Whereas, cash transactions are instant and credit card processing can be done within seconds.

What are some possible advantages?

It is possibly the currency of the future.  Because it is decentralized, Bitcoin has the advantage of not being regulated by a government, a bank or some other form of central authority.  Transaction costs are cheaper and can not only potentially shake up competition in online shopping, but could also revolutionize the way migrant workers send remittance back to their home countries.

What are some possible disadvantages?

The main issue here is that Bitcoin is not highly regulated.  Because of the anonymity of the currency and transactions, it can lend itself to illegal activities like Ponzi schemes and tax evasion. Bitcoin without better regulation could also fuel the black market for drugs, weapons, prostitution, counterfeit goods, human trafficking and other illicit activity.  Furthermore, because Bitcoin is mainly digital, it is vulnerable to being lost or stolen.

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