Many say it isn’t ‘real money’. Others have used it to pay for everything from burgers to private jets.
Some even claim it could become one of the most exciting things in digital since the creation of the World Wide Web.
What am I talking about? In a few short years, Bitcoin, powered by an underlying system running it called the Blockchain, has gone from a seemingly impossible concept to a force to be reckoned with.
What is a Bitcoin?
Bitcoin in its simplest form is a piece of digital information with an attached monetary value. To us mere mortals it might just look like a row of jumbled up letters. But it’s the same principle that says a piece of metal with £1 stamped on it is worth a quid.
The difference is Bitcoin doesn’t exist in a physical form; only a digital one. You keep your Bitcoins in a virtual wallet on your computer or smartphone that only you can access.
The value of that wallet belongs to you and when you want to use it, you and the vendor of the item or service must both agree the Bitcoin has a monetary value as a currency, what that value of it is and how much you need to pay. Importantly, despite its virtual form, you can spend Bitcoin in both the online and offline worlds. That’s what makes it such an exciting prospect.
Now what determines ‘monetary value’ is quite complex. Bitcoin has no central bank like regular currencies. Its value is determined by the complex maths behind the system, influenced by people’s own behaviour around Bitcoin such as how much they buy and sell with it, and how much Bitcoin is in demand (in exchange for other currencies) against the amount of Bitcoin in supply. Trust is also a big factor because unless you agree Bitcoin has a value, then it’s worthless.
How does it work?
To understand the workings of Bitcoin, you need to understand the three commandments of Bitcoin.
It is decentralised. There is no central bank such as the Bank of England. No one person, single body or Government is in control of it or has any influence over it. Bitcoin is instead a system that runs by harnessing the power from across a global network of people’s computers that have volunteered to run the Bitcoin software.
It is transparent. There is a public ledger of every transaction that has ever happened since the beginning of Bitcoin. Yes, you really can see it.
It is unregulated. There is currently no external legislative regulation of Bitcoin. It is only controlled by the complex mathematical constructs that underpin it.
This last commandment is a point of much contention. It means Bitcoin is essentially beyond government confiscation. The people behind Bitcoin’s libertarian roots argue that Bitcoin should remain unregulated and completely free from any government intervention.
The people supporting regulation say that Bitcoin is too powerful and a tool that criminal and terrorist organisations can easily abuse because it is essentially anonymous (or pseudonymous, if you want to get super-specific). You only really have an ID that is very difficult to track back to a real identity.
Regardless of where people may stand on this issue, Bitcoin is moving closer to commercial credibility with developments like the recent ruling by the European Court of Justice recognising it as a currency worldwide and saying exchange trading of it should be exempt from VAT.
So how do you get your first Bitcoin and pay with it?
Imagine you’re hungry and you want to buy a burger. Back in 2013 there was a Bitcoin-friendly burger van parked up in London selling burgers for about £7.50, or 0.0131 BTC at the time. Let’s assume the van is out today, and you want to go buy the burger.
First you’ll have to get yourself some Bitcoin! To do this, you’ll need the following:
Some money in your bank account, let’s say £10
Proof of identity
Proof of address
You will then go to an established Bitcoin exchange like Bitstamp, and register for an account. You will need that proof of identity and address to get the account activated, just like you would for a normal everyday bank account.
You will then transfer the £10 into your new Bitcoin account and once this transaction is confirmed by the system, you can use it to buy Bitcoin.
A great thing about Bitcoin is you don’t have to buy 1 whole Bitcoin in the same way you would have one whole Pound or Euro. The smallest fraction of a Bitcoin you can buy or pay with is 0.00000001 BTC – a hundred-millionth of a Bitcoin!
So now you’ve exchanged your £10 for 0.0406 Bitcoin (as per the exchange rate of 1 GBP = 0.00406 BTC, at 11:56 UTC on 6 November 2015).
But before you can use it, there’s one more step: getting a Bitcoin wallet! A Bitcoin wallet is simply a piece of software (for example, an app) that allows you to store and use your Bitcoin. You can see some examples here. Once you have one, you transfer the Bitcoin from your Bitstamp (the exchange) account into your Bitcoin wallet, and you’re good to go! Ideally for our example, you will have installed the Bitcoin wallet app on your phone.
Now you head to that burger truck, open your Bitcoin ‘wallet’ on your phone, scan the funds over at the till, grab your burger and walk away.
This transaction is now randomly sent to someone in that global network. Let’s call this guy Bob. Bob is one of the people running the aforementioned Bitcoin software on his computer. He chose to run this software, and has therefore volunteered to make sure your transaction checks out – in other words to validate it. This validation is very important to make sure no one is cheating the Bitcoin system. But more on that later…
Is making a transaction safe?
Bitcoin is often referred to as a cryptocurrency. This means it is a digital currency that uses methods of encryption to make it work. Encryption takes a piece of information on your computer, and then jumbles it up beyond all recognition. Once that jumbled up information is sent somewhere else, and only the computer containing the right ‘key’ to un-jumble it can make sense of it.
Encryption essentially keeps your money safe. It stops Bitcoin from being intercepted, duplicated or stolen when Bitcoins are sent from one person to another.
But it is still up to you to keep access to your Bitcoin wallet secure. You need to keep your password and any other security measures secret – much like you wouldn’t go waving your physical wallet around in public!
Why use Bitcoin?
The original ideology comes from the minds of those who created Bitcoin due to being disillusioned with the Government-regulated economic and monetary system.
But the main reason why more and more small businesses are accepting Bitcoin is its virtually 0% transaction fee.
Every time you pay with your credit card, your credit card provider will charge the business you are buying from a small transaction fee (usually around 2%, but this may vary greatly).
By contrast, the person whose computer is processing your transaction – within that global network we spoke of – will on average only take 1 thousandth of a Bitcoin (0.0001 BTC) as a transaction fee, and this fee can be much lower or even free for small transactions. For many businesses this can make a significant saving. And for those powering the system, it creates an incentive/reward for helping out.
Making sure it’s legit
Digital information is super easy to copy – just think how easy it is for you to duplicate a file on your computer! The validation process I spoke of a few paragraphs earlier makes sure that you’re not trying to pay for that aforementioned burger with Bitcoin you already spent on that private jet the other day.
If you were trying to cheat the system and use the same Bitcoin twice, the ledger would not accept your transaction. The maths wouldn’t make sense, and the latter transaction (otherwise known as the burger) would be rendered invalid.
Remember Bob? What’s in it for him to validate it? Well, every time he validates a transaction and adds it to that public ledger for all to see, the Bitcoin system pays Bob with brand new, freshly minted Bitcoins. This in Bitcoin-speak is also known as mining.
You pay Bitcoin, he earns Bitcoin, and all those little validation payments soon add up as he – and others – send a whole bunch of validated transactions to the ledger. This is, in other words, is adding a block to the Blockchain.
What is the Blockchain?
This is the core innovation making Bitcoin possible. And in its own way is actually much more interesting than Bitcoin itself.
A Blockchain is essentially a chronological public record of digital events. A digital event may be a transfer of Bitcoin from one person to another, or something else entirely like a contract between two parties. It is even being used to verify the authenticity of rare artwork. This is done by recording authentic pieces of art and then being able to track their journeys through transactions within the ledger.
That is because the Blockchain uses extremely complex mathematical problems to make sure that each consecutive block added to it is a logical continuation of the block before it. If you ever wanted to change something, then the further up the chain the block with that information is, the more difficult it becomes to change. You would have to change every consecutive block that comes after it.
And that is what makes it virtually impossible to hack. In its current, unchanged state, even when taking Moore’s Law into consideration, by some calculations the Blockchain will still be impossible for the world’s most powerful computer to hack for the next 60 years.
And it goes without saying: in the era of TalkTalk-style hacks and ever increasing cyber threats, a virtually “unhackable” network is a very, very valuable thing.
What comes next with ‘Bitcoin 2.0’?
For the answer to that question, you’ll have to wait and read our next piece. But when you imagine some people are looking to the Blockchain to base a new web on and others are hoping to apply it to manage the Internet of Things, then you realise just how exciting the possibilities are.
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