Bitcoin Bitcoin

Bradley W. Deacon LL.B

Dec 2014 Bradley W. Deacon LL.B

Dec 2014

Bitcoin Basics Bitcoin is a decentralized digital currency

The Bitcoin was concocted by Satoshi Nakamoto and introduced early 2009.

They are digital coins that you send through the Internet.

Uses peer-to-peer technology to facilitate instant payments mostly to purchase goods and services.

In November 2013 there were 93,000 Bitcoin transactions per day, and the average transaction size was US$2,000 (the average mobile money transaction was only US$35 in June 2012)

As of November 30 2013, approximately 800,000 bitcoins have been stolen.

Obtaining A Bitcoin

The main ways to get Bitcoins are:

Exchanges, where you can buy and sell Bitcoin for flat currency

Mining

Transactions between individuals using Bitcoin Wallets

Bitcoin Wallet

Bitcoin owners store the digital currency in the cloud so they don’t have to worry about safeguarding it from, hackers, on their own computers.

Bitcoin functions using public-key cryptography, in which a user generates a pair of cryptographic keys: one public and one private.

Only the private key can decode information encrypted with the public key; therefore the keys' owner can distribute the public key openly without fear that anyone will be able to use it to gain access to the encrypted information.

The private key, however, must be kept secret and secure.

The public key can be used as an "address" to which other users can send bitcoins.

Bitcoin Wallets Continued

Anyone wishing to use Bitcoin can create one or more Bitcoin addresses, which are collected and tracked in "wallets".

Anyone can send bitcoins to the public address provided by the owner of the wallet, while the private key must be entered by the wallet owner to send bitcoins.

Securing and protecting the private key is the essence of wallet security. If the private key for an address is not kept secret, the bitcoins may be stolen; theft has been documented on numerous occasions.

Versatility of Bitcoin Wallets

Wallets allow a user to complete transactions between addresses by requesting an update to the blockchain, the public transaction log.

Wallets come in a variety of forms: apps for mobile devices and computers, hardware devices, and paper tokens. When making a purchase with a mobile device, the use of QR codes to simplify transactions is ubiquitous.

Blockchain

Integral to Bitcoin is a public transaction ledger and log known as the blockchain,

Blockchains shows who owns how many bitcoins currently and records the participants in all prior transactions as well.

Blockchains keep a record of all transactions

The blockchain prevents double-spending (copying one bitcoin and spending it in multiple different places) because the record shows that once a bitcoin has been spent, the previous owner no longer controls it.

The blockchain is maintained not by a central body but by a distributed network of computers that run a program to solve cryptographic puzzles relating to information in the blockchain.

Miners

Users who devote computing power to maintaining the blockchain this way are called "miners" because they are awarded in bitcoin when they are first to solve such puzzles - mining is how new bitcoins are generated

The mathematical calculations performed by miners' computers serve to verify that each transaction is valid and add the information to the blockchain.

As more bitcoins come into circulation, the puzzles involved in mining them become increasingly difficult, and the rewards are halved at regular intervals, until 21 million bitcoins have been created and production stops.

As Bitcoin achieves wider recognition and more people compete to mine the coins, competition for the limited number of bitcoins awarded for solving the cryptographic puzzles becomes more steep and more powerful computers are needed in order to compete - a fact which has spawned a technology boom in sales of Bitcoin mining technology.

Bitcoin Pros Bitcoins are more anonymous than a bank account.

You can make your own “wallet” on your computer without giving any personal information to set up your account.

The number of wallets you can create are unlimited. 

No high-ranking authorities can oversee the transaction record or confiscate Bitcoins.

Trying to figure out which accounts belong to whom and not having accessibility to the “private key” to approve the transaction would be a problem according to some experts who have a degree in electrical engineering.   

Bitcoin Pros ContinuedThe supply of Bitcoins will essentially be limited once they all have been created or mined.

At this juncture, no overseeing legislature can produce further Bitcoins. This is one reason why many people would like to see Bitcoins succeed. Those fueling anti-government sentiments feel Bitcoins are akin to the collapse of a conflictingly controlled monetary system. 

The flow of Bitcoins will eventually cease. At this time, no high-ranking authorities can produce additional Bitcoins or otherwise influence the Bitcoin supply.

Those critical of the bureaucratic system will value this trait; however, those who feel a regulative authority is important to maintain fiscal stability will find this characteristic worrying.   

Bitcoin Cons

There is no guarantee that Bitcoins will be around in the future or whether they will retain any value.

Currently, the Bitcoin phenomenon is literally a group of hobbyists who get a thrill out of the uniqueness of it all.

There are some collectors of Bitcoins who hope to profit if Bitcoins eventually pan-out to the extent where merchants will accept Bitcoins as a standard currency.

Ultimately, users will grow tired of the whole concept if they are not frequently able to use their coins to purchase things. 

Bitcoin Cons Continued

If Bitcoins eventually got into the hands of governments, they could pass regulations and restrict Bitcoin usage.

Bitcoins are a perfect tool for unscrupulous characters like terrorists and drug smugglers who want to exchange currency anonymously with a system that is not vulnerable to government intervention.  

Bitcoins are deficient of many secure methods used by regular banks. For example, if you lose your wallet details you lose your funds your Bitcoins disappear back into cyberspace where they originated.

If another person gets hold of your private key, undoing any unauthorized transactions will be impossible.

Glossary

Hot Bitcoin Wallet-Software that sits on your personal computer and ties into the bitcoin network, allowing you to send and receive bitcoins

Mobile Bitcoin Wallet-Sit on mobile device allowing a person to make transactions in stores

Online Wallet- Website that manages wallets, petting you store, send and receive bitcoins without installing software on your computer

Websites and Real World Shops- Handful of systems that allow shops to connect to the bitcoin system and allows them to accept payments.

Glossary

Bitcoin Exchange- An online exchange where you can trade bitcoins for other currencies including dollars, yen and euros. These are linked to real world banking systems and move converted bitcoins directly to bank accounts.

‘Cold Bitcoin Wallet’ - Bitcoins stored on a computer not connected to the internet. Safeguards from persons hacking into your computer.

In Person Exchanges- Meet in person with one person handing over cash and the other person transmits a bit coin to the other person via the bitcoin network.

Physical Bitcoins - You store the cryptography key on a physical coin or a finger ring.