Wired.co.uk has been reporting on digital currency Bitcoin for several years, but in the last few month, a single bitcoin’s trading value has swung from $30 to $230 and it’s been a daily fixture in headlines across the mainstream media. Despite this, there remains a lot of confusion about what bitcoins are, how to use them and whether or not we are in a Bitcoin Bubble. Here’s our simple guide to Bitcoin.
What is Bitcoin?
Bitcoin is a peer-to-peer electronic cash system or “cryptocurrency” that doesn’t rely on trusting one central monetary authority and allows for anonymous, untrackable and untaxable transactions. The idea was first discussed by members of the cypherpunk mailing list and then a workable system — which used a distributed database spread across the nodes of a peer-to-peer network (a little like the one that underpins Bittorrent) that could keep track of transactions secured by cryptography — was outlined by a programmer called Satoshi Nakamoto in a paper in 2008 and built in 2009.
Is it a commodity or a currency?
It seems that Bitcoin is an awkward combination of the two. The commodity value of bitcoins is linked to their currency value, but the more they become like a commodity, the less useful they are a currency.
How do you mine bitcoins?
Anyone can install Bitcoin’s mining software, which then uses the computer’s processing power (using the CPU or GPU) to carry out intensive calculations — you can think of it like trying to search for prime numbers. Lots of people might be working on the same unit of work — a computationally complicated problem. The aim is to find a certain sequence of data, called a “block”, that produces a particular pattern when the Bitcoin “hash” algorithm is applied to the data. Whoever’s computer manages to do that will win bitcoins.
When it started out, it was relatively easy to mine bitcoins, but as more people are trying to get in on the action, it’s become computationally much more challenging — in the same way that it’s easier to find the early prime numbers, but harder now. The network is used to monitor and verify the creation of new bitcoins and all Bitcoin transactions, which are filed in a log. There is a cap on the number or bitcoins that will be produced, which is 21 million, and a pre-defined schedule of how quickly they are released up until 2040. There are currently around 11 million in circulation.