Bitcoin: inside the encrypted, peer-to-peer digital currency

Fintech

2015-08-11 / www.marketwatch.com




Bitcoin is a digital currency (also called crypto-currency) created in 2009 by an unknown person using the alias Satoshi Nakamoto.  Bitcoin is not backed by any country's central bank or government. Bitcoins can be traded for goods or services with vendors who accept Bitcoins as payment. Bitcoin has populist roots. It made its debut in relative obscurity at the start of 2009, when the financial crisis was still raging. The idea was to take power out of the hands of the central bankers and governments who usually control the flow of currency.
bitcoin is like one big ledger shared by all the users: When you pay for something with bitcoin, or get paid, then your transaction is recorded on the ledger. Computers then compete to confirm the transaction by solving complex math equations, and the winner is rewarded with more bitcoins. The process is known as “mining,” Only the computer powerhouses get their bitcoins this way.
Bitcoin-to-Bitcoin transactions are made by digitally exchanging anonymous, heavily encrypted hash codes across a peer-to-peer (P2P) network. The P2P network monitors and verifies the transfer of Bitcoins between users. Each user's Bitcoins are stored in a program called a digital wallet, which also holds each address the user sends and receives Bitcoins from, as well as a private key known only to the user.
The Bitcoin network is designed to mathematically generate no more than 21 million Bitcoins and the network is set up to regulate itself to deal with inflation. Bitcoins can be spent by initiating a transfer request from a Bitcoin address in the customer's wallet to a Bitcoin address in the vendor's wallet. As of this writing, one Bitcoin (also called a BTC)  is worth $104 -- but just as with stocks, the value of Bitcoins can fluctuate quickly.
Bitcoin is both a digital currency and a payment system. bitcoin could be used by people in developing countries, who might have cellphones but not bank accounts, or people in countries where the official currency is plunging might view bitcoin as a haven (though it’s not like bitcoin isn’t subject to plunging too). Also, bitcoin payments can be anonymous to some extent, which could be a selling point to people who are concerned about privacy or taxation issues.
However The bitcoin exchanges are vulnerable to hacking. Just look at Mt. Gox, which collapsed after it managed to lose some 650,000 bitcoins, or Vircurex, which halted withdrawals after a run on the bank, so to speak. And if something like that happens, good luck getting your money back: This isn’t like an FDIC-insured bank account. The Financial Industry Regulatory Authority, or Finra, issued a warning recently that digital currencies are “more than a bit risky.”
The anonymity isn’t a selling point for everyone. As panelist Mark T. Williams, a banking and risk management expert and a professor at the Boston University School of Management, said during the panel discussion: “If a criminal actually grabs it and gets the coin, they own the coin and there’s no way to pull it back.” Relatively unregulated, bitcoin could potentially be at the heart of illegal activities, including tax evasion or money laundering.
It’s also volatile as heck, which, come to think of it, seems like a given when you’ve got a currency that isn’t controlled by any central bank. Bitcoin was recently trading around $448, according to the bitcoin price index by CoinDesk. A few months ago, it was more than $1,000. A year ago, it was barely pushing $100. Two years ago, it was about $5.
No one really knows how to regulate bitcoin, or who should do it, and, as the MarketWatch panelists point out, regulating a rogue currency too heavily would make bitcoin not really bitcoin any more. There’s a cacophony of opinions: The Treasury is worried that it will be used for illegal activities. Federal Reserve Chairwoman Janet Yellen says the Fed has no authority to regulate it.

HIGHLIGHTS


Top