If you are a fan of online games or any other form of internet-based transactions that require a monetary exchange, you are probably familiar with the term Bitcoin. If instead you are curious about the inner workings of the black market or modern money laundering techniques, you may also have come across the term in reference to Silk Road, an online marketplace that became infamous for making illicit goods available to the public, which used Bitcoins to attempt to protect the identity of its customers. Technologically speaking, Bitcoin refers to an open source payment network that uses public-key cryptography to (semi-)mask the system’s monetary transactions, using bitcoins as the unit of online currency that can be exchanged into several real currencies. Although Bitcoins have been around since 2008, they have only recently become popular. What should you know about Bitcoin?
Where does the Bitcoin system come from?
Bitcoin came into existence in 2008 through the publishing of a technological design paper by a writer under the pseudonym “Satoshi Nakamoto”. Nakamoto’s idea was made into a reality on an open source platform as early as 2009, when the first bitcoin was given value. The initial launch of Bitcoin was marred with difficulty, with some savvy users able to generate an unlimited number of Bitcoins. Once these kinks were worked out, the popularity of the bitcoin spread rapidly around the world. The value of Bitcoins has also witnessed rapid change, with the worth of one bitcoin varying between $0.30 and $32 in 2011. With some mainstream companies adopting the use of Bitcoins in 2013, the value of this currency increased even more, at times selling for over $1,000 in the Chinese market. Many now argue that the entire Bitcoin structure is faulty and will only result in a dangerous financial bubble that will inevitably burst.
How does Bitcoin work?
Bitcoin works by taking advantage of public-key cryptography, a technique that creates interlocking pairs of encryption keys based on a public key that can be freely distributed and a private key that is confidential for every user. The public key acts as an account number, used to receive Bitcoins. The paying party uses his/her private key to send value to the receiving party’s public key, essentially “signing” the transaction by using their privately encrypted key. These transactions are recorded in a block chain. Public keys are ultimately anonymous because they are created and attributed completely randomly, but the flow of Bitcoins from private keys has been found surprisingly easy to trace. All of this is managed by “miners”, who work on the chain and can earn Bitcoins as payout bonuses if their work is timely and popular enough.
What is the future of Bitcoin?
With the completely digital nature of Bitcoin and its ability to obscure at least part of the transaction process from authorities, it is no wonder that it has become a popular tool for money launderers and drug dealers, in addition to the more contemporary online company. Given all the negative press Bitcoin has received lately over its unstable Bitcoin value and use in illicit activities, is it a good idea to invest in Bitcoin now? As of December 5, 2013, the People’s Bank of China officially announced that Bitcoins will not be accepted as a valid currency in Chinese financial institutions any longer. In the U.S., though, the Senate has been told that Bitcoins are a legitimate currency and that regulation is therefore in order.
Because of the uncertainty surrounding Bitcoins, it is one of the riskier investments of today but one with a high payout if the entire scheme does not go under. Follow the trends in companies that deal in Bitcoins carefully before you decide to invest heavily in Bitcoins. (For more information, see the Economist.)