Bit Coin new kind of money
What's Bit Coin?
Bit coin is a digital currency created in January 2009 following the housing market crash. It follows the ideas set out in a whitepaper by the mysterious and pseudonymous Satoshi Nakamoto.
The identity of the person or persons who created the technology is still a mystery. Bit coin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bit coins, only balances kept on a public ledger that everyone has transparent access to, that – along with all Bit coin transactions – is verified by a massive amount of computing power. Bit coins are not issued or backed by any banks or governments, nor are individual bit coins valuable as a commodity. Despite it not being legal tender, Bit coin charts high on popularity, and has triggered the launch of hundreds of other virtual currencies collectively referred to as Altcoins.
Bit coin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bit coins is carried out collectively by the network. Bit coin is open-source; its design is public, nobody owns or controls Bit coin and everyone can take part. Through many of its unique properties, Bit coin allows exciting uses that could not be covered by any previous payment system.
Understanding Bit coin
Bit coin is a collection of computers, or nodes, that all run Bit coin's code and store its blockchain. A blockchain can be thought of as a collection of blocks. In each block is a collection of transactions. Because all these computers running the blockchain have the same list of blocks and transactions and can transparently see these new blocks being filled with new Bit coin transactions, no one can cheat the system. Anyone, whether they run a Bit coin "node" or not, can see these transactions occurring live. In order to achieve a nefarious act, a bad actor would need to operate 51% of the computing power that makes up Bit coin. Bit coin has around 47,000 nodes as of May 2020 and this number is growing, making such an attack quite unlikely.
In the event that an attack was to happen, the Bit coin nodes, or the people who take part in the Bit coin network with their computer, would likely fork to a new blockchain making the effort the bad actor put forth to achieve the attack a waste.
Bit coin is a type of cryptocurrency. Balances of Bit coin tokens are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bit coins. The private key (comparable to an ATM PIN) is meant to be a guarded secret and only used to authorize Bit coin transmissions. Bit coin keys should not be confused with a Bit coin wallet, which is a physical or digital device which facilitates the trading of Bit coin and allows users to track ownership of coins. The term "wallet" is a bit misleading, as Bit coin's decentralized nature means that it is never stored "in" a wallet, but rather decentral on a blockchain.
Style notes: according to the official Bit coin Foundation, the word "Bit coin" is capitalized in the context of referring to the entity or concept, whereas "bit coin" is written in the lower case when referring to a quantity of the currency (e.g. "I traded 20 bit coin") or the units themselves. The plural form can be either "bit coin" or "bit coins." Bit coin is also commonly abbreviated as "BTC."
How Bit coin Works?
Bit coin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bit coin network, are comprised of nodes or miners. "Miners," or the people who process the transactions on the blockchain, are motivated by rewards (the release of new bit coin) and transaction fees paid in bit coin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bit coin network. New bit coin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bit coins approaches 21 million. As of July 2020, there are roughly 3 million bit coins which have yet to be mined. In this way, Bit coin (and any cryptocurrency generated through a similar process) operates differently from fiat currency; in centralized banking systems, currency is released at a rate matching the growth in goods in an attempt to maintain price stability, while a decentralized system like Bit coin sets the release rate ahead of time and according to an algorithm.
Bit coin mining is the process by which bit coins are released into circulation. Generally, mining requires the solving of computationally difficult puzzles in order to discover a new block, which is added to the blockchain. In contributing to the blockchain, mining adds and verifies transaction records across the network. For adding blocks to the blockchain, miners receive a reward in the form of a few bit coins; the reward is halved every 210,000 blocks. The block reward was 50 new bit coins in 2009 and is currently 12.5. On May 11th, 2020 the third halving occurred, bringing the reward for each block discovery down to 6.25 bit coins.5 A variety of hardware can be used to mine bit coin but some yield higher rewards than others. Certain computer chips called Application-Specific Integrated Circuits (ASIC) and more advanced processing units like Graphic Processing Units (GPUs) can achieve more rewards. These elaborate mining processors are known as "mining rigs."
One bit coin is divisible to eight decimal places (100 millionths of one bit coin), and this smallest unit is referred to as a Satoshi.6 If necessary, and if the participating miners accept the change, Bit coin could eventually be made divisible to even more decimal places.
How Bit coin Began?
Aug. 18, 2008: The domain name bit coin .org is registered. Today, at least, this domain is "WhoisGuard Protected," meaning the identity of the person who registered it is not public information.
Oct. 31, 2008: A person or group using the name Satoshi Nakamoto makes an announcement on The Cryptography Mailing list at metzdowd .com: "I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party, entitled "Bit coin: A Peer-to-Peer Electronic Cash System," would become the Magna Carta for how Bit coin operates today.
Jan. 3, 2009: The first Bit coin block is mined, Block 0. This is also known as the "genesis block" and contains the text: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks," perhaps as proof that the block was mined on or after that date, and perhaps also as relevant political commentary.
Jan. 8, 2009: The first version of the Bit coin software is announced on The Cryptography Mailing list.
Jan. 9, 2009: Block 1 is mined, and Bit coin mining commences in earnest.
Who Invented Bit coin?
No one knows who invented Bit coin, or at least not conclusively. Satoshi Nakamoto is the name associated with the person or group of people who released the original Bit coin white paper in 2008 and worked on the original Bit coin software that was released in 2009.
In the years since that time, many individuals have either claimed to be or have been suggested as the real-life people behind the pseudonym, but as of May 2020, the true identity (or identities) behind Satoshi remains obscured.
Before Satoshi
Though it is tempting to believe the media's spin that Satoshi Nakamoto is a solitary, quixotic genius who created Bit-coin out of thin air, such innovations do not typically happen in a vacuum. All major scientific discoveries, no matter how original-seeming, were built on previously existing research. There are precursors to Bit coin: Adam Back’s Hashcash, invented in 1997,8 and subsequently Wei Dai’s b-money, Nick Szabo’s bit gold and Hal Finney’s Reusable Proof of Work. The Bit coin whitepaper itself cites Hashcash and b-money, as well as various other works spanning several research fields. Perhaps unsurprisingly, many of the individuals behind the other projects named above have been speculated to have also had a part in creating Bit coin.
Why Is Satoshi Anonymous?
There are a few motivations for Bit coin's inventor keeping his or her or their identity secret. One is privacy. As Bit coin has gained in popularity – becoming something of a worldwide phenomenon – Satoshi Nakamoto would likely garner a lot of attention from the media and from governments.
Another reason could be the potential for Bit coin to cause major disruption of the current banking and monetary systems. If Bit coin were to gain mass adoption, the system could surpass nations' sovereign fiat currencies. This threat to existing currency could motivate governments to want to take legal action against Bit coin's creator.
The other reason is safety. Looking at 2009 alone, 32,489 blocks were mined; at the then-reward rate of 50 BTC per block, the total payout in 2009 was 1,624,500 BTC, which is worth $13.9 billion as of October 25, 2019. One may conclude that only Satoshi and perhaps a few other people were mining through 2009 and that they possess a majority of that stash of BTC. Someone in possession of that much Bit coin could become a target of criminals, especially since bit coins are less like stocks and more like cash, where the private keys needed to authorize spending could be printed out and literally kept under a mattress. While it's likely the inventor of Bit coin would take precautions to make any extortion-induced transfers traceable, remaining anonymous is a good way for Satoshi to limit exposure.
Receiving Bit coins As Payment
Bit coins can be accepted as a means of payment for products sold or services provided. If you have a brick and mortar store, just display a sign saying “Bit coin Accepted Here” and many of your customers may well take you up on it; the transactions can be handled with the requisite hardware terminal or wallet address through QR codes and touch screen apps. An online business can easily accept bit coins by just adding this payment option to the others it offers credit cards, PayPal, etc.
Working For Bit coins
Those who are self-employed can get paid for a job in bit coins. There are a number of ways to achieve this such as creating any internet service and adding your bit coin wallet address to the site as a form of payment. There are several websites/job boards which are dedicated to the digital currency:
- Cryptogrind brings together work seekers and prospective employers through its website
- Coinality features jobs – freelance, part-time and full-time – that offer payment in bit coins, as well as other cryptocurrencies like Dogecoin and Lite coin
- Jobs4Bit coins, part of reddit .com
- BitGigs
- Bitwage offers a way to choose a percentage of your work paycheck to be converted into bit coin and sent to your bit coin address
Investing in Bit coins
There are many Bit coin supporters who believe that digital currency is the future. Many of those who endorse Bit coin believe that it facilitates a much faster, low-fee payment system for transactions across the globe. Although it is not backed by any government or central bank, bit coin can be exchanged for traditional currencies; in fact, its exchange rate against the dollar attracts potential investors and traders interested in currency plays. Indeed, one of the primary reasons for the growth of digital currencies like Bit coin is that they can act as an alternative to national fiat money and traditional commodities like gold.
In March 2014, the IRS stated that all virtual currencies, including bit coins, would be taxed as property rather than currency. Gains or losses from bit coins held as capital will be realized as capital gains or losses, while bit coins held as inventory will incur ordinary gains or losses. The sale of bit coins that you mined or purchased from another party, or the use of bit coins to pay for goods or services are examples of transactions which can be taxed.
Like any other asset, the principle of buying low and selling high applies to bit coins. The most popular way of amassing the currency is through buying on a Bit coin exchange, but there are many other ways to earn and own bit coins.
Risks of Bit coin Investing
Though Bit coin was not designed as a normal equity investment (no shares have been issued), some speculative investors were drawn to the digital money after it appreciated rapidly in May 2011 and again in November 2013. Thus, many people purchase bit coin for its investment value rather than as a medium of exchange.
However, their lack of guaranteed value and digital nature means the purchase and use of bit coins carries several inherent risks. Many investor alerts have been issued by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau (CFPB), and other agencies.
The concept of a virtual currency is still novel and, compared to traditional investments, Bit coin doesn't have much of a long-term track record or history of credibility to back it. With their increasing popularity, bit coins are becoming less experimental every day; still, after 10 years, they (like all digital currencies) remain in a development phase and are consistently evolving. "It is pretty much the highest-risk, highest-return investment that you can possibly make,” says Barry Silbert, CEO of Digital Currency Group, which builds and invests in Bit coin and blockchain companies.
Bit coin Regulatory Risk
Investing money into Bit coin in any of its many guises is not for the risk-averse. Bit coins are a rival to government currency and may be used for black market transactions, money laundering, illegal activities or tax evasion. As a result, governments may seek to regulate, restrict or ban the use and sale of bit coins, and some already have. Others are coming up with various rules. For example, in 2015, the New York State Department of Financial Services finalized regulations that would require companies dealing with the buy, sell, transfer or storage of bit coins to record the identity of customers, have a compliance officer and maintain capital reserves. The transactions worth $10,000 or more will have to be recorded and reported.
The lack of uniform regulations about bit coins (and other virtual currency) raises questions over their longevity, liquidity, and universality.
Security Risk of Bit coins
Most individuals who own and use Bit coin have not acquired their tokens through mining operations. Rather, they buy and sell Bit coin and other digital currencies on any of a number of popular online markets known as Bit coin exchanges. Bit coin exchanges are entirely digital and, as with any virtual system, are at risk from hackers, malware, and operational glitches. If a thief gains access to a Bit coin owner's computer hard drive and steals his private encryption key, he could transfer the stolen Bit coins to another account.
(Users can prevent this only if bit coins are stored on a computer which is not connected to the internet, or else by choosing to use a paper wallet – printing out the Bit coin private keys and addresses, and not keeping them on a computer at all.) Hackers can also target Bit coin exchanges, gaining access to thousands of accounts and digital wallets where bit coins are stored. One especially notorious hacking incident took place in 2014, when Mt. Gox, a Bit coin exchange in Japan, was forced to close down after millions of dollars worth of bit coins were stolen.
This is particularly problematic once you remember that all Bit coin transactions are permanent and irreversible. It's like dealing with cash: Any transaction carried out with bit coins can only be reversed if the person who has received them refunds them. There is no third party or a payment processor, as in the case of a debit or credit card – hence, no source of protection or appeal if there is a problem.
Insurance Risk
Some investments are insured through the Securities Investor Protection Corporation. Normal bank accounts are insured through the Federal Deposit Insurance Corporation (FDIC) up to a certain amount depending on the jurisdiction. Generally speaking, Bit coin exchanges and Bit coin accounts are not insured by any type of federal or government program. In 2019, prime dealer and trading platform SFOX announced it would be able to provide Bit coin investors with FDIC insurance, but only for the portion of transactions involving cash.
Risk of Bit coin Fraud
While Bit coin uses private key encryption to verify owners and register transactions, fraudsters and scammers may attempt to sell false bit coins. For instance, in July 2013, the SEC brought legal action against an operator of a Bit coin-related Ponzi scheme.13 There have also been documented cases of Bit coin price manipulation, another common form of fraud.
Market Risk
Like with any investment, Bit coin values can fluctuate. Indeed, the value of the currency has seen wild swings in price over its short existence. Subject to high volume buying and selling on exchanges, it has a high sensitivity to “news." According to the CFPB, the price of bit coins fell by 61% in a single day in 2013, while the one-day price drop record in 2014 was as big as 80%.
If fewer people begin to accept Bit coin as a currency, these digital units may lose value and could become worthless. Indeed, there was speculation that the "Bit coin bubble" had burst when the price declined from its all-time high during the cryptocurrency rush in late 2017 and early 2018. There is already plenty of competition, and though Bit coin has a huge lead over the hundreds of other digital currencies that have sprung up, thanks to its brand recognition and venture capital money, a technological break-through in the form of a better virtual coin is always a threat.
Bit coin's Tax Risk
As bit coin is ineligible to be included in any tax-advantaged retirement accounts, there are no good, legal options to shield investments from taxation.
Bit coin Forks
In the years since Bit coin launched, there have been numerous instances in which disagreements between factions of miners and developers prompted large-scale splits of the cryptocurrency community. In some of these cases, groups of Bit coin users and miners have changed the protocol of the Bit coin network itself. This process is known "forking" and usually results in the creation of a new type of Bit coin with a new name. This split can be a "hard fork," in which a new coin shares transaction history with Bit coin up until a decisive split point, at which point a new token is created. Examples of cryptocurrencies that have been created as a result of hard forks include Bit coin Cash (created in August 2017), Bit coin Gold (created in October 2017) and Bit coin SV (created in November 2017). A "soft fork" is a change to protocol which is still compatible with the previous system rules. Bit coin soft forks have increased the total size of blocks, as an example.
What should I do if I forget my Password?
