Just what is Bitcoin and why is it getting so much attention?
Bitcoin has become a hot, controversial topic, but what is it exactly and why is it getting so much attention? As of 2014, Bitcoin is the most popular form of digital currency. Bitcoin (Bitcoin with an uppercase "B") is the system of how payments are made, while the lowercase bitcoin refers to the unit of online currency. Unlike traditional currency, Bitcoin is not regulated by a central organization.
Even though it's been around for more than five years, not too much is known about the origins of Bitcoin. In 2008, a Japanese programmer or programming group using the pseudonym Satoshi Nakamoto published a report about digital currency. The following year, Satoshi Nakamoto presented software which created the first Bitcoin network and currency. However, by 2010, Satoshi Nakamoto had disappeared from the online community.
How Bitcoin Works
In the simplest definition, bitcoins are online money, transferred from one person's digital wallet to another. A new user must install a Bitcoin wallet on their mobile phone or computer. Once the Bitcoin wallet has been installed, a Bitcoin address is generated. The payment transaction is similar to email with one exception: Bitcoin addresses should only be used once. A user can generate as many Bitcoin addresses as needed.
Users can earn bitcoins by accepting them as a form of payment, trading or completing tasks on various websites such as BitVisitor or CoinWorker. Another way to earn bitcoins is through a process called mining. Mining is how new Bitcoins are created. The process is similar to mining for gold. Bitcoin miners solve cryptographic puzzles to earn bitcoins. Like gold, there is a finite number of bitcoins. It is predicted that the last bitcoins will be mined by 2140. As of Jan. 2014, there are 12 million bitcoins in circulation.
Where to Use Bitcoin
Several businesses accept bitcoins as payment. Bitcoin Magazine has a list of a wide range of businesses that accept bitcoins such as OkCupid, Reddit Gold, All Things Luxury and Amagi Metals. Since March 2013, Bitpay, the leading payment processor of Bitcoin payments has worked with Amazon's Fulfillment-by-Amazon service in the first large-scale eCommerce integration. The partnership allows sellers to accept bitcoins for payment on their own website with Amazon fulfilling and shipping the orders.
All Bitcoin transactions are sent to a shared public ledger, which works like a peer file-sharing server except money is shared instead of files. All confirmed transactions are lodged on the block chain. Cryptography maintains the chronological order and integrity of the shared public ledger. Through this process, balances of Bitcoin wallets are tracked and bitcoins are verified. All Bitcoin wallets have a private key which is used to sign transactions. The signature prevents a transaction from being altered.
Bitcoin CEO Arrested
Bitcoin made headlines in Jan. 2014, when a major Bitcoin exchange company founder was arrested for selling digital currency to customers trafficking narcotics through the drug website Silk Road. BitInstant CEO Charlie Shrem was arrested and charged with conspiring to commit money laundering and operating an unlicensed money transmitting business. Robert Faiella, a Bitcoin exchanger, was arrested for the same charges. After the arrests, U.S. Attorney for the Southern District of New York Preet Bharara said, "Truly innovative business models don't need to resort to old-fashioned law-breaking, and when bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act."
BitInstant, Shrem's company, had recently received $1.5 million in funding from Winklevoss Capital, a venture capital firm led by Tyler and Cameron Winklevoss, the twin brothers famous for claiming that Facebook was originally their idea. After the allegations again Shrem, the Winklevoss brothers issued a statement that they "fully support any and all governmental efforts to ensure that money laundering requirements are enforced." Both Shrem and Faiella could get up to 20 years in prison if convicted. A month after Shrem and Faiella were charged, two men in Florida were arrested for using Bitcoin currency in an alleged money laundering scheme. The case was believed to be the first involving Bitcoin currency in the state of Florida.
More Bad News
In late Feb. 2014, it was announced that the largest Bitcoin exchange, Mt. Gox, was filing for bankruptcy. Mt. Gox had been plagued by technical problems for months as well as the loss of 774,000 bitcoins, or six percent of all bitcoins in circulation, in a major theft.
The recent arrests and controversies have raised concerns over Bitcoin currency, concerns such as the lack of regulation and the fact that Bitcoin transactions are anonymous. The bitcoins also have no fixed value, a key difference with traditional currency. Therefore, no one can give the value of such items as a cup of coffee in bitcoin. Supporters love the no fees, no bank account and no regulation of Bitcoin. However, critics of digital currency argue that it is the lack of regulation and anonymous transactions that put users at serious risk.
by Jennie Wood