Bitcoin, the Virtual Currency, Explained

First, what is bitcoin? spending-bitcoins Bitcoin is a crypto-currency that exists only in the digital sense – in your mobile phone, or computer (digital wallet). There is no bitcoin hard currency like notes or coins. It is secured using cryptography (public-key encryption) to make it hard for hackers to spend bitcoins from other people’s wallets. To understand bitcoin, I suggest you read this comprehensive article from Forbes. It’s not hard to understand digital currency if you can understand M-Pesa.

  • You want to buy goods/services, you can send someone money via M-Pesa (or via bitcoin exchange), you just get their number(identifier) and send it using your M-Pesa SIM Toolkit (bitcoin app) on your phone;
  • You can also receive money from someone through M-Pesa (bitcoins).
  • You can pay for stuff online as well, just like you do using VISA cards or M-Pesa or Paypal. The charges of using bitcoin for transactions are less than the traditional means.
  • At the end of the day, if you want cold, hard cash (some places don’t accept M-Pesa (bitcoins)), you can go to an M-Pesa agent (bitcoin exchange) and withdraw the cash in Kshs(dollar/euro/pound). There are a number of people making money from buying bitcoins at a lower rate and selling when the rates are higher (speculation).

What’s So Fascinating About Bitcoin?

1. Process of mining it

What I find interesting about bitcoin is the process of creating bitcoins. For traditional currencies such as the Kenyan Shilling, the Central Bank of Kenya is responsible for printing the cash (although De La Rue is the contracted printer) and regulating supply. For bitcoin, the digital sequences that determine the bitcoins are generated by an algorithm designed by Satoshi Nakamoto. The maximum number of bitcoins that can be generated is 21 million. The process of generating these coins is called mining. Currently, about 12.3 million bitcoins have been mined, or brought into circulation. You too, can mine you own bitcoins, with special hardware that you buy. (You need money to make money!). Here’s a techcrunch review of a bitcoin miner. However, for small scale miners coming in late in the game, it is going to take you ages to make any decent return on your investment. The reviewer ran a collection of three 1 GH/s ASICs (each costs about $12) and got about $1 a month. In this case, it will take you 3 years to break even. Who said mining was easy?

2. Mysterious founder of Bitcoin

Who is Satoshi Nakamoto, the original designer of the bitcoin algorithm? Is he one person, is it a group of people? Is he/they really Japanese?

Satoshi Nakamoto?

Image from jimharold.com

We will never know. Nakamoto is believed to be in possession of roughly one million bitcoins. At one point in December 2013, this was the equivalent of US$1.1 billion. Have a look at the original paper by Satoshi Nakamoto and if you’re a profiler, please leave a comment on who you think he is. The fact that he doesn’t want to be found seems to make bitcoin even more popular.

3. Control is Peer to Peer

While traditional currencies are controlled by the equivalent Central Banks, bitcoin is unregulated. The bitcoin system has no central repository and no single administrator, rather transactions are recorded in a public ledger which every user in the network has access to. It is not recognized legally as a currency but it is gaining acceptance and popularity steadily.

4. Its popularity and volatility

A number of travel agents, and online service providers are accepting payments in form of bitcoins. Although it was launched in 2009, it didn’t gain popularity as much as it did last year. In the beginning of 2013, the exchange rate to the dollar was $13. It heat a peak of $1,200 in November 2013 and right now as I blog it is at $644.65. If you’re into gambling, purchase some coins from bitcoin wallet providers. There is actually a Kenyan wallet provider called bitX Kenya!

5. Coin Exchanges

To exchange bitcoins for traditional currencies, a number of coin exchanges (forex bureaus?) are available. Here is a complete list. Note: there are several other crypto-currencies following in bitcoin’s path.

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9 Responses to Bitcoin, the Virtual Currency, Explained

  1. David Too - DT says:

    A good start to understanding Bitcoin.

    Like

  2. princelySid says:

    Particularly loved the explanation. I don’t think bitcoin will be the crypto-currency that wins out but it will provide a model for all those that follow it

    Like

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