In the first of this two-part blog, Grant McMaster gives a beginner’s guide to the Bitcoin concept. In the next article, he’ll question what it means for online business…
In 2009 the first crypto currency appeared on the world stage. Bitcoin is the first currency to be independently available from government or bank control, and its appearance ushered in a new era of financial transactions that have thrilled the more anarchistic members of the Internet community whilst forcing those same governments and banks to adjust laws and financial strategies to cater to its appearance.
The open source bitcoin system is a software-based payment system devised in 2008 by a semi-anonymous person, or group of persons, with a figurehead called Satoshi Nakamoto.
The peer-to-peer payment system records transactions on a public ledger without the need for a central repository with owned currency being stored in a personal online wallet.
Since its inception and public release bitcoin has seen a growth in legitimacy amongst individuals and businesses as well as an inevitable rise in black market or illegal use due to the virtually anonymous nature of the transaction.
Some consumer groups, however, have warned people that although bitcoin transactions are cheaper than credit card transactions, they lack any form of consumer protection, the facility for chargeback and the fees are paid by the buyer and not the seller.
Bitcoin transactions are accomplished without a central facility using decentralized bitcoin software running on server banks. Through the Internet anyone can join this group with such computers being called miners.Validation of the online currency is accomplished by means of the block chain, which is a virtual chain of accepted transactions that is updated every six hours and then distributed to all machines on the network.
The virtual anonymity of Bitcoin lies in the fact that no names are traded, although that anonymity is limited, as transactions can be traced to both ends.
As I mentioned earlier, the system uses virtual wallets, but as bitcoins only really exist within the block chain, a wallet is best understood as a method of holding both your online credentials for accessing your funds and the software necessary for you to spend them.
Transactions may be accomplished through e-mail or QR codes that are read by smartphones. There are also specialized merchant solutions for businesses, gift cards and even physical bitcoins.
The security of bitcoins wallets is another concern. Possession of the private key of any wallet allows anyone to transfer all of the funds, and losing or forgetting the key results in those bitcoins associated with the bitcoin address being lost forever and this has occurred many times.
And you can’t talk about bitcoin security without mentioning the Mt. Gox fiasco. In April 2014, this bitcoin exchange announced that 850,000 bitcoins were missing and likely stolen. The real-time value of this was $450,000. Speculators suggested that the disappearance of the coin was due to hacking.
Nonetheless Bitcoin and other crypto currencies are having an impact upon the digital retail world and many merchants are now interested in trading with the currency, which is legal in all countries of the world except Iceland, although it has a legal restriction on use in Russia where all purchases must now be made using Rubels.
Using Bitcoins requires a certain level of security awareness, whether you chose an online wallet, desktop wallet or mobile wallet there is a risk of the software being compromised. Many users mitigate this risk by moving their funds offline to what is referred to as cold storage.
Cold Storage examples include a USB Drive, a paper wallet, physical bitcoins or an offline hardware wallet kept in a secure place.Keeping the bulk of funds secured in this way mminimizestheft due to compromised computer security.
It may seem that this article places a great emphasis upon the need for significant security when using bitcoin, that’s because there is a need. With no central authority, no consumer protection, no chargeback and the ability for the possessor of a private key to do what he wants with any funds at a bitcoin address it is very easy to lose your bitcoins.
Yet, bitcoin as a currency is definitely here to stay, and as it matures, it might soon become a more common option for online business transactions and even e commerce – a point we’ll’ discuss in the next article.
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