What is Bitcoin

What is Bitcoin

Bitcoin is a digital currency. It is the first and most famous application on the Bitcoin network.

The Bitcoin network allows for what is a global distributed ledger based on the consensus of the network. This ledger is known as the Block Chain. The Bitcoin network came online in 2009. The Block Chain and Bitcoin network allow for the development of a host of new and potentially world changing technologies, apart from the ground breaking currency itself.

The above video is made by weusecoins.com which is a great resource for beginners.

Its disruptive nature and innovation potential is why many people compare Bitcoin network to the internet in the early nineties, and the currency to one of the earliest applications of the internet, email.

Some of the features of Bitcoin:

- The distributed ledger prevents the double spending of Bitcoin.
- Bitcoin transactions don't need an oversight organisation i.e. middle man, which means transaction fees are zero or close to zero.
- It is possible to have micro-transactions that are infinitely small.
- The supply of Bitcoin is mathematically constrained to be 21 million.
- The technology is open source and not owned by any central organisation.

At the time of this writing there are around 13 million Bitcoin. New Bitcoin is created at an ever decreasing rate. They are given to clients that use computing power to verify the network. This process is known as mining. When all 21 million Bitcoin are mined the reward for miners will be transaction fees.

Why Should I Get Bitcoin?

Use Bitcoin

Acceptance and growth of Bitcoin has grown rapidly and it is now possible to buy almost anything with Bitcoin. In January a publicly listed US company overstock.com started accepting Bitcoin. Many other small and larger businesses all over the world accept Bitcoin. This includes restaurants, bars and brick and mortar shops.

Usebitcoins.info has maps of physical Bitcoin accepting businesses.

Bitcoin as Investment

The information here does not constitute financial advice and does not take into account individual circumstances. Before acting on the basis of any information presented you should consider consulting your financial advisor. Bitcoin is a new technology and like any investment has inherent risks.

There are about 13.5 million Bitcoin now, and there will never be more then 21 million. Supply is fixed but demand is not. This makes for a simple conclusion. The more demand there is for Bitcoin the more the price will increase.

So as users increase we can expect the price to rise. Its hard to get the true number of users of Bitcoin. It is probably around 5 million as of 19/3/14. A relatively a small amount.

Blockchain.info is a popular wallet and can be used as a proxy for illustrating user growth.

bitcoin users growth
User numbers increased 7x over a year.

The market capitalisation at a price of $700 is about 9 billion. That is about 10% of the value of a company like Facebook. It is about 0.13% of the value of gold.

So in perspective, its possible that the value of Bitcoin, has still a lot of upside potential.

Bitcoin in Business

The potential for innovation with programmable money is immense. Bitcoin will create many new industries and reshape existing ones.

However, one of the simple and immediate advantages of Bitcoin is as a payment system for e-business.
- It provides a free alternative to expensive credit cards and other payment processing systems. This is particularity important in online businesses where margins can be very low.
- It is easy to implement.
- It prevents fraud and chargebacks for the merchant.

Bitcoin for Freedom

With Bitcoin you are in control of your own money. Nobody can take it from you or tell you what you can and cant do with it. Many consider money as speech, and if that is the case freedom of money is equal to freedom of speech.

Wallet Types

Hosted Wallets

These are wallets that are hosted online for you. They are easy to use. You can login with a browser from any computer.

You rely on and trust another party with your Bitcoin. It is not recommended to store large amounts of cash on a web wallet. They are great for holding smaller amounts for your everyday payments.

SPV Clients

These are apps to be installed on your computer/mobile device. They are s similar to the full Node Bitcoin client but do not need to download the Blockchain. Instead they connect to other nodes in the Bitcoin network to abstract the blockchain. Thus they are known as lightweight or thin clients.

Mobile devices generally use SPV clients.

Their advantage is that you are in direct control of your Bitcoin. The offer most of the security advantages of a full client. They are a much safer alternative to hosted wallets.

The clients allow for encryption of your wallets, you should also be careful with the security of your device. They also introduce a vulnerability where the SPV client is subjected to a double-spend attack by somebody who controls its network connection. For example, suppose you are at a wi-fi cafe and are paying for something using your smartphone -- the cafe owner controls your network connection. Waiting for block confirmations (every ten minutes) would secure you in this case.

Multibit is a popular SPV client available on most operating systems.

Full Node

These are apps to be installed on your computer. They have a full copy of the blockchain , around 20GB in size at the time of this writing. They are a node on the network and help support it.

Since the Bitcoin is stored on your hard drive you are in direct control of your Bitcoin. This is safer then hosted wallets but means you are responsible for your Bitcoin security. The clients allow for encryption of your wallets.

Bitcoin Core - This is the first bitcoin client. It is by far the most popular full client. Care should be taken when backing up Bitcoin-Qt wallets as the addresses can change after sending Bitcoin. That means that back ups you have will be of old addresses with less Bitcoin on them. One solution to this is to make regular backups. Armoury client helps solve this problem and allows backups that are forever.

Armoury - Is based on Bitcoin Core but implements many security features. It is considered the gold standard in Bitcoin security, sometimes at the expense of usability.

One feature of Armoury is fragmented backups. This is a way of splitting a physical paper backup into multiple pieces, such that multiple “fragments” are needed to restore your wallet. For example it is possible to have five different backups and require three of them to access the Bitcoin wallet. This protects against lost or stolen backups.

Armoury also allows backups that last forever, paper wallet backups and many other great security features.

Paper Wallet

This is just a physical medium. It is usually a printed document, with a public address and its private key. You can then send Bitcoin to that public address at any time. If you want to spend the Bitcoin you can import the address pair into a software client or web wallet. This is known as making the wallet go hot.

The idea is to to keep the wallet isolated from the internet and electronic devices and therefore limit its exposure to any possible attack.

Several tools exist for producing paper wallets (i.e. the address and its private key), including BitAddress.org, Bitcoin Address Utility, BitcoinPaperWallet.com, OfflineAddress.com, SafePaperWallet.com, and vanitygen.

It's best to generate to paper wallet address pairs from a computer not connected to the internet. For additional security they can be created on a newly installed operating system or one running of a bootable CD or USB drive.

Armoury client has features that help with the creation of paper wallets.

Offline Wallet

This is similar to paper wallets except stored on offline electronic devices, like usb. Armoury client has features that help with the creation of offline wallets.