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peer to peer currencyEarlier this month two prominent US politicians (Senators Charles Schumer of New York and Joe Manchin of West Virginia) wrote to US Attorney General Eric Holder to express concerns about the rise of a new online currency – BitCoin, abbreviated as BTC.

The anonymous, peer-to-peer currency has become very popular over the last few months, with websites popping up all over cyberspace enabling BitCoins to be exchanged or donated with nothing more than a unique, non-identifying public key.

What Is BitCoin?

In 2007 a supposedly Japanese programmer began working on BitCoin under the pseudonym “Satoshi Nakamoto” with the technology officially released in 2009. The currency is currently breaking new ground, and has already been heralded as one of the first working implementations of a crypto-currency.

By using cryptography (the act of hiding information) to both generate and transfer the currency, “Nakamoto” created a theoretically anonymous and self-contained economy. The idea was to cut out middlemen, denying a central authority the ability to issue currency or track transactions. Instead, these tasks are handled by the network of connected peers and no identifying information is recorded (try masking your IP How to Use a Fake IP Address & Mask Yourself Online How to Use a Fake IP Address & Mask Yourself Online Read More for total peace of mind).

Here’s an example of how it all works – you want to send your friend (let’s call him Mark) a BitCoin. On your side, Mark’s public key is added to the coin and this is signed on your end via a personal private code. Mark now owns the BitCoin, and you’re prevented from using it again thanks to the BitCoin network, which records and verifies transactions.

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Luckily none of this is done by hand, but by free software which handles your BitCoin banking. This software is available for Windows, OS X and Linux and only requires a user’s public key to make a payment. You can download a version for your operating system and learn about storing your BitCoins on the BitCoin website.

How Do I Get BitCoins?

There are a couple of ways to acquire BitCoins, with the easiest way being simply buying them. Using a BitCoin exchange like Mt. Gox or #bitcoin-otc on IRC or by finding a BitCoin trader on TradeBitCoin.com. For asking prices you can check out how the BitCoin markets are doing on BitCoin Charts.

peer to peer currency

It may also surprise you that you can generate your own BitCoins – a process known as mining. This is essentially a way of processing and verifying transactions, by generating “blocks” which are permanent records of BitCoin activity on the network (a block includes all recent transactions, a random number and the preceding block’s hash) and new BitCoins.

These blocks are then added to the “block chain” in chronological order, and once added to the chain a block is very difficult to modify (making it hard to “double spend” your BTC) as each subsequent block must also be modified.

Once a block has been created, a bounty (currently 50BTC) is awarded to the individual who created it. This bounty halves every 210,000 blocks, and it is estimated that by the year 2140 the maximum number of BitCoins – 20,999,999.9769 BTC – will have been generated. The fact that transaction “fees” can be added to BitCoin transactions means that mining can remain profitable, even when the maximum number has been reached.

peer to peer currency trading

If you’re thinking of mining for BTC then you’ll need the right hardware and the right software. Mining using your PC’s processor (CPU) is inefficient and likely to be removed from BitCoin altogether, according to the official wiki, so you won’t need to spend lots on a speedy quad core chip. Instead you’ll have more joy using a graphics processor (GPU) on a high-end graphics card. Why? The BitCoin wiki explains:

A CPU core can execute 4 32-bit instructions per clock (using a 128-bit SSE instruction) or 8 via AVX (256-Bit), whereas a GPU like the Radeon HD 5970 can execute 3200 32-bit instructions per clock (using its 3200 ALUs or shaders). This is a difference of 800 (or 400 in case of AVX) times more instructions per clock. As of 2011, the fastest CPUs have up to 6, 8, or 12 cores and a somewhat higher frequency clock (2000-3000 MHz vs. 725 MHz for the Radeon HD 5970), but one HD5970 is still more than five times faster than four 12-core CPUs at 2.3GHz.

You can find suitable software to become a BitCoin miner on this software page. If you have reduced grunt in your mining rig then you might want to consider pooled mining.

Silk Road, Spending & Safety

The two US Senators who initially raised the Attorney General’s attention to the BitCoin phenomena had noticed the popularity of a certain anonymous trading place called Silk Road. As BitCoins are also anonymous, they are currently Silk Road’s currency of choice for the sale and purchase of illicit drugs and other such illegal products.

The website requires Tor, a security tool Anonymous Internet Surfing with Tor Anonymous Internet Surfing with Tor Read More which ensures visitors do not leave a trace on the website and uses BTC exclusively for all trades. It is likely that much of the negative press that has attached itself to BitCoin has come from Silk Road. The website operates both as a reputation system and as an internal escrow, though this doesn’t make it safe (all purchases are sent by snail mail, after all).

If you’d rather buy legal things with your BitCoins then check out the exhaustive list of merchants on the official BitCoin wiki. You might also want to visit weusecoins.com, which has plenty of privacy and security advice for newbies interested in BitCoin.

peer to peer currency

If you are going to invest time, money and effort into BitCoin mining or trading then beware that much like any risky financial venture the markets can crash and lose you a lot of money. This has already happened once, with the value of a single BTC falling more than 30% in a day, eventually recovering by 15%.

Physical safety is also a concern, especially if you’re intending on buying a lot of mining rigs and leaving them on 24/7. BitCoin Mining Accidents is a tongue-in-cheek website dedicated to reports of injury from around the mining world. According to the website one anonymous miner now has a touch of permanent brain damage due to his mining operation, and he warns you not to make the same mistakes.

Oh, and your electricity bill 5 Ways To Reduce The Power Consumption Of Your Computer 5 Ways To Reduce The Power Consumption Of Your Computer Read More is bound to suffer too!

Conclusion

It remains to be seen whether BitCoins will be a total success, though early signs suggest that merchants are at least receptive to the new currency. The BitCoin wiki has a Myths page that runs through many misconceptions and sceptical statements, though it is naturally weighted towards the currency and thus biased.  Only time will tell if BitCoin really is a viable, sustainable and usable decentralised currency.

What do you think of BitCoin? What do you think of Silk Road? Tried mining your own? Massive fad that’ll burn out? The future of online trade? Everyone’s got an opinion, and yours belongs in the comments box below this post.

Image Credits: BitCoin Miner PC

  1. Emptythemagazine
    July 20, 2011 at 10:29 am

    I prefer to watch and see. It is sound in concept, but it's greatest threat is huamn stupidity; such as the belief that 'backing' is anything more than trust. You can trust the backer, be it a government, a bank, or the belief that a precious metal has intrinsic value. They all are lies. The only thing of value is what you do and who you know, and the goods or services exchanged. Bitcoin covers this. But, the fundamental cluelessness of the human race, the effort spent on misinformation and propaganda that the stupid people prefer to beleive in, will be their own undoing now as it has always been in the past.

  2. Devin Chopra
    June 24, 2011 at 11:34 am

    Its a novel concept, but like some famous currencies "flawed", in the sense, it is not backed by something tangible - the whole concept of a currency is in its intrinsic value which is backed by gold.

    Some countries are busy printing 'funny' money, which is not backed by equivalent gold - and many believe that such 'funny' money will eventually become worthless.

    It is the same with bitcoin, instead of printing it in mints, they are 'mining' it in computers with good GPUs.

    The speculators are having a fun day at the exchanges.

    Not to mention the illegal traders using it as the currency of choice - because of it being next to impossible to track.

    Now that politicians have stepped in, bitcoin may die a pre-mature death, - I don't see any politician accepting bribes in bitcoins soon :)

     

  3. james
    June 23, 2011 at 7:34 pm

    Bitcoin is not going under. It had a boom. Think of back in the early 1800's when America did not have a central banking system. It had big booms and big falls. I see bitcoins fallowing that trend. I am currently a miner but do not plan on using the currency. Too many shady merchants, out of the poor selection. There is a large variety of things to use bitcoins for, just not for my needs. I see it as a "short lived opportunity." I sell my bitcoins and have the funds put in paypal.

  4. Jon Bennett
    June 23, 2011 at 5:35 pm

    I don't see any real benefit to using BitCoins over normal currency. What is the advantage? Anonymity?

  5. EduFunToys
    June 23, 2011 at 4:02 pm

    Hmm...I smell opportunity.  Even if it's a short lived one.

  6. Saikat Basu
    June 23, 2011 at 3:51 pm

    I think it's just a matter of time before governments crackdown on it. The concept is very good and novel; eventually some form of it should evolve into something more permanent. Thanks for the detailed post, Tim. Wasn't aware of it till a few days back.

  7. Bob3000
    June 23, 2011 at 11:45 am

    Isn't BitCoin going under? See above post and http://www.wired.com/threatlevel/2011/06/gox/
     

  8. ptsuk
    June 23, 2011 at 3:02 am

    You should better highlight the risky nature and the volatility of the recent hacks and personal data and privacy issues of recent late, which is likely to kill off bitcoin for good.

    For Example:

    Bitcoin, "the first decentralized digital currency," suffered a personal data breach at the largest Bitcoin-to-real-money exchange, Mt. Gox, that caused values to drop from $17 to $0.01 per Bitcoin credit. The news was coupled with the Electronic Frontier Foundation's decision to stop accepting donations using the virtual currency, partially because, "We don't fully understand the complex legal issues involved with creating a new currency system."

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