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<firstimage=”//static.makeuseof.com/wp-content/uploads/2011/06/intro6.jpg”>Earlier 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 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.
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.
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.
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.
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 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 [No Longer Available]. You might also want to visit weusecoins.com, which has plenty of for newbies interested in BitCoin.
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 is bound to suffer too!
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