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10 things you should know about Bitcoins
The world of Bitcoins, a virtual currency, has all the makings of a Hollywood thriller. There are people collecting the currency in hope of becoming millionaires. There are drugs dealers, illegal trades, CIA and FBI.
Then there’s a mysterious genius who developed the system that no one has been able to hack until now. And the world is trying to trace the creator but he remains elusive.
All this euphoria for Bitcoin could soon be heading to India, thanks to the large techie population, according to the international media. Forbes, for example, says that ‘India could be the next booming market for Bitcoins’.
There’s a Global Bitcoin Conference this week in Bangalore to promote the digital currency.
The Wall Street Journal reported that India ranks in the top thirty Bitcoin-using countries. A TechCruch report said that there are 30,000 Bitcoin users in India at least according to community estimates. The actual number could be far more.
Regulators and enforcement agencies in India, and world over, are already worried about this virtual currency, as they fear that it can be used for money laundering and other illegal activity. Indian regulators are planning to soon issue warning (pubic advisory) against buying and selling Bitcoins.
Wondering what the whole buzz about Bitcoins is? Want to know more? Here are all the answers to the questions that you may have.
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10 things you should know about Bitcoins
What exactly is Bitcoin?
Bitcoin is a virtual currency. It is a revolutionary system as it is not controlled by a person, organisation or any government.
As of today very few shops, establishment, and organisations accept it; and most people use it for trading purpose only.
Those supporting Bitcoin say that is the future of currency.
Currently, to buy 1 Bitcoin, you will need to spend about $922. This is around Rs 57,000.
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10 things you should know about Bitcoins
Who founded Bitcoins?
This question has puzzled the world. Little is known until now except that a person called Satoshi Nakamoto conceptualised, designed and developed Bitcoins. But it turned out to be a pseudonym.
Nakamoto claimed to be an individual male at the age of 37 and living in Japan, which was met with great scepticism due to his use of English and his Bitcoin software not being documented nor labelled in Japanese.
British formatting in his written work implies Nakamoto is of British origin. However, he also sometimes used American spelling, which may indicate that he was intentionally trying to mask his writing style, or that he is more than one person.
According to an article in Wired, someone on an internet chat pointed out that the name can be combination of four corporations - SAmsung, TOSHIba, NAKAmichi, and MOTOrola.
The New Yorker and Fast Company attempted to investigate into the real identity of Satoshi Nakamoto but none of them were successful.
His involvement in the original Bitcoin software does not appear to extend past mid-2010.
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10 things you should know about Bitcoins
If it is not controlled by any one organisation, government, institution or person, who issues the currency?
With paper money, a government decides when to print and distribute money. Bitcoin doesn't have a central government.
You can either say that Bitcoins are discovered or they are rewarded. New Bitcoins come into the system by a process called as mining.
Those seeking Bitcoins use special software to solve math problems and they are rewarded a certain number of Bitcoins in exchange. This provides a smart way to issue the currency, according to bitcoinmining.com.
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10 things you should know about Bitcoins
Is it that simple - let the computer solve maths problems and get Bitcoins in return?
Yes and no. In concept it is that simple but the working of the system is complex. You will need to understand how it works.
Once you decide you want to ‘find’ new Bitcoins, you will need an extremely powerful computer and software (like BFGMINER or CGMINER) that solves maths problems to get the new Bitcoins.
Once you start running the programme, you become part of the Bitcoin community and you will be called as a miner.
In order to discover the Bitcoins, the software first collets records of Bitcoins transactions (called as blocks) that are being carried out and then strings them in one master database (called as block chain) in a particular order.
If you successfully string the information in the master database, you will be rewarded Bitcoins. When you are solving maths problems, you are actually trying to string together blocks in the block chains.
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10 things you should know about Bitcoins
How difficult is it to get Bitcoins by mining?
The total supply of Bitcoin is limited, which means it’s a currency with a finite supply. As of today, there will be no more new Bitcoins coming into the system after 2140 and the total Bitcoins in supply will be about 21 million (2.1 crores).
When Bitcoin started in the year 2009, the miners were rewarded 50 Bitcoins for stringing together the information in the database. This value halves every four years. In 2013, miners get 25 Bitcoins. It will fall to 12.5 Bitcoins in 2017 and so on. This process ensures that Bitcoins supply is regulated.
The genius behind the currency has designed the system in such a manner that the new Bitcoins come into the system every 10 minutes.
It is true that power of computers to process go up every year. This means, powerful computers can find new Bitcoins faster, right? Logically yes but the system is designed in such a manner that the problems get more difficult to solve every time new currency is awarded, and it’s supposed to maintain the average time of new Bitcoins coming into the system at 10 minutes while the supply is reduced.
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10 things you should know about Bitcoins
Is mining the only way to get Bitcoins?
No. Mining is probably the hardest way to get Bitcoins. The simplest way is to buy the currency through Bitcoin exchanges. There are numerous exchanges throughout the world.
One of the most famous is Mt.Gox based in Japan. You can look for a local buyer and seller but do your research thoroughly before parting with your money.
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10 things you should know about Bitcoins
It sounds like a great concept. But why are regulators and enforcement agencies worried about Bitcoins?
Bitcoins have public record of each and every transaction. This database, however, does not carry names. It carries a unique digital identity of the buyer, seller and merchant.
World over, governments are worried because the virtual currency can be used for illegal purposes such as funding terrorism or money laundering.
In fact, FBI closed down a website called Silk Road that sold illegal drugs on internet. The website accepted payments in Bitcoins that made the case difficult to crack.
In first week of December, China's central bank warned that financial institutions should not trade Bitcoin, saying that while it does not yet pose a threat to China's financial system, it carries risks.
Since the beginning, many have called the currency as a Ponzi scheme. One more reason why Indian government is worried about Bitcoins it that if it goes bust, investors would lose money.
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10 things you should know about Bitcoins
How do you buy and sell Bitcoins?
Whether you are mining Bitcoins or planning to buy them, you will need a digital wallet to store the currency.
You can sign up for a web-based wallet where your currency is stored online with a service provider (Blockchain, for example), or you can keep it in your computer through software (such as Armory and Bitcoin-qt) or even in your smartphone via an app.
There’s one more option known as a "paper wallet," where you print out encryption keys and store them in a safe place, such as a safe deposit box.
Next, you have to find an exchange and trade currency on it. Currently, to buy 1 Bitcoin, you will need to spend about Rs 57,000 (around $922).
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10 things you should know about Bitcoins
You have Bitcoins in your ‘wallet’. What do you do next?
You can keep them safe and sell them for a profit. More than 90 per cent people buy the currency for speculative trading.
You can also buy stuff using Bitcoins. The list of merchants accepting Bitcoins are on a rise. According to TechCrunch, a hair salon in Chandigarh has started accepting Bitcoins as mode of payment for services it offers.
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10 things you should know about Bitcoins
Should you buy Bitcoins?
You would want to buy Bitcoin for two reasons - either speculate on its price or make purchases with it. The regular currency issued by the government is a better option in both the cases.
There have been incidents where hackers stole Bitcoin from owners’ computers. Though there is a public record, it does not have data on individuals. And though such transactions take place via an exchange, these cannot be reversed.
Secondly, Bitcoins are highly volatile. Their value can suddenly crash. When in the first week of December China discouraged use of Bitcoins in the country, the value of Bitcoin dipped.