Following on from the last ‘blog about Bitcoins, I spoke to a Bitcoin user and enthusiast to get the low down on acquiring, using and losing Bitcoins.
Getting your hands on a Bitcoin is easier now than it was when they were first launched in 2009.
New coins are ‘mined’ by cyber-prospectors armed with computers and algorithm cracking software programmes, instead of tin pans and shovels. A miner with enough computing power sets a computer to solve a series of complex puzzles which surround each Bitcoin. Once all the codes are cracked, the user receives one freshly mined Bitcoin in his wallet. So far, miners have found around half of the 21m Bitcoins which will ever be produced. Their labours have created a thriving market for the sale and exchange of Bitcoins, which is good news for other potential Bitcoin users.
Although the mining process is complicated, the exchange of value is simple once you have some Bitcoins in your wallet. Virtual currency exchanges such as Mt Gox and Crypto-exchange were set up sell Bitcoins, in the same way a Forex dealer buys and sells currencies, charging a percentage of each transaction as a fee. Individual sellers will also trade Bitcoins for other currencies.
How to use a Bitcoin
Apart from fancy cars, Bitcoins can be used to buy an increasing number of goods. Real estate agents in Australia and Canada have started to accept Bitcoins for their services. Some individual online sellers are offering to accept Bitcoins for property sales without an agent. In theory, this transaction could go ahead without the intervention of government however there could be national tax implications which potential buyers should investigate.
In Argentina, Brazil and Peru Bitcoins are used to rent cars and pay hotel bills. Numerous Latin American countries have expressed interest in installing Bitcoin ATMs, cash machines which accept the national currency and put crypto-currency into your virtual wallet. There is a chance that Bitcoins could subvert US$ as the alternative currency of choice. As with cash, if it can be used to buy legal goods, it can be used to buy products on the black market.
Silk Road is a virtual market place which is famous for the anonymous trade in Bitcoins for drugs, tools for hacking computer programmes and other illegal as well as legal products. It can only be accessed via a web browser which makes the user’s IP address anonymous, so transactions cannot be traced. Silk Road’s only physical identifier is a piece of code on a server which probably changes regularly enough to keep the hackers at bay.
The market place’s estimated annual turnover of USD$20m makes it a healthy enterprise which is the target of cyber-attacks. Buyers and sellers are still taking huge risks to smuggle drugs and receive the deliveries, which is where law enforcement could try to intercept sales. The only difference between buying on Silk Road or buying from your local drug dealer that you’ll never have to meet in person to make the handover.
How to lose a Bitcoin
Bitcoins are essentially strings of highly valuable code which means hackers and cyber crooks all over the Internet are dedicating a significant amount of effort to stealing Bitcoins from users’ virtual wallets. Backing up your computer hard drive will download the security updates issued by the Bitcoin Foundation to protect your wealth. Storing the Bitcoins off line on a USB stick removes the online threat but increases the actual theft or loss risks. Losing your offline Bitcoins is the same as losing your wallet. Crucially, users should ensure they have an updated block chain which will maintain the coin’s currency and the universal record of transactions. There is also the risk of hackers attacking Bitcoin exchange, which accept fiat currency for Bitcoins. The Australian Crypto Xchange was the victim of a large scale hack which lost money stored for clients and was closed down in November 2012.
As an observer, I’d be interested to hear from banking professionals about how and if they think Bitcoin is a real threat to fiat currency and mainstream banking. Please do comment.
The SEC Shows Why Bitcoin Is Doomed – Bloomberg (bloomberg.com)
Betting on Bitcoins: A New Way To Pay, or Just Here Today? (simplisafe.com)