What is Bitcoin?

By Kim Bo-eun

Bitcoin is a virtual currency as well as a peer-to-peer payment network with no central authority or middlemen. It gained increasing attention as a new, convenient currency powered by its users.

Where are they used?

A growing number of offline and online stores, mostly in North America and Europe, now accept Bitcoins as a currency.

While Bitcoins are a form of currency with which to purchase goods or services, many have purchased the currency for speculative purposes.

How are they created and obtained?

The Bitcoin protocol was created in 2009 by an unknown programmer operating under the pseudonym Satoshi Nakamoto.

The software was designed so that people could obtain Bitcoins by solving algorithms on a PC. This process is referred to as “mining,” and people pursuing Bitcoins this way are called “miners.”

There is a fixed number of Bitcoins — 21 million — that can be mined. Currently, 12 million Bitcoins are in circulation, and 9 million are yet to be mined. The current maximum mineable coins are 25 per 10 minutes. The last Bitcoin is expected to be mined in 2140.

Bitcoins can also be obtained from online exchange markets, where they can be traded with existing local currencies. ATMs where people can exchange cash for Bitcoins have also been appearing.

How do they work?

The currency can be transferred between individuals’ digital wallets through the Internet or mobile apps. Bitcoins are stored in digital wallets in a cloud, on a user’s computer or mobile device. A digital wallet is obtained by installing a free, open-source software that generates a Bitcoin address.

Transactions occur anonymously, but the Bitcoin network shares a public ledger called the “block chain,” where all transactions are recorded and open for view. However, the anonymous nature of transactions leaves room for illegal activities such as drug dealing and money laundering.

What are the pros and cons?

Bitcoins are not issued, controlled or regulated by a central body, enabling freedom from political interference. And with no a mediator such as a bank or credit card firm, individual transactions transcend borders and commission fees are kept at a minimum.

However, security vulnerability and price volatility have been cited as major drawbacks of the currency. The recent shutdown of MtGox, once the world’s largest Bitcoin exchange, due to theft arising from security loopholes, demonstrates that technical issues remain. A number of hacking cases have also occurred at other exchanges.

The price of the Bitcoin fluctuates with such technical issues; Bitcoin prices fell after MtGox halted withdrawals earlier this year. The Bitcoin’s lack of intrinsic value caused its trading price to spiral up from $13 in January to some $1,200 in late November last year when speculators flocked to purchase the currency.