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Bitcoin: What is it and how does it interact with Networks?

28 · AUG ·2014

What is Bitcoin? Some have summarised it as the first decentralised digital currency, others the most simplistic way for online transactions to be carried out. Then there are those that have gone so far as to claim that it’s the future of our financial platform to which we will purchase goods online.

It's by no means a stable currency, in extreme cases seeing fluctuations of 80%. In its early stages it attracted the investment of the famous Winklevoss twins, who wisely invested $11 million of their Facebook payoff into Bitcoin. Though it's had some hiccups in its time, its momentum is still moving decidedly forward. As more large corporations like that of Virgin Galactic accept it as a payment of product or service, Bitcoin becomes an increasingly desirable currency to have in your pocket. In case you were wondering, yes that does mean that you can technically get to space with Bitcoin as payment of service.

In its construct, Bitcoin plays on the simplest form of financial transfer: peer to peer. It cuts out the middle man of the banks whose clearing houses add ever increasing fees to online purchases. Peer to peer is by no means as simple as it implies, however what Bitcoin have cottoned onto is that through constructing a resilient network of miners that verify transactions as well as being able to generate new Bitcoins for themselves, they have the ability to maintain a perpetually moving form of online purchasing with a somewhat stable inflation rate.

The way Bitcoin interacts with networks is all down to the miners doing their job to verify transactions as they occur. It's both profitable for the miners and Bitcoin itself, as it sustains one of its most important factors: minimal transaction fees. It can be argued that it's a bit of a risky system, however it's security in transaction verification is assured by Bitcoins complex system that prevents people from tampering with the 'chain' of transactions.

However, recent reports have suggested that an imbalance could form between the amount of hardware being created in order to mine Bitcoins and the amount of Bitcoins that users are actually spending. This means that the price of Bitcoins could decrease in the near future, especially when you consider that their price has remained generally stable over the past few months while mining hardware has doubled.

Discussing the issue, CitiFX’s Steven Englander said: “This uninspired demand side may interact with the rising costs of mining, which has become a very specialized and capital intensive industry. For now we have miners looking to sell and not much of anyone looking to buy.” To make matters worse a recent survey conducted by the Massachusetts Division of Banks (MDB) and the Conference of State Bank Supervisors (CSBS) revealed that 65% of US consumers are ‘unlikely’ to buy Bitcoin.

Financial regulators are also concerned over the use of Bitcoin as a form of payment due to the fact it is not controlled by current markets and therefore can, and has, been used for illegal purposes. For example, back in June hackers used GameOver Zeus and Cryptolocker malware to hold users’ computers ransom until they were paid in Bitcoin.

Bitcoin opens up an immense amount of possibilities for business and consumers alike. It relies upon credibility and acceptance on a global scale, and even though the price of Bitcoins is still likely to fluctuate, it could well increase in the future. In fact, if you invested in Bitcoin in the first stages of its origin then you could now be sitting on a small fortune. For the rest of us we can only utilise this currency for what it currently is: an innovative yet somewhat unstable tool that enables low cost online purchasing.

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Posted by Sanita Karra