17 CardsEDITED BY 2015-11-03 21:07:00 -0500 What is Bitcoin?Bitcoin is a new kind of global payment network.Like MasterCard or PayPal, it allows money to be transmitted electronically.But Bitcoin is different from these conventional payment networks in two important ways.First, the Bitcoin network is fully decentralized.The MasterCard network is owned and operated by MasterCard Inc.But there is no Bitcoin Inc.Instead, thousands of computers around the world process Bitcoin transactions in a peer-to-peer fashion.Second, MasterCard and PayPal payments are based on conventional currencies such as the US dollar.In contrast, the Bitcoin network has its own unit of value, which is called the bitcoin.The value of one bitcoin fluctuates against other currencies in the same way the euro’s value fluctuates against the dollar.In November 2015, one bitcoin is worth around $400, and all bitcoins in existence are worth around $6 billion.In 2013, the skyrocketing value of Bitcoins — from $13 in January to more than $1,000 in early December — pushed it into the mainstream.

Venture capitalists invested $95 million in Bitcoin-based startups in 2013, $347 million in 2014, and more than $450 million so far in 2015.But there hasn't been much sign that Bitcoin is revolutionizing the financial industry the way optimists hoped it would three years ago.Use of the Bitcoin network has grown only slowly.Almost seven years after the network was created, there still aren't any good examples of Bitcoin applications that are accessible and useful to mainstream users.What's the case for optimism about bitcoin?Bitcoin doesn’t have very much to offer ordinary users right now.But many technologists believe that Bitcoin could be the foundation for innovative financial software and services in the future.That’s because Bitcoin is the world’s first truly open financial network.MasterCard and PayPal place limits on who can build applications using their platforms and what those applications can do.The Bitcoin network has no such limitations.This openness could lead to a fast pace of innovation in the coming years.

The internet provides a good point of comparison.In the 1980s, the internet was complicated and clunky, with limited functionality.But the internet was an open platform.And, over time, innovators used that platform to build new products with broader and broader consumer appeal.Something similar could happen with Bitcoin.Venture capitalists are pouring hundreds of millions of dollars into Bitcoin-based startups.Bitcoin boosters believe that some of these firms will become the Google and Facebook of the financial sector and revolutionize how financial transactions work.What will people be able to do with Bitcoin that they can’t do with conventional financial systems?It’s hard to predict what path future innovations might take.But here are a few examples to illustrate the kinds of applications that might make Bitcoin useful.One is international money transfers.Right now, companies like Western Union and MoneyGram charge fees as high as 8 percent to send money from one country to another, and it can take as long as three business days for transactions to clear.

New Bitcoin-based entrants could easily compete on price and speed.Bitcoin could also enable improvements in payment security.The conventional credit card network essentially works on the honor system, with fraud-detection happening after the fact.sell bitcoins krakenBitcoin could serve as the foundation for payment systems that deal with fraud in a more sophisticated way.bitcoin price history in inrFor example, a Bitcoin-based payment app could ask the user to approve a transaction on his or her smartphone before it goes through.jones gear bitcoinFinally, Bitcoin could be a lifesaver for people in developing countries with dysfunctional banking systems.bitcoin euro sepa

The conventional banking system is geographically segregated, with people in each country expected to use that country’s banking system.But the Bitcoin network is global.ios bitcoin faucetSo consumers in low-income countries who are worried that local banks will mismanage their funds could use Bitcoin-based financial services in a developed country such as Canada, Switzerland, or South Korea.bitcoin hourly chartWho is in charge of Bitcoin?bitcoin inflation hedgeNo one is in charge of Bitcoin.litecoin fast walletThe Bitcoin network is based on the consensus of everyone who participates in it.bitcoin verotusThe rules of the Bitcoin game give everyone on the network an incentive to follow the rules that were established by Bitcoin’s founder.

That founder called himself Satoshi Nakamoto, but that's widely believed to be a pseudonym.Nakamoto introduced the ideas behind Bitcoin in a 2008 paper and launched the Bitcoin network in 2009.The technology began to gain mainstream attention in 2011, when the value of one bitcoin reached parity with the dollar.That same year, Nakamoto stopped actively participating in the Bitcoin community.He turned responsibility for the Bitcoin software over to another developer, Gavin Andresen, who has been the lead Bitcoin developer ever since.Ultimately, the identity of Bitcoin's creator isn't important to Bitcoin's success or failure, because Satoshi Nakamoto probably couldn't control Bitcoin's future development even if he wanted to.Today, the official Bitcoin software is maintained as an open-source project by Andresen.But not everyone on the Bitcoin network uses this software.Others have developed independent Bitcoin implementations, and people are free to modify the official Bitcoin client for their own purposes.

Andresen is an employee of the Bitcoin Foundation, a non-profit organization that promotes Bitcoin.But while the foundation often represents the views of the Bitcoin community, it doesn’t have any formal authority over the Bitcoin network.How does the Bitcoin network process transactions?The heart of the Bitcoin network is a shared, public record of Bitcoin transactions known as the blockchain.Every Bitcoin transaction that has ever occurred is listed in the blockchain, and every node (i.e.computer) in the Bitcoin network has its own copy.The blockchain is organized as a list of blocks, each of which contains transactions that occurred during a particular period of time.When a Bitcoin user wants to make a transaction, she announces the transaction — the sender, recipient, amount, and other information — to the network.Nodes share these announcements in peer-to-peer fashion so that everyone soon knows about them.Nodes check that each transaction complies with the rules of the Bitcoin system, combine all the valid transactions they have heard about into a block, and then work to solve a difficult mathematical problem that takes this block as an input.

The first node to solve the problem announces the solution to the others.The other nodes verify that the problem was solved correctly.If it was, then they put the block at the end of their copy of the blockchain.Once most nodes have done this, the block is considered to be an official part of the blockchain, and transactions in that block are considered final.Why does the Bitcoin network use such a crazy scheme to process transactions?The Bitcoin network's process for maintaining the blockchain, the shared record of all Bitcoin transactions, might seem unnecessarily complex.But it accomplishes something that no other payment network has accomplished before: guaranteeing the integrity of the system without a central authority.Until Bitcoin came along, computer scientists working on digital cash were bedeviled by the double-spending problem: how to ensure that the owner of a digital coin didn't defraud the system by spending it twice.Before Bitcoin, the only known way to solve the problem was for a central authority to approve a transaction before it was considered final.

Bitcoin is the first electronic system to solve the double-spending problem in a completely decentralized fashion.If someone tries to spend the same bitcoin twice, the network refuses to add the second transaction to the blockchain.For this scheme to be secure, it has to be extremely difficult to tamper with the blockchain.Otherwise, someone could spend a coin, delete that transaction from the blockchain, and then spend the coin again.The Bitcoin network makes that really hard to do.Suppose that two different nodes try to add new blocks to the blockchain simultaneously.Which node will be accepted by the network?The winner is determined through a computational race.Each node accepts the block it hears about first and then begins working on the next block.Whichever node solves the next round of the computational race not only gets to add a new block of its own, it also gets to choose which preceding block will be considered valid.If there's still not a consensus after the second round, the process repeats, with the first node to find a third solution getting to choose the winner of the previous two rounds.

The probability of solving a block is proportional to computing power, so the Bitcoin network essentially operates on a principle of one computing cycle, one vote.A malicious party who wants to tamper with the blockchain would need to obtain a majority of the network's computing power.Only then could it introduce a bogus block and then win the next few computational races to ensure that its block is eventually recognized by the rest of the network.And as the network has grown, that has become very, very difficult to do.Right now, nodes in the Bitcoin network are performing more than 300 million billion mathematical operations per second.If you wanted to tamper with the blockchain in order to spend your bitcoins twice, you'd have to acquire more computing power than that.What incentive do people have to help process Bitcoin transactions?Bitcoin’s rules allow the person who adds a block to the blockchain to award some bitcoins to himself.Currently, the creator of each block gets 25 bitcoins, worth around $10,000.

Because this is how new bitcoins are introduced to the system, the process is known as mining and the participants are known as miners.Bitcoin miners compete for this lucrative honor by racing to solve a difficult mathematical problem.The difficulty of the problem adjusts automatically to ensure that it is solved (and a new block created) at an average rate of once every 10 minutes.The size of the reward miners get for creating new blocks will halve approximately every 4 years: in 2016, the block reward will fall from 25 bitcoins to 12.5 bitcoins.As a result, there will never be more than 21 million bitcoins.Miners are rewarded in another way too: Bitcoin users can attach a transaction fee to a payment as an incentive for miners to process it quickly.As the volume of Bitcoin transactions grows, these fees should gradually replace the declining per-block reward.How do people get bitcoins?Bitcoins are entries in the shared public ledger called the blockchain.When you receive bitcoins, you get a private key, like a password, that allows you to transfer them to someone else.

New bitcoins are created through a process called mining.But as the Bitcoin network has grown, mining has become too technologically complex to be practical for new users.So for most people the better way to get Bitcoins is to purchase them from others who already have them.There are a number of ways to do this.There are Bitcoin exchanges, such as the European company Bitstamp, that match Bitcoin buyers and sellers.There are also user-friendly services such as Coinbase that will sell bitcoins to customers at the current exchange rate. helps Bitcoin users find others in their local area interested in making face-to-face Bitcoin trades.Finally, in 2013 we saw the emergence of Bitcoin ATMs, which buy and sell bitcoins for cash.As of May 2015 there are around 400 Bitcoin ATMs around the world.Here's a video of someone purchasing Bitcoins at an ATM: People have made a lot of money investing in bitcoins.Should I buy some?Bitcoin is an immature technology and holding it is extremely risky.

Bitcoin’s value is highly volatile.If you buy at the wrong time, you could lose as much as 80 percent of your investment in a matter of days.Even worse, bitcoins are difficult to store securely.You can save bitcoins using an online wallet service, but this type of service hasn’t had a great security record.Several wallet firms have gotten hacked or gone out of business, taking their customers’ deposits with them.You can also store bitcoins on your own hard drive, but then you’re vulnerable to hackers, hard drive failures, and other technical glitches.So unless you have significant technical expertise and a healthy appetite for risk, you should probably leave this to the pros.Is volatility going to be a fatal problem for Bitcoin?It’s true that Bitcoin’s value is volatile, and that creates headaches for users.But experience so far suggests that it might be a manageable problem.The Bitcoin startup Bitpay provides a good example.The company helps thousands of merchants accept Bitcoin payments for their goods and services.

Bitpay customers price their products in conventional currencies such as the dollar.When a customer makes a purchase, Bitpay automatically converts the transaction to an equivalent Bitcoin price.When Bitpay receives the payment, it can immediately convert the funds to dollars and deposit them in the merchant’s conventional bank account.Hence, Bitcoin’s volatility isn’t a problem for Bitpay’s customers.Insulation against price fluctuations is part of the value Bitpay offers to merchants.Bitcoin’s volatility will be a serious problem for anyone who wants to make financial transactions priced in bitcoin.But there are a lot of possible applications that can use Bitcoin as the medium of exchange while prices are set in a conventional currency such as the dollar.Isn’t Bitcoin just a currency for criminals?Over the years, a number of anonymous websites have sprung up to allow users to use bitcoins to purchase drugs and other illicit products.The most famous of these was Silk Road, which was shut down in 2013.

In the years since then, other marketplaces have sprung up to replace it.One of these sites, called Evolution, became popular in 2014, but then seemed to disappear — taking a lot of customers bitcoins with it — in March 2015.Bitcoin is attractive to some criminals because it is easier to use anonymously than conventional financial networks.Yet it’s important to remember that old-fashioned cash remains the most popular way to buy drugs.Meanwhile, the number of legitimate companies accepting Bitcoin has grown rapidly in the last couple of years.By the end of 2014, the Bitcoin payment processor BitPay was helping more than 100,000 merchants accept bitcoins — up from 10,000 in September 2013.Companies that accept bitcoins include Microsoft, Dell, Expedia,  and Richard Branson’s space travel company, Virgin Galactic.Bitcoin is also used to provide tips on Reddit.What’s up with Bitcoin competitors such as Litecoin and Dogecoin?Bitcoin is the first cryptocurrency: a payment network based entirely on cryptographic algorithms rather than trust in a centralized institution.

But because Bitcoin is an open-source project, it’s not hard to spin off competitors based on the same basic concepts.Today there are dozens of them, commonly known as "altcoins."One of the first, and still the most popular, is Litecoin.It boasts a shorter transaction time (2.5 minutes compared to Bitcoin’s 10) and a different algorithm for mining that makes it easier for ordinary users to participate and earn coins.In November 2015, the value of all litecoins in circulation is around $200 million.Other relatively popular (but still tiny) currencies include privacy-oriented Dash and Dogecoin, a currency based on a silly internet meme.These altcoins are worth less than litecoins and a lot less than bitcoins.Indeed, the value of all bitcoins in circulation is around 9 times the value of the top 100 altcoins put together.Bitcoin is by far the most important cryptocurrency.Isn’t Bitcoin’s fixed money supply going to create deflationary problems?Economics teaches that an excessively tight money supply can cause economic problems.

But the harms from deflationary monetary policy mostly occur when wages, rents, mortgages, and other long-term financial arrangements are based on a currency such as the dollar.In economics jargon: deflation is harmful when a currency is used as an an economy’s unit of account.But hardly anyone uses Bitcoin this way.Most merchants who accept bitcoins price their goods in a conventional currency, converting to an equivalent number of bitcoins at the time of sale.Even the Bitcoin Foundation, which pays its staff in bitcoins, sets salaries in dollars and converts peoples’ paychecks to bitcoins on payday.Is using Bitcoin a good way to fight inflation?In recent years the dollar has had an inflation rate of around 2 percent, and it has been higher in the past.Some have advocated using Bitcoin as an alternative to inflationary fiat currency.But Bitcoin is not a good choice for preserving the value of your cash.Bitcoin’s value is extremely volatile.While Bitcoin’s value has generally increased in the last few years, it has also experienced dramatic declines in value.

For example, the currency lost more than half of its value in 2014.Hence, Bitcoin should be seen as a high-risk investment like a technology stock, not as a stable store of value.If you want a hedge against inflation, the United States Treasury offers inflation-protected bonds for just this purpose.Does Bitcoin have a security problem?Bitcoin transactions are irreversible.Once bitcoins are sent, there’s no way to get them back, even if the transaction later proves to be fraudulent.This has created headaches for a lot of Bitcoin users.For example, there is now malware circulating on the internet that scans peoples’ hard drives looking for bitcoins.If your computer is infected with this kind of malware and you have unencrypted bitcoins stored on it, your bitcoins will be gone forever.Fortunately, bitcoin owners can take countermeasures.One common strategy is known as "cold storage," in which bitcoins are stored somewhere that isn’t connected to the internet.Bitcoin developers are also working on a technology called multi-signature transactions, which requires multiple people to approve a transaction before it can be submitted to the Bitcoin network.

For Bitcoin to succeed as a mass-market product, Bitcoin-based business will have to develop best practices for secure handling of bitcoins — for now holding large quantities of bitcoins is quite risky, similar to carrying around a lot of cash.What is the future of Bitcoin?We don't know how the Bitcoin economy will grow in the coming years, but there are two broad theories.The optimistic view is that over the next decade or two, Bitcoin will have the same kind of transformative effect on the financial system as the internet had in the telecommunications industry during the 1990s and 2000s.Bitcoin supporters argue that the openness of the Bitcoin platform will allow a wide variety of innovators to provide financial products and services, leading to faster, cheaper, and more reliable payments, and perhaps new types of financial services that aren't feasible using existing financial networks.The pessimistic view sees Bitcoin as being of little value, and predicts that it will have only a marginal impact on the global financial system.