Bitcoin has become frequently talked about in the financial media. Despite this the general public is still relatively under informed when it comes to this digital currency.
Criticism of Bitcoin overwhelmingly comes from the uninformed, while support often comes from the technologically competent. Paul Graham, a prominent venture capitalist, refers to Bitcoin as a paradigm shift that is unfortunately “derided as a toy, just like microcomputers.” Accomplished venture capitalist and entrepreneur Marc Andreessen has written that the potential of bitcoin today is analogous to personal computers in 1975 and the Internet in 1993. Today, it is the preoccupation of “nerds.” Tomorrow, it can change the life of everyone.
So, what is Bitcoin?
Bitcoin is a virtual currency. As with all currencies, they function as a mean of exchange and a store of value.
As a mean of exchange, you can use them to purchase goods and services just like you will with your physical money. (The actual process is somewhat different but we will come to that in a while).
As a store of value, we can accumulate more bitcoins than we require for now and stash them away in our virtual wallet. One bitcoin in your virtual wallet remains there until you withdraw or spend it just like your one dollar remains in your bank account remains until you withdraw or spend it.
How is it different from physical currencies such as the US dollar or the Singapore dollar?
Currencies are backed up by the country issuing them. As for Bitcoin, the payments work peer-to-peer without a central repository or single administrator, which has led the US Treasury to call bitcoin a decentralized virtual currency.
For example, MacDonalds is legally bounded to accept my dollar notes in exchange for their fast food. On the other hand, if I insist on paying for my latte with two bananas, they have every right to refuse me my drink.
Think of the Bitcoin currency as Gold in virtual form. No nation is on the gold standard now, meaning there is no fixed price for gold anywhere in the world at this time. The reason why Gold (and Bitcoin) is worth a certain value is because of the laws of demand and supply, which means it is subject to high speculative risks and manipulation.
What about the value of the currency?
Governments all over the world intervene in the money markets with one over-ridding aim – that is to keep their currencies stable. When supply is more than demand, the Central Bank might step in to reduce excess liquidity from the markets to prevent the currency from rapidly losing value and vice versa.
This stability creates confidence in the minds of consumers and businesses utilising the currency.
Because there is no Central Bank doing the same for Bitcoin, the value of Bitcoin is left entirely to market forces (and speculative activity). Unfortunately this caused massive fluctuations in the value of the currency.
How many bitcoins are there in the world?
Just like commodities, the supply of bitcoins is limited in existence. Currently, there are roughly about 13 million BTC in existence. A pre-determined schedule allows that and the total number of bitcoins will eventually converge to 21million in the year 2140.
How does one mine a virtual currency?
Like traditional gold miners who exert physical labour to extract ore from the earth, mining for the virtual currency involves using computers to perform complex data processing activities.
Miners are rewarded for their efforts with blocks of bitcoins after their solutions are submitted to the Bitcoin network. At this moment, one block is worth 25 bitcoins and that number will halve approximately every four years.
So where can I get my bitcoins from?
There are basically two ways to accumulate bitcoins. You can mine them by connecting your pc to a network, running it 24/7 and dedicating computing technology to the solving of complex mathematical problems, or you could buy bitcoins with actual money. With how competitive bitcoin mining has become, with new and improved application-specific integrated circuits (ASIC) being developed for mining, it is highly improbable that any retail consumer would mine bitcoins.
Where does my bitcoins end up after I buy them?
Before you can even buy bitcoins, you need an address to store them. Think of it as your email address or even as a P.O box by which others are able to send bitcoins to. Your address would look like this.
In order to create an address you will need a virtual wallet to manage and access your address. Two leading Bitcoin wallet sites are Coinbase and Blockchain.info. Opening an account with either is simple.
Bitcoin is a virtual currency and the transactions are only tracked by a virtual wallet statement. Not only so, the latest transactions are also visible on the website as seen in the image.
Why do I even want to purchase bitcoins?
Bitcoins are so popular as they are able to bypass the traditional mode of payment via a bank. In fact, you can actually be the bank yourself. (More on that later). So the benefits can be subdivided into merchant and customer interests.
For the merchant, the transaction fees are up to three times lower than with credit cards ( See: https://bitpay.com/pricing )
For the customer, he has to note that by holding a balance of bitcoins from the time you acquire them to the time you pay, Bitcoins generally go up in value. Also, because of how many transactions there can be, with each only taking 0 to 30 minutes, not two or three days, open 24/7, you can function like a bank. Then, one other point is that for digital goods, you don’t have to give your “billing” address, which is often your home. Thus, you don’t have to worry about a company having your credit card info on file.
Of course, one has to admit that the concept of virtual currency is still very novel. While they share the same functions as physical currencies, many aspects are radically different. Hence we cannot measure Bitcoin with the same yardstick used on physical currencies.
Traditional currencies are backed by Governments and nations (or a group of nations in the case of the Euro). The strength and stability and security is tied to that of the host nation. A virtual currency like Bitcoin bypasses this issue altogether, thus the tradeoff between security and price is formed.
How can I purchase bitcoins?
There are three avenues. Bitcoins can be purchased on a Bitcoin exchange, through a third party broker and most recently, via a Bitcoin ATM.
A Bitcoin exchange functions like your broker and stock exchange combined. Buyers and sellers come together and the exchange matches the best prices for both and facilitates the transaction, taking a small commission in the process.
To participate, you would require an account which you could sign up for (easy and painless), and complete a verification process that involves sending copies of your identification (passport, NRIC or driving license) and proof of address (slightly more complicated). Once you are verified, the buying and selling is actually quite simple.
You could also choose to purchase bitcoins through a third party broker. Coinrepublic is rather established and a good source of information on Bitcoin. Users generally leave good feedback and the purchasing process is stated clearly and made easy to understand. However, their fees of 5% per transaction tend to be on the high side compared to itBit at 0.7%.
Now that I have bitcoins in my account, what can I do with them?
The list of merchants accepting bitcoins is growing everyday.
Amazon.com, the granddaddy retailer of the western internet world has recently jumped on the bandwagon and started accepting the vitual currency as payment. Other notable ways to spend your bitcoins in cyberspace include WordPress and eGifter.
Major retailers in the US such as GAP, Sears and JC Penny have also started to accept payment in bitcoins. Even sites like Okcupid and Expedia are bitcoin integrated now, so if anything, the trend for Bitcoins is booming , not gloomy unlike how others make it out to be.
So how the exchange of bitcoins can be done is as such: you either do it through the QR code generated by the virtual wallet at the point of sale or through email invoice. The image below, from Coinbase.com, explains the Point of Sale concept.
How can I track the value of the Bitcoins?
The Bitcoin value changes rather quickly with time, so sites like Coinbase have created charts monitoring its changes with time. Below is an image from coinbase:
Are Bitcoin exchanges safe?
With the suspension of Mt Gox”s website, a bitcoin exchange based in Japan, a hoohaa ensued as 850,000 Bitcoins which had the equivalent value of US$450 million went missing. Since that time 200,000 of these Bitcoins have been found but the rest remain missing.
While it has allowed for most people to criticise Bitcoin, it recovered rather quickly. It’s important to note that the dangers in the system actually lay with Mt Gox which was insecure and poorly managed, rather than than Bitcoin itself.
Is Bitcoin legal in Singapore?
Some countries such as China have stated outright that companies are not allowed to accept payment in Bitcoin and buying and selling of the currency is illegal.
Monetary Authority of Singapore has taken a progressive approach to the entire Bitcoin issue. Rather than outright stating that Bitcoin is illegal, they have sounded a cautionary note about the currency, leaving the onus to be on the user himself.
And in recent weeks MAS is starting to take a regulatory approach towards the currency. For more background on the pros and cons of Bitcoin adoption in Singapore, read these two articles here and here.
How good is Bitcoin as an alternate Asset Class?
While the idea how how This is quite untrue as Bitcoin has a number of advantages over both fiat currencies and gold. Compared to a fiat currency, such as US dollars, Bitcoin is anonymous, faster to transfer, not based on debt, limited in supply, and not controlled by central authority. As a consequence governments cannot simply print more Bitcoins when they want to stimulate the economy.
Because of the dangers of a Fiat currency many people have called for a return to the gold backed system. However Bitcoin has a number of advantages over gold including being easier to secure, verify and to transfer.
For the long term investor, Bitcoin can thus be kept like gold and other precious metals, although there also exists differences.
How can I protect my bitcoins/create my own “bank”?
For most who think that Random Number Generators (RNGs) are random, I am sorry to say that this is grossly untrue.
In Mircea Popescu’s view, the concept of entropy is better suited to creating a safer system. Entropy, for those who have forgotten their classroom physics, is the degree of disorder in a system. This is derived from the Second Law of Thermodynamics, which states that the world acts spontaneously to minimize potentialsiii or, equivalently, maximize entropy. In information theory, entropy is measured in bits, where one bit of entropy is equivalent to the uncertainty of a single coin flip, two bits is two flips, and so on.
So why does entropy matter to Bitcoin? Because entropy is all about collisions and therefore the likelihood of brute-forcing an input based on the output. As such, entropy is the core of private key security.
For many users, a strong password and a USB back-up are the only tools implemented in wallet security. With a desktop client, a web-based wallet, or bitaddress.org’s paper wallets, we’re trusting someone else’s interpretation of “adequate entropy”. As much as Bitcoiners love trusting, let’s not and say we did.
Generating secure and highly entropic private keys is of the utmost importance, and it’s easy enough to do on our own. Here are the steps:
1. Visit bitaddress.org
2. Save the page as an HTML file to a USB key.
3. Safely remove the USB and plug it into an offline computer running a clean OS.
4. Open the HTML file and click on “Brain Wallet”vii.
5. Since your own vocabulary is inadequateviii, derive an 10-word (minimum) passphrase using five (5) dice and this 7776-word English dicelist, this Romanian dicelist, or one of these other non-English language dicelists.
6. Click “View”, then print 2 copies.
7. Clear the browsing history, safely eject the USB drive, and restart the computer.
Voila! You now have a high-entropy private key on a paper wallet (aka cold storage)!
You should keep each copy of the paper wallet in a different location, and even cut each piece in half and store them separately so that the compromising of one location doesn’t compromise your savings. Laminating each piece will also protect from age-related fading and moisture damage.
That’s it! You’re now your own bank.
Original post from: http://bitcoinpete.com/2014/03/14/on-making-high-entropy-bitcoin-paper-wallets/
As Nobel Peace Prize nominee Leon Louw has noted: ‘Every informed person needs to know about Bitcoin because it might be one of the world’s most important developments.’ Hopefully, my post will also enlighten all of you to Bitcoin’s many uses, and we can continue to see the growing importance of Bitcoin in the near future.
List of articles referenced: