The Bitcoin Phenomena

By Steve Marsten

Clients have been asking us about Bitcoin for several months now. I thought it was time to cover the basics. Bitcoin was invented as a peer-to-peer system for online payments that does not require a trusted central authority such as a bank. But it does require that you TRUST the system. Since its inception in 2008, Bitcoin has grown into a technology, a currency, an investment vehicle, and a community of users.

Since anything digital can be copied over and over again, the hard part about implementing a digital payment system is making sure that nobody spends the same money more than once. Traditionally, this is done by having a trusted central authority (like PayPal) that verifies all of the transactions. The core innovation that makes Bitcoin special is that it uses consensus in a massive peer-to-peer network to verify transactions. This results in a system where payments are non-reversible, accounts cannot be frozen, and transaction fees are much lower. Its like an honesty system but everyone is keeping an eye on each other.

You will hear and read about Bitcoin Mining or Miners. They are not the miners as we know the term. These are computer nerds who are the backbone of the Bitcoin network.  They oversee the network and process every Bitcoin transaction. Without them the network would collapse and lose all value. Nobody seems to know who these people are other than the few souls who have shown their faces on documentaries over the past 12 months. These users are rewarded with new bitcoins proportional to the amount of computing power they contribute to the network.

As we mentioned above, there is no central person or central authority in charge of Bitcoin. Various programmers donate their time developing the open source Bitcoin software and can make changes subject to the approval of lead developer Gavin Andresen. It is in the miners’ best interest to only accept changes that are good for the Bitcoin currency in the long run. These checks and balances supposedly make it difficult for anyone to manipulate Bitcoin.

The best way to learn about Bitcoin is to spend time researching it. It is not an investment that we would recommend due to its highly volatile state.

For further information though, call our team on 4972 1300. Happy New Year from the Sothertons Team!