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Bitcoin
is an innovative payment network and a new kind of money. Bitcoin uses
peer-to-peer technology to operate with no central authority or banks
managing transactions and the issuing of bitcoins is carried out
collectively by the network. Bitcoin is open-source; its design is
public, nobody owns or controls Bitcoin and everyone can take part.
Through many of its unique properties, Bitcoin allows exciting uses that
could not be covered by any previous payment system.
Bitcoin is an innovative payment network and a new kind of money. Bitcoin
uses peer-to-peer technology to operate with no central authority or
banks; managing transactions and the issuing of bitcoins is carried out
collectively by the network. Bitcoin is open-source; its design is
public, nobody owns or controls Bitcoin and everyone can take part.
Through many of its unique properties, Bitcoin allows exciting uses that
could not be covered by any previous payment system.
How does Bitcoin work?
From
a user perspective, Bitcoin is nothing more than a mobile app or
computer program that provides a personal Bitcoin wallet and allows a
user to send and receive bitcoins with them. This is how Bitcoin works
for most users. Behind the scenes, the Bitcoin network is sharing a
public ledger called the "block chain". This ledger contains every
transaction ever processed, allowing a user’s computer to verify the
validity of each transaction. The authenticity of each transaction is
protected by digital signatures corresponding to the sending addresses,
allowing all users to have full control over sending bitcoins from their
own Bitcoin addresses. In addition, anyone can process transactions
using the computing power of specialized hardware and earn a reward in
bitcoins for this service. This is often called "mining". To learn more
about Bitcoin, you can consult the dedicated page and the original
paper.
Who created Bitcoin?
Bitcoin
is the first implementation of a concept called "cryptocurrency", which
was first described in 1998 by Wei Dai on the cypherpunks mailing list,
suggesting the idea of a new form of money that uses cryptography to
control its creation and transactions, rather than a central authority.
The first Bitcoin specification and proof of concept was published in
2009 in a cryptography mailing list by Satoshi Nakamoto. Satoshi left
the project in late 2010 without revealing much about himself. The
community has since grown exponentially with many developers working on
Bitcoin. Satoshi’s anonymity often raised unjustified concerns,
many of which are linked to misunderstanding of the open-source nature
of Bitcoin. The Bitcoin protocol and software are published openly and
any developer around the world can review the code or make their own
modified version of the Bitcoin software. Just like current developers,
Satoshi’s influence was limited to the changes he made being adopted by
others and therefore he did not control Bitcoin. As such, the identity
of Bitcoin’s inventor is probably as relevant today as the identity of
the person who invented paper.
Who controls the Bitcoin network?
Nobody
owns the Bitcoin network much like no one owns the technology behind
email. Bitcoin is controlled by all Bitcoin users around the world.
While developers are improving the software, they can’t force a change
in the Bitcoin protocol because all users are free to choose what
software and version they use. In order to stay compatible with each
other, all users need to use software complying with the same rules.
Bitcoin can only work correctly with a complete consensus among all
users. Therefore, all users and developers have a strong incentive to
protect this consensus.
Is Bitcoin really used by people?
Yes.
There is a growing number of businesses and individuals using Bitcoin.
This includes brick and mortar businesses like restaurants, apartments,
law firms, and popular online services such as Namecheap, WordPress, and
Reddit. While Bitcoin remains a relatively new phenomenon, it is
growing fast. At the end of August 2013, the value of all bitcoins in
circulation exceeded US$ 1.5 billion with millions of dollars worth of
bitcoins exchanged daily.
How does one acquire bitcoins?
As payment for goods or services.
Purchase bitcoins at a Bitcoin exchange.
Exchange bitcoins with someone near you.
Earn bitcoins through competitive mining.
While
it may be possible to find individuals who wish to sell bitcoins in
exchange for a credit card or PayPal payment, most exchanges do not
allow funding via these payment methods. This is due to cases where
someone buys bitcoins with PayPal, and then reverses their half of the
transaction. This is commonly referred to as a chargeback.
How difficult is it to make a Bitcoin payment?
Bitcoin
payments are easier to make than debit or credit card purchases, and
can be received without a merchant account. Payments are made from a
wallet application, either on your computer or smartphone, by entering
the recipient’s address, the payment amount, and pressing send. To make
it easier to enter a recipient’s address, many wallets can obtain the
address by scanning a QR code or touching two phones together with NFC
technology.
What are the advantages of Bitcoin?
Payment
freedom - It is possible to send and receive any amount of money
instantly anywhere in the world at any time. No bank holidays. No
borders. No imposed limits. Bitcoin allows its users to be in full
control of their money.
Very low fees - Bitcoin payments are
currently processed with either no fees or extremely small fees. Users
may include fees with transactions to receive priority processing, which
results in faster confirmation of transactions by the network.
Additionally, merchant processors exist to assist merchants in
processing transactions, converting bitcoins to fiat currency and
depositing funds directly into merchants’ bank accounts daily. As these
services are based on Bitcoin, they can be offered for much lower fees
than with PayPal or credit card networks.
Fewer risks for
merchants - Bitcoin transactions are secure, irreversible, and do not
contain customers’ sensitive or
personal information. This protects merchants from losses caused by
fraud or fraudulent chargebacks, and there is no need for PCI
compliance. Merchants can easily expand to new markets where either
credit cards are not available or fraud rates are unacceptably high. The
net results are lower fees, larger markets, and fewer administrative
costs.
Security and control - Bitcoin users are in full control
of their transactions; it is impossible for merchants to force unwanted
or unnoticed charges as can happen with other payment methods. Bitcoin
payments can be made without personal information tied to the
transaction. This offers strong protection against identity theft.
Bitcoin users can also protect their money with backup and encryption.
Transparent
and neutral - All information concerning the Bitcoin money supply
itself is readily available on the block chain for anybody to verify and
use in real-time. No individual or organization can control or
manipulate the Bitcoin protocol because it is cryptographically secure.
This allows the core of Bitcoin to be trusted for being completely
neutral, transparent and predictable.
What are the disadvantages of Bitcoin?
Degree
of acceptance - Many people are still unaware of Bitcoin. Every day,
more businesses accept bitcoins because they want the advantages of
doing so, but the list remains small and still needs to grow in order to
benefit from network effects.
Volatility - The total value of
bitcoins in circulation and the number of businesses using Bitcoin are
still very small compared to what they could be. Therefore, relatively
small events, trades, or business activities can significantly affect
the price. In theory, this volatility will decrease as Bitcoin markets
and the technology matures. Never before has the world seen a start-up
currency, so it is truly difficult (and exciting) to imagine how it will
play out.
Ongoing development - Bitcoin software is still in
beta with many incomplete features in active development. New tools,
features, and services are being developed to make Bitcoin more secure
and accessible to the masses. Some of these are still not ready for
everyone. Most Bitcoin businesses are new and still offer no insurance.
In general, Bitcoin is still in the process of maturing.
Why do people trust Bitcoin?
Much
of the trust in Bitcoin comes from the fact that it requires no trust
at all. Bitcoin is fully open-source and decentralized. This means that
anyone has access to the entire source code at any time. Any developer
in the world can therefore verify exactly how Bitcoin works. All
transactions and bitcoins issued into existence can be transparently
consulted in real-time by anyone. All payments can be made without
reliance on a third party and the whole system is protected by heavily
peer-reviewed cryptographic algorithms like those used for online
banking. No organization or individual can control Bitcoin, and the
network remains secure even if not all of its users can be trusted.
Can I make money with Bitcoin?
You
should never expect to get rich with Bitcoin or any emerging
technology. It is always important to be wary of anything that sounds
too good to be true or disobeys basic economic rules. Bitcoin is a
growing space of innovation and there are business opportunities that
also include risks. There is no guarantee that Bitcoin will continue to
grow even though it has developed at a very fast rate so far. Investing
time and resources on anything related to Bitcoin requires
entrepreneurship. There are various ways to make money with Bitcoin such
as mining, speculation or running new businesses. All of these methods
are competitive and there is no guarantee of profit. It is up to each
individual to make a proper evaluation of the costs and the risks
involved in any such project.
Is Bitcoin fully virtual and immaterial?
Bitcoin
is as virtual as the credit cards and online banking networks people
use everyday. Bitcoin can be used to pay online and in physical stores
just like any other form of money. Bitcoins can also be exchanged in
physical form such as the Casascius coins, but paying with a mobile
phone usually remains more convenient. Bitcoin balances are stored in a
large distributed network, and they cannot be fraudulently altered by
anybody. In other words, Bitcoin users have exclusive control over their
funds and bitcoins cannot vanish just because they are virtual.
Is Bitcoin anonymous?
Bitcoin
is designed to allow its users to send and receive payments with an
acceptable level of privacy as well as any other form of money. However,
Bitcoin is not anonymous and cannot offer the same level of privacy as
cash. The use of Bitcoin leaves extensive public records. Various
mechanisms exist to protect users’ privacy, and more are in development.
However, there is still work to be done before these features are used
correctly by most Bitcoin users. Some concerns have been raised
that private transactions could be used for illegal purposes with
Bitcoin. However, it is worth noting that Bitcoin will undoubtedly be
subjected to similar regulations that are already in place inside
existing financial systems. Bitcoin cannot be more anonymous than cash
and it is not likely to prevent criminal investigations from being
conducted. Additionally, Bitcoin is also designed to prevent a large
range of financial crimes.
What happens when bitcoins are lost?
When
a user loses his wallet, it has the effect of removing money out of
circulation. Lost bitcoins still remain in the block chain just like any
other bitcoins. However, lost bitcoins remain dormant forever because
there is no way for anybody to find the private key(s) that would allow
them to be spent again. Because of the law of supply and demand, when
fewer bitcoins are available, the ones that are left will be in higher
demand and increase in value to compensate.
Can Bitcoin scale to become a major payment network?
The
Bitcoin network can already process a much higher number of
transactions per second than it does today. It is, however, not entirely
ready to scale to the level of major credit card networks. Work is
underway to lift current limitations, and future requirements are well
known. Since inception, every aspect of the Bitcoin network has been in a
continuous process of maturation, optimization, and specialization, and
it should be expected to remain that way for some years to come. As
traffic grows, more Bitcoin users may use lightweight clients, and full
network nodes may become a more specialized service. For more details,
see the Scalability page on the Wiki.
Is Bitcoin legal?
To
the best of our knowledge, Bitcoin has not been made illegal by
legislation in most jurisdictions. However, some jurisdictions (such as
Argentina and Russia) severely restrict or ban foreign currencies. Other
jurisdictions (such as Thailand) may limit the licensing of certain
entities such as Bitcoin exchanges. Regulators from various
jurisdictions are taking steps to provide individuals and businesses
with rules on how to integrate this new technology with the formal,
regulated financial system. For example, the Financial Crimes
Enforcement Network (FinCEN), a bureau in the United States Treasury
Department, issued non-binding guidance on how it characterizes certain
activities involving virtual currencies.
Is Bitcoin useful for illegal activities?
Bitcoin
is money, and money has always been used both for legal and illegal
purposes. Cash, credit cards and current banking systems widely surpass
Bitcoin in terms of their use to finance crime. Bitcoin can bring
significant innovation in payment systems and the benefits of such
innovation are often considered to be far beyond their potential
drawbacks. Bitcoin is designed to be a huge step forward in making
money more secure and could also act as a significant protection
against many forms of financial crime. For instance, bitcoins are
completely impossible to counterfeit. Users are in full control of their
payments and cannot receive unapproved charges such as with credit card
fraud. Bitcoin transactions are irreversible and immune to fraudulent
chargebacks. Bitcoin allows money to be secured against theft and loss
using very strong and useful mechanisms such as backups, encryption, and
multiple signatures. Some concerns have been raised that Bitcoin
could be more attractive to criminals because it can be used to make
private and irreversible payments. However, these features already exist
with cash and wire transfer, which are widely used and
well-established. The use of Bitcoin will undoubtedly be subjected to
similar regulations that are already in place inside existing financial
systems, and Bitcoin is not likely to prevent criminal investigations
from being conducted. In general, it is common for important
breakthroughs to be perceived as being controversial before their
benefits are well understood. The Internet is a good example among many
others to illustrate this.
Can Bitcoin be regulated?
The
Bitcoin protocol itself cannot be modified without the cooperation of
nearly all its users, who choose what software they use. Attempting to
assign special rights to a local authority in the rules of the global
Bitcoin network is not a practical possibility. Any rich organization
could choose to invest in mining hardware to control half of the
computing power of the network and become able to block or reverse
recent transactions. However, there is no guarantee that they could
retain this power since this requires to invest as much than all other
miners in the world. It is however possible to regulate the use of
Bitcoin in a similar way to any other instrument. Just like the dollar,
Bitcoin can be used for a wide variety of purposes, some of which can
be considered legitimate or not as per each jurisdiction’s laws. In this
regard, Bitcoin is no different than any other tool or resource and can
be subjected to different regulations in each country. Bitcoin use
could also be made difficult by restrictive regulations, in which case
it is hard to determine what percentage of users would keep using the
technology. A government that chooses to ban Bitcoin would prevent
domestic businesses and markets from developing, shifting innovation to
other countries. The challenge for regulators, as always, is to develop
efficient solutions while not impairing the growth of new emerging
markets and businesses.
What about Bitcoin and taxes?
Bitcoin
is not a fiat currency with legal tender status in any jurisdiction,
but often tax liability accrues regardless of the medium used. There is a
wide variety of legislation in many different jurisdictions which could
cause income, sales, payroll, capital gains, or some other form of tax
liability to arise with Bitcoin.
What about Bitcoin and consumer protection?
Bitcoin
is freeing people to transact on their own terms. Each user can send
and receive payments in a similar way to cash but they can also take
part in more complex contracts. Multiple signatures allow a transaction
to be accepted by the network only if a certain number of a defined
group of persons agree to sign the transaction. This allows innovative
dispute mediation services to be developed in the future. Such services
could allow a third party to approve or reject a transaction in case of
disagreement between the other parties without having control on their
money. As opposed to cash and other payment methods, Bitcoin always
leaves a public proof that a transaction did take place, which can
potentially be used in a recourse against businesses with fraudulent
practices. It is also worth noting that while merchants usually
depend on their public reputation to remain in business and pay their
employees, they don’t have access to the same level of information when
dealing with new consumers. The way Bitcoin works allows both
individuals and businesses to be protected against fraudulent
chargebacks while giving the choice to the consumer to ask for more
protection when they are not willing to trust a particular merchant.
How are bitcoins created?
New
bitcoins are generated by a competitive and decentralized process
called "mining". This process involves that individuals are rewarded by
the network for their services. Bitcoin miners are processing
transactions and securing the network using specialized hardware and are
collecting new bitcoins in exchange. The Bitcoin protocol is
designed in such a way that new bitcoins are created at a fixed rate.
This makes Bitcoin mining a very competitive business. When more miners
join the network, it becomes increasingly difficult to make a profit and
miners must seek efficiency to cut their operating costs. No central
authority or developer has any power to control or manipulate the system
to increase their profits. Every Bitcoin node in the world will reject
anything that does not comply with the rules it expects the system to
follow. Bitcoins are created at a decreasing and predictable rate.
The number of new bitcoins created each year is automatically halved
over time until bitcoin issuance halts completely with a total of 21
million bitcoins in existence. At this point, Bitcoin miners will
probably be supported exclusively by numerous small transaction fees.
Why do bitcoins have value?
Bitcoins
have value because they are useful as a form of money. Bitcoin has the
characteristics of money (durability, portability, fungibility,
scarcity, divisibility, and recognizability) based on the properties of
mathematics rather than relying on physical properties (like gold and
silver) or trust in central authorities (like fiat currencies). In
short, Bitcoin is backed by mathematics. With these attributes, all that
is required for a form of money to hold value is trust and adoption. In
the case of Bitcoin, this can be measured by its growing base of users,
merchants, and startups. As with all currency, bitcoin’s value comes
only and directly from people willing to accept them as payment.
What determines bitcoin’s price?
The
price of a bitcoin is determined by supply and demand. When demand for
bitcoins increases, the price increases, and when demand falls, the
price falls. There is only a limited number of bitcoins in circulation
and new bitcoins are created at a predictable and decreasing rate, which
means that demand must follow this level of inflation to keep the price
stable. Because Bitcoin is still a relatively small market compared to
what it could be, it doesn’t take significant amounts of money to move
the market price up or down, and thus the price of a bitcoin is still
very volatile.
Can bitcoins become worthless?
Yes.
History is littered with currencies that failed and are no longer used,
such as the German Mark during the Weimar Republic and, more recently,
the Zimbabwean dollar. Although previous currency failures were
typically due to hyperinflation of a kind that Bitcoin makes impossible,
there is always potential for technical failures, competing currencies,
political issues and so on. As a basic rule of thumb, no currency
should be considered absolutely safe from failures or hard times.
Bitcoin has proven reliable for years since its inception and there is a
lot of potential for Bitcoin to continue to grow. However, no one is in
a position to predict what the future will be for Bitcoin.
Is Bitcoin a bubble?
A
fast rise in price does not constitute a bubble. An artificial
over-valuation that will lead to a sudden downward correction
constitutes a bubble. Choices based on individual human action by
hundreds of thousands of market participants is the cause for bitcoin’s
price to fluctuate as the market seeks price discovery. Reasons for
changes in sentiment may include a loss of confidence in Bitcoin, a
large difference between value and price not based on the fundamentals
of the Bitcoin economy, increased press coverage stimulating speculative
demand, fear of uncertainty, and old-fashioned irrational exuberance
and greed.
Is Bitcoin a Ponzi scheme?
A
Ponzi scheme is a fraudulent investment operation that pays returns to
its investors from their own money, or the money paid by subsequent
investors, instead of from profit earned by the individuals running the
business. Ponzi schemes are designed to collapse at the expense of the
last investors when there is not enough new participants. Bitcoin
is a free software project with no central authority. Consequently, no
one is in a position to make fraudulent representations about investment
returns. Like other major currencies such as gold, United States
dollar, euro, yen, etc. there is no guaranteed purchasing power and the
exchange rate floats freely. This leads to volatility where owners of
bitcoins can unpredictably make or lose money. Beyond speculation,
Bitcoin is also a payment system with useful and competitive attributes
that are being used by thousands of users and businesses.
Doesn’t Bitcoin unfairly benefit early adopters?
Some
early adopters have large numbers of bitcoins because they took risks
and invested time and resources in an unproven technology that was
hardly used by anyone and that was much harder to secure properly. Many
early adopters spent large numbers of bitcoins quite a few times before
they became valuable or bought only small amounts and didn’t make huge
gains. There is no guarantee that the price of a bitcoin will increase
or drop. This is very similar to investing in an early startup that can
either gain value through its usefulness and popularity, or just never
break through. Bitcoin is still in its infancy, and it has been designed
with a very long-term view; it is hard to imagine how it could be less
biased towards early adopters, and today’s users may or may not be the
early adopters of tomorrow.
Won’t the finite amount of bitcoins be a limitation?
Bitcoin
is unique in that only 21 million bitcoins will ever be created.
However, this will never be a limitation because transactions can be
denominated in smaller sub-units of a bitcoin, such as bits - there are
1,000,000 bits in 1 bitcoin. Bitcoins can be divided up to 8 decimal
places (0.000 000 01) and potentially even smaller units if that is ever
required in the future as the average transaction size decreases.
Won’t Bitcoin fall in a deflationary spiral?
The
deflationary spiral theory says that if prices are expected to fall,
people will move purchases into the future in order to benefit from the
lower prices. That fall in demand will in turn cause merchants to lower
their prices to try and stimulate demand, making the problem worse and
leading to an economic depression. Although this theory is a
popular way to justify inflation amongst central bankers, it does not
appear to always hold true and is considered controversial amongst
economists. Consumer electronics is one example of a market where prices
constantly fall but which is not in depression. Similarly, the value of
bitcoins has risen over time and yet the size of the Bitcoin economy
has also grown dramatically along with it. Because both the value of the
currency and the size of its economy started at zero in 2009, Bitcoin
is a counterexample to the theory showing that it must sometimes be
wrong. Notwithstanding this, Bitcoin is not designed to be a
deflationary currency. It is more accurate to say Bitcoin is intended to
inflate in its early years, and become stable in its later years. The
only time the quantity of bitcoins in circulation will drop is if people
carelessly lose their wallets by failing to make backups. With a stable
monetary base and a stable economy, the value of the currency should
remain the same.
Isn’t speculation and volatility a problem for Bitcoin?
This
is a chicken and egg situation. For bitcoin’s price to stabilize, a
large scale economy needs to develop with more businesses and users. For
a large scale economy to develop, businesses and users will seek for
price stability. Fortunately, volatility does not affect the main
benefits of Bitcoin as a payment system to transfer money from point A
to point B. It is possible for businesses to convert bitcoin payments to
their local currency instantly, allowing them to profit from the
advantages of Bitcoin without being subjected to price fluctuations.
Since Bitcoin offers many useful and unique features and properties,
many users choose to use Bitcoin. With such solutions and incentives, it
is possible that Bitcoin will mature and develop to a degree where
price volatility will become limited.
What if someone bought up all the existing bitcoins?
Only
a fraction of bitcoins issued to date are found on the exchange markets
for sale. Bitcoin markets are competitive, meaning the price of a
bitcoin will rise or fall depending on supply and demand. Additionally,
new bitcoins will continue to be issued for decades to come. Therefore
even the most determined buyer could not buy all the bitcoins in
existence. This situation isn’t to suggest, however, that the markets
aren’t vulnerable to price manipulation; it still doesn’t take
significant amounts of money to move the market price up or down, and
thus Bitcoin remains a volatile asset thus far.
What if someone creates a better digital currency?
That
can happen. For now, Bitcoin remains by far the most popular
decentralized virtual currency, but there can be no guarantee that it
will retain that position. There is already a set of alternative
currencies inspired by Bitcoin. It is however probably correct to assume
that significant improvements would be required for a new currency to
overtake Bitcoin in terms of established market, even though this
remains unpredictable. Bitcoin could also conceivably adopt improvements
of a competing currency so long as it doesn’t change fundamental parts
of the protocol.
What is Bitcoin mining?
Mining
is the process of spending computing power to process transactions,
secure the network, and keep everyone in the system synchronized
together. It can be perceived like the Bitcoin data center except that
it has been designed to be fully decentralized with miners operating in
all countries and no individual having control over the network. This
process is referred to as "mining" as an analogy to gold mining because
it is also a temporary mechanism used to issue new bitcoins. Unlike gold
mining, however, Bitcoin mining provides a reward in exchange for
useful services required to operate a secure payment network. Mining
will still be required after the last bitcoin is issued.
How does Bitcoin mining work?
Anybody
can become a Bitcoin miner by running software with specialized
hardware. Mining software listens for transactions broadcast through the
peer-to-peer network and performs appropriate tasks to process and
confirm these transactions. Bitcoin miners perform this work because
they can earn transaction fees paid by users for faster transaction
processing, and newly created bitcoins issued into existence according
to a fixed formula. For new transactions to be confirmed, they
need to be included in a block along with a mathematical proof of work.
Such proofs are very hard to generate because there is no way to create
them other than by trying billions of calculations per second. This
requires miners to perform these calculations before their blocks are
accepted by the network and before they are rewarded. As more people
start to mine, the difficulty of finding valid blocks is automatically
increased by the network to ensure that the average time to find a block
remains equal to 10 minutes. As a result, mining is a very competitive
business where no individual miner can control what is included in the
block chain. The proof of work is also designed to depend on the
previous block to force a chronological order in the block chain. This
makes it exponentially difficult to reverse previous transactions
because this requires the recalculation of the proofs of work of all the
subsequent blocks. When two blocks are found at the same time, miners
work on the first block they receive and switch to the longest chain of
blocks as soon as the next block is found. This allows mining to secure
and maintain a global consensus based on processing power. Bitcoin
miners are neither able to cheat by increasing their own reward nor
process fraudulent transactions that could corrupt the Bitcoin network
because all Bitcoin nodes would reject any block that contains invalid
data as per the rules of the Bitcoin protocol. Consequently, the network
remains secure even if not all Bitcoin miners can be trusted.
Isn’t Bitcoin mining a waste of energy?
Spending
energy to secure and operate a payment system is hardly a waste. Like
any other payment service, the use of Bitcoin entails processing costs.
Services necessary for the operation of currently widespread monetary
systems, such as banks, credit cards, and armored vehicles, also use a
lot of energy. Although unlike Bitcoin, their total energy consumption
is not transparent and cannot be as easily measured. Bitcoin
mining has been designed to become more optimized over time with
specialized hardware consuming less energy, and the operating costs of
mining should continue to be proportional to demand. When Bitcoin mining
becomes too competitive and less profitable, some miners choose to stop
their activities. Furthermore, all energy expended mining is eventually
transformed into heat, and the most profitable miners will be those who
have put this heat to good use. An optimally efficient mining network
is one that isn’t actually consuming any extra energy. While this is an
ideal, the economics of mining are such that miners individually strive
toward it.
How does mining help secure Bitcoin?
Mining
creates the equivalent of a competitive lottery that makes it very
difficult for anyone to consecutively add new blocks of transactions
into the block chain. This protects the neutrality of the network by
preventing any individual from gaining the power to block certain
transactions. This also prevents any individual from replacing parts of
the block chain to roll back their own spends, which could be used to
defraud other users. Mining makes it exponentially more difficult to
reverse a past transaction by requiring the rewriting of all blocks
following this transaction.
What do I need to start mining?
In
the early days of Bitcoin, anyone could find a new block using their
computer’s CPU. As more and more people started mining, the difficulty
of finding new blocks increased greatly to the point where the only
cost-effective method of mining today is using specialized hardware. You
can visit BitcoinMining.com for more information.
Is Bitcoin secure?
The
Bitcoin technology - the protocol and the cryptography - has a strong
security track record, and the Bitcoin network is probably the biggest
distributed computing project in the world. Bitcoin’s most common
vulnerability is in user error. Bitcoin wallet files that store the
necessary private keys can be accidentally deleted, lost or stolen. This
is pretty similar to physical cash stored in a digital form.
Fortunately, users can employ sound security practices to protect their
money or use service providers that offer good levels of security and
insurance against theft or loss.
Hasn’t Bitcoin been hacked in the past?
The
rules of the protocol and the cryptography used for Bitcoin are still
working years after its inception, which is a good indication that the
concept is well designed. However, security flaws have been found and
fixed over time in various software implementations. Like any other form
of software, the security of Bitcoin software depends on the speed with
which problems are found and fixed. The more such issues are
discovered, the more Bitcoin is gaining maturity. There are often
misconceptions about thefts and security breaches that happened on
diverse exchanges and businesses. Although these events are unfortunate,
none of them involve Bitcoin itself being hacked, nor imply inherent
flaws in Bitcoin; just like a bank robbery doesn’t mean that the dollar
is compromised. However, it is accurate to say that a complete set of
good practices and intuitive security solutions is needed to give users
better protection of their money, and to reduce the general risk of
theft and loss. Over the course of the last few years, such security
features have quickly developed, such as wallet encryption, offline
wallets, hardware wallets, and multi-signature transactions.
Could users collude against Bitcoin?
It
is not possible to change the Bitcoin protocol that easily. Any Bitcoin
client that doesn’t comply with the same rules cannot enforce their own
rules on other users. As per the current specification, double spending
is not possible on the same block chain, and neither is spending
bitcoins without a valid signature. Therefore, It is not possible to
generate uncontrolled amounts of bitcoins out of thin air, spend other
users’ funds, corrupt the network, or anything similar. However,
powerful miners could arbitrarily choose to block or reverse recent
transactions. A majority of users can also put pressure for some changes
to be adopted. Because Bitcoin only works correctly with a complete
consensus between all users, changing the protocol can be very difficult
and requires an overwhelming majority of users to adopt the changes in
such a way that remaining users have nearly no choice but to follow. As a
general rule, it is hard to imagine why any Bitcoin user would choose
to adopt any change that could compromise their own money.
Is Bitcoin vulnerable to quantum computing?
Yes,
most systems relying on cryptography in general are, including
traditional banking systems. However, quantum computers don’t yet exist
and probably won’t for a while. In the event that quantum computing
could be an imminent threat to Bitcoin, the protocol could be upgraded
to use post-quantum algorithms. Given the importance that this update
would have, it can be safely expected that it would be highly reviewed
by developers and adopted by all Bitcoin users.
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