Week #4 - Introduction to Bitcoins

I was going to do an in-depth analysis on Bitcoins and their advantages and their pitfalls. Unfortunately, after a week of research, I still am not confident that I will be able to accurately explain the intricate ideas behind Bitcoins. Instead, I will give an introduction to Bitcoins and hopefully help you understand this revolutionary invention better.

At the core of it all, BitCoins are essentially a digital file that lists a bunch of accounts and how much each account has, just like a ledger. A copy of this ledger is sent to the BitCoin network, and all computers linked to the network will have the same copy. 

Basically, every time someone sends or receives BitCoins, the 'ledger' is updated, ensuring the money was actually sent and received. For example, if Cavin sends 5 BitCoins to Brian, the ledger will update itself, showing that Cavin has 5 BitCoins less and Brian has 5 BitCoins more.

Are you still with me? Well, it this isn't the confusing part yet.

BitCoins don't really have any value, BUT there are people willing to BELIEVE it has value and are willing to trade goods and services for it. It is no different from fiat currency - this digital, decentralised currency only has value because we believe it is valuable.

An interesting thing about the BitCoin system is how it is designed so that no trust is needed. As you may have to deal with completely anonymous people in the network, a special algorithm was created to protect people from forgeries. A special password is needed to prove at the rightful owner has authorised some of the unspent funds to be sent. This password is called a digital signature. You can't copy a digital signature as a mathematical algorithm prevents that. Also, every transaction's digital signature is different so it cannot be re-sued.

At this point of time I would like to add that the BitCoin system is not flawless. In fact, I find it to be rather dodgy at times. Firstly there is the issue about anonymity. In my research I have found that it is possible to create different, for a lack of a better word, 'personas' and make it impossible to link a persons different transactions together. The danger lies in the fact that this ability makes it very difficult to regulate and keep track of.

Another thing I've come across in my research is that BitCoins can be lost when someone inputs a wrong code or if the computer's harddrive crashes. Not only will the money disappear from your bank account, it will also disappear from the BitCoin economy. As there will definitely be someone out there whose harddrive will crash, it is likely that this currency might become a deflationary one.

I point these problems out as there are many videos and articles out there that only explain the advantages of digital currency. For example, the most popular one out there would be the fact that it is decentralised and not governed by any bank or institution That sounds great, but I'm sure there are not so great parts (well, you call me a skeptic.)

I hope I have given you a better understand of the BitCoin and how it works. It is an extremely difficult notion to grasp well in a short time, but I hope this is a good introduction. I'm sorry if I have made an errors in this post, I have truly tried to understand to the best of my ability and all mistakes are unintentional and though I hate to say it, rather ignorant. I leave you with a video about how BitCoins are created, or mined, so you might have a even better understanding of this new fangled creation.