Bitcoin Explained

June 14, 2017 by Staff Writer
Bitcoin Explained
If you keep up to date with the web hosting industry news you might have come across ‘Bitcoin’.

It seems that hardly a day goes by without another web host announcing that they have adopted Bitcoin as a payment system.

But is Bitcoin another PayPal? Is it a new currency?

What exactly is Bitcoin?

Bitcoin is a ‘cryptocurrency’ (or ‘virtual currency’) that can be used as a payment system, but it’s not a physical currency like dollars and cents. It came on the scene in 2009 as a “peer-to-peer” payment method that challenged more traditional types of online payment.

Up until Bitcoin people had accepted the idea that a third-party intermediary was necessary to make a payment over the internet. Whether it was a bank, or a company like PayPal, the intermediary acted as the medium of transfer, and of course, took a commission for its services.

With no middlemen so to speak, transferring money by Bitcoin means considerably lower transactional fees. And amongst other reasons, that makes Bitcoin incredibly attractive.

Who owns Bitcoin?

Internet folklore has it that Bitcoin was created by Satoshi Nakamoto. Although Nakamoto’s name appeared on the original 2008 research paper that first mentioned Bitcoin, he has never been properly identified.

In February 2014, Newsweek magazine did find someone called Satoshi Nakamoto they thought was the Bitcoin founder, but once questioned, the man they found suggested he knew nothing about the cryptocurrency!

Since then a number of names have been suggested, culminating in Australian entrepreneur Craig S. Wright in late 2015. Other suggestions have included the name ‘Satoshi Nakamoto’ was actually passed around a series of developers who took turns using it.

While someone may indeed have created Bitcoin, it exists only as recorded data and is not therefore owned in the sense that a company like ‘Paypal’ is owned.

Is Bitcoin legitimate?

Bitcoin has had a chequered history. It has at times been labelled a “digital Ponzi scheme” and being an internet technology, it has been associated with the “Deep Web” or “Dark Web” – this is the 90% of the internet that can only be accessed with a ‘Tor Browser Bundle’ (rather than Google Chrome!).

This is the world of ‘Silk Road’, drug dealing and other crime.

And as you don’t have to use a name when you are making a Bitcoin transaction, it is also the currency of choice for hackers!

Aside from associations with the murkier side of the Internet, Bitcoin has had other problems.

MtGox, a leading Bitcoin provider, collapsed in February 2014 leaving Bitcoin owners with millions of dollars worth of losses.

Despite setbacks, Bitcoin has certainly come of age and has gone very much mainstream. As we said at the beginning of the article, more and more web hosts accept Bitcoin, but also the likes of Microsoft now accept it – and it doesn’t get much more mainstream than that!

Other companies like online travel booking agency Expedia accept Bitcoin, as does WordPress, and, as you might imagine, a number of pizza delivery services accept Bitcoin!

How is Bitcoin valued?

Bitcoin’s value is determined by a series of complex mathematical formulas and over the last year its value has nearly doubled.

Like other currencies, it is also valued based on what the market will pay for it and the amount of activity around the currency.

Unlike standard legal tender, there are no Bitcoin notes and coins. A Bitcoin ledger exists which is in essence a record of every Bitcoin transaction that has ever taken place.

At the time of going to press the value of one Bitcoin is worth a staggering $2,841.25!

Its level of growth means that if you had bought $1,000 of Bitcoin in 2010 you would be a millionaire 35 times over today!

I understand I can earn Bitcoins. How do I do that?

One way you can earn Bitcoins is to you involve yourself in ‘Bitcoin mining’.

Bitcoin mining is the process of adding transaction records to Bitcoin's public ledger of past transactions.

‘Bitcoin miners’ receive Bitcoins as a reward for doing this.

That said, these days you need A LOT of servers to make any real money Bitcoin mining.

Just how extensive is Bitcoin?

Currently there are approximately 15 million Bitcoins ‘in circulation’, but the maximum number of Bitcoins can never exceed 21 million. This gives the currency more stability when compared to other currencies where printing money is rampant – Bitcoin is restrained and therefore has genuine value.

How is Bitcoin controlled?

There is a huge database of all Bitcoin transactions past and present. A network of ‘nodes’ monitor when Bitcoins have been sold and recognize attempts to re-spend Bitcoins that have already been spent. It’s a relatively secure system.

How do you use Bitcoin?

To use Bitcoin you need to establish a ‘virtual wallet’. Virtual wallets are available through a number of websites – Blockchain being the most recognized.

Alternatively, you can buy Bitcoin through online exchanges. Some of the better known exchanges include Coinbase, LocalBitcoins, Kraken, BitStamp and BTC-e.

Believe it or not, Bitcoin ATMs are also now available, as are a number of Bitcoin mobile apps.

How do you get Bitcoin?

To get your Bitcoins you need a ‘Bitcoin address’. Each wallet is associated with an address.

You can store digital wallets on a computer hard drive or on a mobile phone, but remember – if your hard drive fails or your mobile phone bricks, your Bitcoins have gone forever!

To get your Bitcoins you need a ‘Bitcoin address’. Each wallet is associated with an address.
You can store digital wallets on a computer hard drive or on a mobile phone, but remember – if your hard drive fails or your mobile phone bricks, your Bitcoins have gone forever!

How do you spend Bitcoin?

A Bitcoin address includes 24-34 letters and numbers and Bitcoins are simply moved between addresses. As every wallet has a Bitcoin address, sending and receiving money is fairly straightforward - Bitcoins are simply removed from one wallet and added to another.

Is it here to stay?

Whether Bitcoin is here to stay very much depends on who you speak to.

A Forbes article in June 2017 asks whether Bitcoin is about to “self-destruct” (Bitcoin Is At An All-Time High, But Is It About To Self-Destruct?).

The problems appear to lie within the Bitcoin community itself:

“The power struggle” the article suggests is “over the seemingly simple question of how to upgrade the network to handle more transactions”.

Although the smallest Bitcoin unit is the “Satoshi” – one hundred millionth of a Bitcoin – its increasing value means transfer fees are increasing and it is becoming nearly unusable for some types of transactions.

However, the general consensus is that Bitcoin has got this far and it will be here for the long haul!

How do I accept Bitcoin payments for my (web hosting) business?

There are a wide range of Merchant Services that will enable you to accept Bitcoin payments.

You can also utilize ‘Point-of-Sale’ hardware terminal solutions such as Coinkite, XBTerminal, and BitStraat.

These units are very reminiscent of the payment terminals you can use for credit card transactions.

Anything else?

Remember – like traditional currencies Bitcoin payments represent income and are therefore taxable!
Don’t forget to pay your taxes!!!

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