From Coins to Bitcoins

The much hyped electronic currency: bitcoin is gaining popularity among everyone at an exponential rate. In future the extinction of currencies and their replacement by the virtual currency is a high possibility. As stated by Rahul Mishra, Vice President Data64 “It is high time to take bitcoin seriously, since this virtual currency is compelling us to adjust the way we look at value transfer .”

Bitcoin is a global virtual currency that was designed by the pseudonymous developer Satoshi Nakamoto. This peer to peer electronic currency was coined in 2009 and was a hotstock. Bitcoin’s value has escalated from around zero in 2009 to around 1200$ in November 2013. In this context Mumpi Ghosh, Digital Forensic Analyst, Data64 remarked “Although the bitcoin market is volatile, people are coming forward and considering it a positive investment plan.”

Now, a riveting question that strikes our mind is “what gives bitcoin its value? Being the most valued currency what value does it have?” The answer to this is very simple. Like any other thing people are promptly willing to trade in it, and this gives bitcoin its value. Furthermore, bitcoin is a peer to peer transaction scheme that does not involve any intermediary financial institutions, and thus involves negligible transaction fees. As a result, more and more people are investing in bitcoins every day.

For investors willing to invest in bitcoins there are ample bitcoin markets, the most popular one presently being Mt Gox. Investors largely rely on these markets to decide about their investments in bitcoin.

What gives bitcoin an edge over normal currency?

·         Transaction using bitcoin is peer to peer without the involvement of any trusted 3^rd party or financial institution.

·         There is almost no transaction fees involved.

·         All the transactions in bitcoin is public providing transparency.

·         There are no arbitrary fund transfer limits.

·         Account cannot be frozen.

·         This currency is global in nature.

What actually is a bitcoin?

Bitcoin , the cryptocurrency is based on the concepts of public key cryptography and digital signatures. The public key is the address to which others can send bitcoins to the user, whereas the private key is used to digitally sign any transaction to be made.

To start transacting in bitcoins, a bitcoin wallet software has to be downloaded.  A bitcoin wallet is analogous to a bank account that keeps track of the user’s bitcoin addresses. An address can be generated for each transaction and each address can contain varied amount of bitcoins. These wallets are available on various forms like application for mobile phones and computers, hardware devices and paper tokens etc. As said by Rahul Mishra, Vice President Data64 “ The increasing smartphone applications related to bitcoins, is making it easier for the people to trade in bitcoins.”

The bottleneck of this electronic currency is the problem of double spending. However, this problem has been taken care of by making all the transactions taking place in the bitcoin network  public.  This public ledger and log maintaining record of who owns how many bitcoins presently alongwith all the prior transactions since genesis is called as a Blockchain. A general question that arises is that “who maintains the blockchain?”

It is the miners, who devote computing power in solving cryptographic puzzle relating to information in the block chain to add transaction blocks to the chain and maintain it. These miners are not a centralised body but are volunteers distributed in the network. They get bitcoins as a reward for solving the cryptographical puzzle. Initially the reward was of 50 bitcoins per block, however, it was decreased to 25 bitcoins per block on the 4^th year. However by the process of mining, unlimited number of bitcoins cannot be generated since the founders of bitcoin has designed the system in such a way that generation of bitcoins is to cease on generation of a total of 21 million bitcoins.