Jul
22
2010

What are Bitcoins?

Coins in a fountain (photo by BFS Man - CC-BY)

Bitcoins are computer-generated digital tokens. You can buy stuff with them, yet bitcoins differ fundamentally from banknotes, coins, and digital currencies—not the least because you can mint bitcoins yourself.

Paper money, minted coinage, and digital currencies each require a central authority to issue the stock of the currency. Digital currencies also require a central authority to register transactions—to ensure that a digital “coin” is authentic and has not been double-spent.

Bitcoins, however, have no central authority, just a bunch of users who choose to use bitcoins. So how do they get issued? Any user can “generate” bitcoins by performing a computing-intensive calculation on their own computer. There’s an element of randomness, but in the long run a user who dedicates more CPU power to the task would expect to generate more bitcoins.

The market doesn’t get flooded with bitcoins, because the difficulty of the computation increases as more users take part. Currently, a user running their computer 24 hours a day might generate a bundle of 50 bitcoins every week or so (on a high-end machine) or every month or so (on a laptop or older desktop computer).

Because it consumes a few cents worth of electricity to generate each coin, people who want to use bitcoins sometimes prefer to buy the bitcoins from someone else—for a few cents each.

The cryptographic detail behind the system was developed by Satoshi Nakimoto, and is fiendishly clever. The machines that are generating bitcoins are, as part of the same computation, processing the transactions between different bitcoin users. Here’s why it’s so clever: the system requires a non-trivial amount of computing power to compute the hash codes required to process the transactions, and multiple computers confirm each transaction on a peer-to-peer basis. So if someone wanted to defraud or undermine the system, they would need to control more CPU power than all of the other users combined.

Bitcoin is open to anyone. There’s no cost to join, and no need to register. Just download the software application (for Mac, Linux or Windows). At the time of writing, Bitcoin is mostly used by geeks and idealists who are playing with the system to stress-test it and to explore its boundaries. A few people are offering products and services in exchange for Bitcoins. Others are exchanging gift tokens, so that anyone with bitcoins can (indirectly) obtain pretty much anything online. Some people are exchanging bitcoins for cash.

Bitcoins are divisible, potentially to 8 decimal places. The symbol BTC is sometimes used for bitcoins. The Bitcoin Faucet is a website that will give you BTC 0.05 for free to get you started.

This decentralization of the exchange of economic value is a potentially disruptive technology, and it will be interesting to see where it goes from here.

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2 Comments

  • eiffel says:

    Update: as the processing power being used to generate bitcoins increases, it is becoming harder to generate them. Now it takes a month or more for a typical PC to generate any coins, and this is likely to increase further.

    For most people, the best way to acquire bitcoins is to auction something for bitcoins at BiddingPond.

    [Update January 2011: The value of bitcoins has risen, but it has also become harder still to generate them. It might take a year for a PC to generate any coins, although a high-end graphics card can still typically generate a bundle of 50 coins in under a week. From here onwards, trading or purchasing will be the best way for most people to obtain bitcoins.]

  • dalson says:

    Fun to read old Bitcoin related Articles. The times of generating Bitcoins without a large ammount of GPU’s calculating them is over. Hard to get any profit out of mining anymore. Purchasing and trading though is still a good option.

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