Information Technology Reference
In-Depth Information
Nakamoto has since been alleged to be the originator of bitcoin, but he has denied
being connected with bitcoin. He has sued
Newsweek
for incorrectly linking him to
bitcoin (Lattman, 2014;
Winona Daily News
, 2014).
Rather than having a central authority or bank to regulate them, bitcoins are
powered by their users, with no authority, organization, government, or middlemen
to control them. Because there is no mint either for bitcoins, users “mine” bitcoins
by using computer algorithms to solve complex mathematical problems. Bitcoins are
mined by running a computer algorithm that creates a digitized code that can then
be used to complete online transactions. The algorithm makes it progressively harder
to mine bitcoins as the total number increases. There is supposed to be a preset limit
to the number of bitcoins that can be mined. That limit is 21 million, and as of the
first quarter of 2014, about 12 million bitcoins were in circulation. The tremendous
power and speed at which computers attempt to solve the problems and accumulate
more bitcoin were initially measured in terms of “hashrate,” the speed at which blocks
of code are solved to mine virtual coins. With the exponential increase in computer
power and speed, the measure has been raised to “petahash,” with
peta
standing for
a quadrillion times the power to mine a virtual coin (Sidel, 2013a). Because of the
anticipation of a wider acceptance of bitcoins, the price of a bitcoin soared to more
than $1,200 at the beginning of 2014. However, its price fell significantly due to a
number of factors, including the declaration of Baidu.com, a Chinese web services
company, that it would not accept bitcoin for payments; the hacking that had taken
place on the server of one of the major exchanges; and the bankruptcy of Mt. Gox,
one of the major exchanges for bitcoin (Galston, 2014). It is important to note that
the volatility in the price of bitcoin is one factor that prevents its greater acceptance.
Bitcoins are transferred from person to person via the Internet, without going
through a bank or clearing house. This lowers the transaction fees when using bit-
coin compared with using traditional money. Bitcoins can be used in every coun-
try as long as private parties engaged in the transactions agree to its use. Bitcoin
accounts cannot be frozen by government agencies, and there are no arbitrary lim-
its on the size and frequency of transactions.
Bitcoin's underlying software code, known in developer circles as “the proto-
col,” is believed to keep track of every transaction using a special marker that can
be traced via an online ledger. 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 unique bitcoin addresses and wallets.
Users trade the coins among themselves, usually through exchanges like the
now defunct Mt. Gox, or spend them on various items like tickets to Sacramento
Kings basketball games and at online retailer Overstock.com.
When compared with money, virtual currencies can perform the usual functions
of money. They are a medium of exchange, a unit of account, a store of value, and
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