Have you every heard about Bitcoins? Bitcoin is a virtual currency, but it can be used to buy actual items such as cars or food. Anyone can create it, and is not subject to the control of the banks.
In recent weeks, we heard a lot talking about Bitcoins and the reasons are many. Some of them we can discover or guess, but the main reason is the uncertainty caused by an economic and work crisis in progress. Others are mysterious and unfathomable, like many phenomena using the Internet to publicize.
However, one thing is certain: this novelty is bound to develop and to become important for each of us.
So we decided to write a short guide to Bitcoins, to explain what it is, how it works, how you can create Bitcoins, if it`s dangerous or not and why Bitcoins have many supporters and many detractors.
In the chapter Pros, we have also added a reminder to explain who in the world today can print money, why it can do it and with what consequences.
General Information About Bitcoins
Bitcoin is an electronic currency founded in 2009. The pseudonym of the inventor is Satoshi Nakamoto, but his true identity is unknown.
The creation and exchange of this coin is made via peer-to-peer protocol. It`s value is fluctuating. In May 2012, for example, a Bitcoin was worth 2$, while today is worth more than 175$.
With this virtual currency you can buy concrete goods (there are more and more people accepting it as money), but you can also sell it in exchange for money (Euros or Dollars, for example). Here you can find, among other things, the list of stores that accept payments in Bitcoins.
The ability to coin new Bitcoin is not infinite. There exists a precise limit, which are 21 million units. The availability of new coins, as you can read on Wikipedia, “grows as a geometric series every 4 years”. The figure of 21 million Bitcoin generated will be achieved in 2140.
In any Bitcoin is written who is the owner. In this way you can only spend it once, this is a system to avoid possible scams. The database of who owns each Bitcoin is divided between those who form the P2P network.
There is, at least for now, no law prohibiting this type of currency. Besides its lack of localization and the use of a P2P network as a circuit, makes the regulation and control almost impossible.
It is said that the use of Bitcoin provides anonymity. This is partially true. The transactions of each Bitcoin address, as we read on the official website, are public and preserved forever in the network. In other words, the activities of every Bitcoin address can be accessed by anyone. The name of the holder, however, is not in any way exposed until he decides to reveal in the course of a transaction.
For this reason, the creators of the virtual currency Bitcoin recommend to create a new address each time you receive the money, especially when it comes to transactions conducted through websites, which are public. But a Bitcoin address, what is it? Let’s see.
How to Create and Spend Your Bitcoins
Step 1: Get yourself a Wallet – The first thing to do is to download the client, your virtual wallet, through which you can keep and spend the money that you will generate, or that you’ll be given. It is available for PC, Mac and Linux.
You can manage your wallets also using Android smartphones, a convenient way to pay for virtual currency even in traditional shops.
When you open the wallet you will see the interface of an alphanumeric code, which is your first Bitcoin address (Bitcoin address of 34 alphanumeric characters). It`s very important not to lose this number: copy it to a safe place. If you lose this number, your Bitcoin contained in it will be lost forever, and will disappear from the network.
An important note: the Bitcoin address and wallet is not the same thing. The first is a unique code, and you can generate as many addresses as you want, based on recommended practices of behavior we mentioned in the first paragraph of this article. The second, the wallet, is the virtual wallet which you can assign all Bitcoin address you generate. All the money you get out of those addresses will be saved in your wallet.
Step 2: Generate Bitcoins – The activity of generating them is called Bitcoins Mining.
The first thing to do to generate Bitcoins is to join a Pool. A Pool is a kind of consortium, to which every person “gives” a part of the resources of their computer to perform extremely complex calculations. More precisely, to solve cryptograms. In the Internet there are many of these groups, which you can join easily.
But this transfer of resources, how it happens? It is simple. Once you’re associated with a Pool and you`ve created your personal account, you can download a small Java program.
When you run it, part of the computing resources of your computer will be made available to the group. Thanks to this combination of resources, encryptions are resolved more easily. A single PC, in fact, would not be able to complete the task.
Every time a Pool solves the encryption, the system gives them one or more packages of 50 Bitcoins, and these virtual currencies will be shared among all members according to the contribution of resources given.
Bitcoins: Economic and Ethical Aspects
That reality of Bitcoins is still young, and quite unknown. This means that it`s still in a stage where it can be discussed without ideological constraints of any kind.
The argument, moreover, is extremely interesting, because when viewed in perspective it has some practical implications for each of us. Implications which are disastrous for someone, but desirable for others. The discussion is in the balance between economics, finance and ethics. Let us briefly discuss the reasons of the supporters and detractors of Bitcoins.
It`s not a coincidence that about this virtual currency, that was born four years ago, we’re talking so much just now.
The economic crisis of the West, scandals involving banks and in particular the story of Cyprus, have made clear the serious flaws in the financial system that governs our world. People have become aware that a strong system is actually extremely fragile and are therefore open to alternatives. And some people see in Bitcoins a possible cure of the sickest part of the financial system: the one who presides over the creation of money.
To better understand this topic; here is a quick reminder about who is printing the money, why it can do this and what are the consequences.
Who Creates the Money?
For decades, central banks no longer have to provide coverage of the auriferous money they print. The value that the banknotes have is given by an agreement between those who issued them and the people who use it. The two parts, in other words, agree that that particular banknote is actually worth the amount written above it.
The only authority that can print money in the European Union is the ECB (European Central Bank), whose shareholders are the owners of the national central banks.
And here lies the problem. The central banks are not public institutions, so they are not “owned” by the state, but they are private bodies.
If an European state needs large injections of money into the circuit, it must borrow it from the ECB, but in return must promise to return it. This promise has the form of a document called Title of public debt. In practice, the ECB (which, remember, is owned by private individuals) buys the debts of the states in exchange for banknotes. This debt, sooner or later, has to be soldered. If the State is unable to return it, every year this debt increases. The public debt is therefore essentially a debt that the citizens of every nation have against SpA called central banks.
Based on these considerations, we can say that Bitcoin is exempt from this logic by many considered to be the limit of wear, and reintroduces the popular ownership of the coin.
Virtual money, however, is always available (no jokes style Cypriot banks), and you can arrange them when and how you want.
Finally, as we have seen, the maximum total quantity of Bitcoin that will be generated is equal to 21 million. Not a penny more. The inability to generate money which would devalue the existing one, automatically cancels the risk of inflation.
The Bitcoins, at this time, have become the currency of choice for illegal online businesses, such as the purchase of drugs or weapons.
The transactions in fact are not directly attributable to natural persons, but only to Bitcoin addresses and for now there are no regulations covering this topic. On the other hand, it would be very complex to only establish territorial competences to legislate Bitcoins, since their production is the responsibility of individuals, and the transactions are cross-border and rigorously peer-to-peer.
This legal emptiness, as it is easy to understand, leaves room for maneuver to corrupted people. And even though Max Keiser, the Russian economist, called Bitcoin “currency of the resistance,” the boundary between freedom fighters and unscrupulous merchants can be subtle.
Bitcoin critics, therefore, illustrate a possible future in which this virtual currency would become ubiquitous as a sort of Babel and the chaos would benefit mainly the criminals.
Finally, despite the risk of inflation is none, the value of Bitcoins are highly fluctuating and offers no guarantees, at least for now, from the stability point of view.
Bitcoins yes or no? Difficult to take a side. Certainly, thinking of a currency immune to the official production system of money is quite fascinating. But you can’t ignore the risks. The discussion, however, is likely to become gradually more important. And it`s important to know as much as possible of every aspect this subject, in order to choose consciously.