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Bitcoin The Article (June 2017)

Published June 2017

Quick Introduction:

When I announced that I was going to do a quick article on this subject, several people said it confused them. After completing the article, I feel it really shouldn’t. I have kept this article concise and without too much waffle. If anyone has questions, please ask, it helps me dig deeper, and I am happy to assist where I can.

Bitcoin is a crypto currency, which just means it is digital money.

The value is not assigned by bank or government, but rather by the users; that being the seller and buyer.

Before you panic, no money really has any value. For this reason, there really is no difference between Bitcoin and the Pound, Dollar or Rand. Values are attributed by an authority.

Bitcoin Pros:

  • Less costly transaction fees worldwide.
  • International currency. You can trade with anyone anywhere. Bitcoin sees no borders. It does not see Pound, Dollar or Rand.
  • No government or central authority interference. This is interesting. If you think of one of the major super powers, or two or more, or a worldwide crash, trading in Bitcoin might be the very best option with the most appeal. Then again, could there ever be a worldwide financial crash?
  • It is faster, and funds are visible immediately. Checking transactions and balances are far easier.
  • You don’t ever have to provide your credit card number, CVV number or bank account information. In fact, you are pretty much anonymous all the time. Just another number on the system.
  • There are about one-hundred-thousand merchants worldwide that accept the currency; some of which include Richard Branson’s space project and flights, Virgin Galactic, and Lamborghini. Smaller traders such as fruit and veg shops also accept the currency. See these two helpful links:
    https://99bitcoins.com/who-accepts-bitcoins-payment-companies-stores-take-bitcoins/
    http://www.ebay.com/gds/100-Companies-That-Accept-Bitcoins-As-Payment-/10000000206483242/g.html
  • You can trade peer to peer, which literally means transferring funds from one cell phone to another or PC to PC. You can make use of the system in the car, the shop, the bathroom; you name it, mobile money.
  • You can use the currency in South Africa. For now.
  • The entire system is fully open book, as in any 3rd party and public can review any and all transactions. How is that for transparency! Everyone has a copy of every single transaction from the inception of the system. You get a copy of the system ledger.

Jean-Pierre Murray-Kline - Internet & Social Media Specialist

Bitcoin Cons:

  • There is no one to report to or resolve an issue should something go wrong. 100% risk. If you lose the money, either by your own error or by dealing with someone who does not deliver on their part of the deal, the money is lost. In 2013, one James Howells accidentally threw away his hard-drive, which contained his Bitcoin keys with a value of 7.5 million US dollars credit on it.
  • The currency is not stable. At one point, a single Bitcoin was worth more than an ounce of gold. It then crashed and then recovered. Lots of ups and downs. One thing is for certain, if you step back and look at the bigger picture, its value is appreciating. A great true story and comparison is that at one point in 2010 you could buy four pizzas and have to spend 10 000 Bitcoins in South Africa. Now that same value is worth tens of millions of rands. One company, who had a stockpile of Bitcoins, reported to have suffered a loss of 450 million US dollars.
  • The currency can lose 80% of its currency in seconds. This also means it can gain 80% in seconds.
  • Several countries have banned the currency. See list: https://99bitcoins.com/list-countries-banned-bitcoin/
  • You can see everyone’s transactions and balances because of the open book policy / system. However, with that said, it is important to remember that you cannot see a person’s identity, only their virtual bank account number, assigned in either positive or negative balances.
  • The digital ledger file used on the system, and available to users, has a fundamental flaw. That being, the ledger file is a computer file, which, like every other file, needs space, because the file is downloaded by each user to operate and trade. The download of the block chain (order of transactions) is estimated to reach 250 gigs in two years. That is about 175 movies. Or, in most cases, 50% of most people’s entire PC hard-drives. This means, for most people, it will be impossible to use very soon.

Background:

  • Currently the user base of Bitcoin is 0.003% of the world’s population.
  • Currently there are around 200-350 thousand transactions per day. Conflicting reports.
  • The value of a Bitcoin at the time I wrote this article:

    Jean-Pierre Murray-Kline - Internet & Social Media Specialist

  • Each Bitcoin can be divided into 100 million units. Each unit can have an assigned task / value. So, you can do a purchase per bit of the coin.
  • By 2140, production of Bitcoins will cease. Similar to a coin mint, stopping production of making coins. It was planned by the creator of the system to never have more than 21 million coins put into the system. Each year, production is halved. 60% of the coin stock is still available.
  • The shady reputation of Bitcoin has probably been exaggerated due to a lack of public knowledge around digital currency. Therefore, a lack of trust exists, which is also owed to the fun story of Satoshi Nakamoto, the said creator of the software. It is estimated that he has one million Bitcoins hidden across several places. Added to that, the fact that criminals, or the amount of users making shady purchases, are the first and majority users of the currency at the start of its existence.

    There is a more interesting rumour (to me anyway) which is that some companies such as Samsung and Toshiba may have started the currency… If you wish to believe such things.

    The fact is this, the creator has not been heard from since 2011. Does it matter? It doesn’t in my opinion. The system is software and open source, which is better than the closed-off sold software we use far more often but has far less transparent processes, such as our Internet banking and mobile phone banking apps. Let me also make a point here, I could find no record of a user not receiving funds for a transaction.
  • • The network of computers managing this currency is 250 times more powerful than the world’s top 500 super computers combined.

Okay, so how does it work?

SIMPLE:

  • You can own. (have money in your account)
  • Send. (send to a seller, or whoever, to buy, or offer as a gift, etc.)
  • Mine. (Basically, be involved in the bookkeeping side of it all, through the network of computers, and get paid a few Bitcoins for your efforts… when I say a few, I need to also say some people have made small fortunes).

A normal process:

  • Buyer, called Bob, wants to buy an apple.
  • Seller, Susan, wants to sell an apple.
  • Susan could have a shop of apples, or a single apple and standing under a tree. Does not matter.
  • Susan and Bob can use either a PC or a cell phone, or even a printed voucher of sorts. Both have a virtual Bitcoin wallet on their devices, which is basically a digital wallet.

    “Susan, I want an apple,” says Bob.

    “Sure, Bob, it will cost you 5 Bitcoins,” says Susan.

    They agree. Bob uses his phone to scan the purchase record on Susan’s phone, which looks like an old Blackberry username or the new WhatsApp PC log in code:

    Jean-Pierre Murray-Kline - Internet & Social Media Specialist


    Money is transferred. Susan can see it immediately and spend it in 30-90 minutes.

    Done…

    “What do you mean done?” you say.

The above sounds simple, and it is!

The process is made possible as follows:

Digital wallets on everyone’s devices have copies of the Bitcoin Ledger, which is basically a record of every single transaction… ever. But this is an example of it in simplicity:

Jean-Pierre Murray-Kline - Internet & Social Media Specialist

A lot of people are going to confuse you, but the basic idea is that the ledger knows how much money is in the system and to whom it is assigned at the time. So the system is not, in fact, offering a bank statement balance but rather verifies the path of the money in the system.

The path of the money in the system:

It is a similar concept to using a web browser and clicking the go back button.

Jean-Pierre Murray-Kline - Internet & Social Media Specialist

Except, you can go back since the inception.

This is the beauty and the safety of the system. Like web pages, there is an address, which links to a place on the Internet, and the browser moves you from place to place, and at the end and last part of each address and place link, hidden in the code on the browser, there is a string of information. If you clear your history, or type something out of place in the browser, it becomes impossible to go back. Therefore, the concept and process of Bitcoin, although technically not the same, is that you will understand if you press the back page button and it takes you to the wrong page that something has changed or gone wrong. That is the same concept as Bitcoin… Both have a record (string of information) of the past and a process for future transactions.

This is what confuses people. If I can explain it as follows.

There are 100 apples in the world.

There are 1000 people in the world.

But who has what apples? How many? And when?

We know that Susan and Bob just traded.

So we can see through the open book system that Susan sold an apple. We can see the apple is now with Bob.

The system knows Bob has it. It’s a transparent system. Every single person on the system has a copy of that transaction.

Therefore, at any time, anyone can see that Bob had the apple AFTER Susan.

This means, he is allowed to trade THAT apple. He cannot trade two apples, and he cannot grow a new apple.

Why?

Because he only has one?

In the system, you cannot have more than you were given. Not ever.

So, we can confirm, Bob has one Apple only.

Therefore, Bob has one apple to trade, not two, not ten, Bob has one apple.

Total transparency of the apples. Power to the People. Know where your apple came from!

Let me emphasize:

No one can add an apple to the system. Why? There are only 100 apples. There will never be more than 100 apples. Of course, in this explanation, I am referring to the Bitcoin as a product.

Apples make people understand for some reason, so I use the word apple a lot.

Jean-Pierre Murray-Kline - Internet & Social Media Specialist

The currency, Bitcoin, protects itself; it records and shares two things.

  1. How many apples everyone has received, ever!
    How many apples they have sent away, ever!
  2. The order in which people have received their apples, and sent them away.

Then, it uses a clever block system, which adds time to the entire process, to ensure that there are no duplicate trades or purchases when funds are not available. This adds security and also solves the problem caused by the multiple computers around the word in the network, which would obviously create a time delay.

Let’s talk about these computers, and the users of the computers, which are called miners.

This is where I get very excited. You might not, but I do.

So, when Bob and Susan decided they wanted to trade an apple, and because they want to use the Bitcoin system to trade for the apple and pay, they had to announce the transaction to the entire network. Not to one person, but absolutely every single user of the entire currency!

Now, some of these users, the miners, sit at a computer and observe.

When a transaction is announced as a pending trade, and the system transaction code/key is processed, there is this virtual race by all these participating computers around the world to try and verify the transaction. This is simply done through guessing! Yes, guessing. The total number of transaction keys in the system are over 7 million trillion. Now that’s a lot, and this is the variable per transaction! Remember, the key is basically where the money is coming from and going to. That’s all. But, the key is also linked to the transactions prior and all the transactions in the future. A lot of transactions happen at the same time and, to add some sort of order to the ledger, someone has to put the transactions in an order, thus helping the universal ledger make sense.

That is exactly what a miner does.

So a transaction is announced, all the transactions are sitting there and the minors try to solve a random guess to decide which transaction is processed first, which is then added to the log and, therefore, ledger, which creates a successful and safe transaction. Remember, this transaction is added to the history of Bitcoin transactions and will link and backdate since its inception.

So, if the miner guesses the answer correctly, he or she is awarded with Bitcoins, which is how the Bitcoins enter the system! Genius!

In order to beat or hack the system you are up against every single miner.

The future:

To fix the fundamental flaw of the block chain file size, centralization of the file through super nodes might be necessary, and this will be similar to branches of a bank. So we will, again, have authorities in terms of Bitcoin bank branches. There is, however, no stable, long-term solution finalized. I really do not know who is going to fix this.

The currency, as it’s designed now, with an established limit to the amount of coins and given over time, more users, some of which will lose funds, will result in less money across more people. 21 million multiplied by 100 million is all that there could ever be to trade with. That with a world population of 7 billion is not very much money.

Security is an on-going concern with the Internet. I don’t know who at Bitcoin is going to tackle this, because the program creator disappeared some time back. At the time this article was written, June 2017, there were nearly 21 million transactions done to date.

The main vulnerability and attacks appear to link directly to user fault and those companies who manage stock larger than the amount of funds, for example, Bitcoin firms.

I read in an article that currently it is estimated that 10 to 20% of all Bitcoins in existence are held by criminals. Again, is this really a need for panic? No, think about it, how many non-digital criminals are sitting with funds and how much larger that percentage must be.

My only advice, based on my research and the processing time it takes, is that if you are physically offered a product, wait seventy minutes before you release the product.

Another challenge, out of everyone’s control, is that Bitcoin users are going to have to work on how to exchange their currency for other normal currencies. While there are actual vendors and machines you can use to buy Bitcoin, there is nowhere to buy other currencies with Bitcoins.

Also, while peer to peer and peer to Bitcoin traders remain anonymous, or has a level of anonymity, when you need to use your standard currency in your country to purchase Bitcoin you have to follow the local rules and legislation, and that often requires giving more information than you might wish to the authorities.

Where do you buy Bitcoins?

South Africa: https://www.bitcoinzar.co.za/buy-bitcoin-in-south-africa/

World: https://www.bitcoin.com/buy-bitcoin

Published June 2017

Disclaimer:

  • While I attempt to ensure information is accurate and up-to-date at time of publication, I will not accept liability should information be used, and found to be incorrect. If you do see an error, please let me know.
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