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Bitcoin The Article(June 2017)

Published June 2017

Introduction quickly.

When I announced 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. Regardless, on editing, 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 from the users, that being the seller and buyer.

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

Bitcoin Pros,

  • Less costly transactions fees. World Wide.
  • International currency. You can trade with anyone anywhere. Bitcoin sees no borders. It does not see Pound, or 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 world-wide crash, trading in Bitcoin might be the very best option with the most appeal. Then again, could there ever be a World-wide financial crash?
  • Faster, and funds are visible immediately. Checking transactions and balances is far easier.
  • Don’t ever have to provide your credit card number and CVV number, or bank account information, in fact, you are pretty much anonymous all of the time. Just another number on the system.
  • There are about 100 thousand merchants World-wide that accept the currency, including but not limited to Virgin Galactic (Richard Branson's space project and flights), and Lamborghini, but also smaller traders such as shops to buy fruit and veg. 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, literally, funds from one cell phone to another. Or PC to PC. In the car, in the shop, 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 review all and any 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,

  • If something goes wrong, there is no one to report the matter to or to resolve it. 100% risk. If you lose the money, through own error, or mistake, or if you deal with someone who does not deliver on their side of the deal, the money is lost. A man in 2013, James Howells accidently threw away his hard-drive with his Bitcoin keys on it, 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, then recovered. Lots of ups and downs. One thing for certain, if you step back and look at the bigger picture, its value is appreciating. A great true story, and comparison, at one point in 2010 you could buy 4 pizzas and have to spend 10 000 Bitcoins in South Africa, now that same value is worth tens of millions 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, 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, and 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 drive. 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 Bitcoin has probably been exaggerated by lack of public knowledge around digital currency, therefore lack of trust, and then also the fun story about Satoshi Nakamoto (the said creator of the software), who is estimated to have 1 million bitcoins hidden away across several places. Added with the fact that criminals or the amount of users doing shady purchases to be the first and majority users of the currency in the beginning.

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

    Fact is, the creator has not been heard from since spring 2011. Does it matter? Perhaps, but not really in my opinion. The system is software, and open source – which is better than the closed off sold software we use far more often with far less transparent process, such as our internet banking and mobile phone App banking. Let me also make a point here that I could find no record of a user not receiving funds for a transaction.
  • The network of computer managing this currency is 250 times more powerful 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.)
  • or 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 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 or 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 can 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 device have copy of 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, the ledger knows how much money is in the system, and to whom it is assigned at the time. So the system is in fact not offering a bank statement balance, but rather it verifies the path of the money in the system.

The path of the money in the system.

A similar concept to using a web browser, and you 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 in 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, you will understand if you press the back page button, and it takes you to the wrong page, you know something has changed or gone wrong – and that is the same concept as Bitcoin… which both has 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 or 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, Bob had the apple AFTER Susan.

Which 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 1 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 a product, as the Bitcoin.

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 purchase 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 it is for me.

So, when Bob and Susan decided they wanted to trade an apple, and because they want to use 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, sit at a computer, and are called Miners.

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 makes sense.

That is exactly what a Miner does.

So, transaction is announced, all the transactions are sitting there, and the Minors try solve a random guess to decide which transaction is processed first, and then added to the log and therefore ledger and creating a successful 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 some bitcoins, which is how the Bitcoins enter the system! Genius.

In order to beat the system, 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 need to happen, and this will be similar to branches of a bank, so we will again have in 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 designed now, with a set limit to the amount of coins, and given over time more users, some of which will lose funds, will result in less money over 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 ongoing 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 direct with user fault and those companies who manage stock larger amount of funds, for example bitcoin firms.

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

My only advice would be and based on my research, and the processing time it takes, and some other complicated things, is that if you are physically offered a product, wait 70 minutes before you release the product.

Another challenge, out of everyone’s control, 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 really to buy other currencies using Bitcoins.

Also, while peer to peer, and peer to Bitcoin traders remains 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? In:

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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