Bitcoin: The Hacker Currency?
by Variable Rush
Bitcoin is a decentralized, non-fiat currency.
There is no distributing authority. It has worth and value because a group of people believe it has worth and value, the same as nearly every other currency system that has ever been devised on this planet. For example, the U.S. Dollar ceased being backed by gold in 1971. Instead, it is now backed by the "full faith and credit" of the U.S. government.
Unlike the U.S. Dollar, which only goes to two decimal places (like $0.00), the Bitcoin goes to eight, so your Bitcoin wallet could have as little as 0.00000001 BTC in it. If you convert that to USD, that would be zinc shavings from a penny.
Bitcoin is an anonymous currency and the protocols associated with its creation and distribution help facilitate anonymous transactions. Each Bitcoin user uses a wallet program. This wallet can be from a dedicated wallet program such as Bitcoin-Qt or another such as MultiBit, or even a website-based client such as the one found on blockchain.info.
A Bitcoin user is not limited to how many wallet programs or wallet addresses they can use. Actually, they are encouraged to use many such addresses. If a person uses a single wallet address for all of their transactions, then it could be easily seen where that person has sent their money to and from. If a person regularly creates a new wallet address, or uses a different address for every transaction, their privacy will increase since the only people who know a transaction took place would be you and the person to whom you sent Bitcoins.
Wallet addresses are a series of 34 alphanumeric characters that look like this: 16F8sVDtyGeFTjSSaSr4mwqTCgVBq82BMb (that's one wallet address that I personally use, so if you want to throw me a few Bitcoins, knock yourself out).
How do you get Bitcoin? First, you should install at least one of the various Bitcoin wallet programs (or create an account on blockchain.info). I like MultiBit, as it's a lightweight client and does not have to download nearly 5 GB of every previous Bitcoin transaction to date, unlike BitCoin-Qt, which downloads a month's worth of previous transactions upon first installation.
Once you have a wallet address, you can purchase BTC from an exchange such as Mt. Gox, accept it as payment for services rendered, or, if you're desperate, there are a lot of "Bitcoin faucets" and other grunt work sites that make you answer questions or watch a video or some other small thing to gain a reward of a really, really, small amount of BTC, sometimes as small as 0.00000009 BTC. Trying to earn BTC from these kinds of sites is extremely tedious and not really worth it in the long run.
The other way to earn Bitcoin is to mine it. In Bitcoin mining, you install a mining program on an extremely high-end computer and essentially have the computer crunch numbers trying to solve Bitcoin algorithms. Around the world, these algorithms are solved nearly every ten minutes and a new block is created. As these algorithms are solved, the Bitcoin network increases the difficulty of mining. Many would-be miners team up in mining pools. These pools split the BTC reward dependent on each member's computer's contribution to the number crunching.
The reward for creating a new block is currently 25 BTC. This amount halves every four years. When Bitcoin was created in 2009, mining would yield 50 BTC per block. In 2017, the reward is due to drop to 12.5 BTC and on and on until the year 2140 when the last Bitcoins will be able to be mined. There will only ever be 21 million Bitcoins. Of course, Bitcoins can be lost forever if a computer containing a person's Bitcoin wallet were to crash and there were no backups of that wallet.
The market for Bitcoins has been fluctuating wildly for the past several months. In August 2012, the price was $10 per Bitcoin. This later went up to $15 per Bitcoin. In March 2013, the exchange rate skyrocketed to an all-time high of $260 per Bitcoin before falling to around $150 as a large group of people sold their Bitcoins to take advantage of this bubble.
And that brings another negative to light. If someone had sold, say, 25 BTC when the price was $260, that would have yielded that person around $6,500, a pretty impressive amount. However, the transfer from anonymous BTC to cold hard cash deposited into a bank account costs the person the anonymity Bitcoin is known for. An amount as significant as this (and perhaps even lower) when it hits a bank account can send up red flags that will put you under the suspicion of the IRS, and perhaps even the Secret Service and FBI.
Even if you manage to skate by with no problems there, your bank will report your account activity to the IRS at the end of the year for tax purposes. Whether or not, or even how, you report this income is up to you. So far, no documentation exists on any Bitcoin user that has been collared by the Feds. As even cursory readers of this magazine are aware, the less government intervention in your life, the better.
Will Bitcoin last as a currency? Who knows? Other virtual currencies may be created in the future that will replace Bitcoin's supposed dominance in the marketplace. But for right now, Bitcoin seems to be on top.