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Explaining Bitcoin and Crypto Currency

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On Tuesday, Hong Kong-based exchange Bitfinex reported that it had halted all trade activity due to a security breach. Specifically, hackers took 119,756 bitcoins or about $72 million worth (at the time of attack). In response to the news, value of the crypto currency dropped 20% before recovering its losses.

A crypto currency is a digital currency that is encrypted, or secured in a way that allows it to operate independently of a central bank. Bitcoin (BTC) is considered the first crypto currency, although some form of the concept did exist before its inception. It is however the first decentralized digital currency.

There are still many who do not fully understand bitcoins or virtual currency, so let’s get to the bottom of it.

What is Bitcoin?

As previously mentioned, bitcoin is a crypto currency. It exists only virtually, and a growing number of institutions accept it as payment. Bitcoin was invented by Satoshi Nakamoto, who published a paper on the invention on October 31st of 2008. Many believe that Nakamoto is a pseudonym for multiple people.

It was released in January of 2009, and has since gained recognition and acceptance around the world. Bitcoin was released as open source code, meaning anyone could figure out how it was created. As a result, other crypto currencies started to emerge from 2011 onwards.

Bitcoin is known as an anonymous currency due to the fact that it is possible to send and receive the currency without revealing any personal information. Transactions are tied to a bitcoin address, a series of numbers and letters. All transactions are stored in the so-called blockchain, which records and verifies transactions.

The blockchain ensures that a unit of bitcoin is not spent more than once, and is operated by a network of bitcoin “miners,” who use computers to make the calculations to validate each transaction. As a reward, these miners receive newly issued bitcoin.

Bitcoin is still both controversial and volatile. Towards the end of 2013, China’s central bank prohibited financial institutions from using bitcoins, which dropped its value significantly. Bitcoin hacks such as the one announced on Tuesday have also occurred before, and negatively impact price.

Bitcoin can be purchased both online and offline. Online, transactions occur through buy and sell bids that occur on an exchange. Offline, they can be purchased from an individual or a bitcoin ATM.

Bitcoin Alternatives

As I mentioned, the rise of bitcoin also saw the rise of dozens of alternative crypto currencies as well. These include litecoin, peercoin, primecoin, namecoin, ripple, quark and many others.

Each of these trade at different prices and attract different audiences. Furthermore, they boast certain features that bitcoin does not have. For example, litecoin trades faster than bitcoin, and claims to operate in a way that does not reward miners who have specialized software, aiming to level the playing field.

Bottom Line

Both bitcoin and the idea of crypto currency are still very much in their fledgling state. Although a growing number of institutions now accept them, it still has some ways to go before hitting the mainstream.

Still, the concept of a peer-to-peer currency network that bypasses the need for big banks and governments is enticing to many, and could potentially gain further traction, even if it is not through bitcoin but rather another currency.

Welcome to the joys of the 21st century.

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