All you need to know about Bitcoins

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A detailed article on Bitcoins by Wallstreet Club's former Vice-President Shashank Verma :

It was 2009, and it was time we went digital with money, like everything else. Don’t get me wrong, I’m not talking about services for online transactions like PayPal, Google Wallet, Wepay, 2Checkout etc., which had been in the market a few years, this article will be about the medium of the transaction, or virtual currency.
For the uninformed, virtual currency is a digitized currency which is controlled and issued by its developers, and has to have a group of people using it, without which it won’t even qualify as a medium of exchange. It is intangible unlike paper money and, if it can be bought with and sold back for legal tender, it is called a convertible virtual currency.
So, in 2009 an anonymous developer (or a group of developers) by the name of “Satoshi Nakamoto”, introduced the world to an unregulated, decentralized virtual currency which was soon to make a sizeable impact on online transactions and related govt. laws in the future. Unlike the others, this would be a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.
Regulated virtual currencies in itself had several flaws, as stated in his white paper, for example completely non-reversible transactions were not possible, the cost of mediation increased the total transaction cost thus limiting the minimum practical size of the transaction and making it impossible to have small casual transactions. In short, virtual currency was still nowhere as feasible as physical currency is, where transaction between two parties takes place without the need for a mediator. In short, it was a trust based system instead of one based on proof, which is just one of the reasons, the idea wasn’t very popular before Bitcoins came.
The Bitcoin system proposed that the problem could be resolved if we use a peer-to-peer timestamp server to generate cryptographic computational proof of the chronological order of transactions.

Now that you know where and why it came, let us discuss as to how it can be generated.
Bitcoins are “mined” using computing operations, and therefore their value arise from computing power. They can always be bought from anyone else who has them, but in order to generate them you need to allocate CPU power through computer programs known as “miners”, and these miners create a block of 25 Bitcoins, with each Bitcoin consisting of 100 million units, the smallest unit (10-8) being “1 Satoshi”.
Bitcoins don’t need a governing authority because they maintain a public ledger, which is called the block chain, that records all transactions in bitcoins, and the maintenance of the ledger must be performed by a network of communicating nodes running the bitcoin software that anyone can join. Transactions are readily displayed to this network using certain software applications. The block chain registers the address of the bitcoin amount, and to use this amount the person must “digitally sign” the transaction using a certain “private key”, this system prevents unauthorized transfers. The network can then verify this signature using a public key.

Then one might ask “What would happen if you lose the private key?”, well, the answer is fairly depressing because there is no other way of providing evidence of ownership. And hence, the coins are then lost in the system and cannot be retrieved. So if you are mining, then you have to be careful to maintain the key in your hard-drive.

One of the major aspects of the system is that it is self-deflationary. It was designed such that the total amount of bitcoins that can be mined cannot exceed 21 million.The bitcoin protocol specifies that the reward for adding a block will be “halved” approximately every four years. Eventually, the reward will be removed entirely when an arbitrary limit of 21 million bitcoins is reached by around 2140, and transaction processing will then be rewarded only by transaction fees involved which again is optional, but may speed up confirmation of the transaction.Payers have an incentive to include such fees because doing so means their transaction will likely be added to the block chain sooner, on the other hand, miners can choose which transactions to process and prefer to include those that pay fees. But, as of 2014, the reward amounts to 25 newly created bitcoins per block added to the block chain.

On the negative side of things, this system still isn’t flawless. In fact, criminal activities have attracted the attention of various financial regulators, legislative bodies and law enforcement. It has been infamously called “The currency of choice of seedy online activities”. Some activities include theft of private key, and presence of a black market, wherein many transactions are drug related. Once such market was “Silk Road” which was shut down by the US law enforcement leading to a big dip in the value associated. Other illegal activities may include money laundering, ponzi schemes, malwares etc.

In the end, we cannot be sure of anything at all, with the algorithm involved, the bitcoin production should slow down exponentially, and if does not keep up with pressure of population , it would just mean that normal people would freeze the thought of using it as a medium of exchange, it would just be an investment. There is only one thing we can be certain of, that is, only the people quick enough the exploit the system while it's still new to the rest of the world, would be the major beneficiaries in case it does live up to its potential. But, isn’t that valid for everything else in the world too?

Shashank Verma
Former Vice-President
WallStreet Club BITS Pilani Goa