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7 things you need to know about Bitcoin

Alex Wawro | April 12, 2013
Bitcoin is booming, but don't buy the hype before you read our guide.

The currency's popularity (and therefore price) increases in international markets that have become unstable--say, when a government threatens its citizens with capital controls and currency restrictions, as Cyprus did last week.

"Bitcoin is a very volatile asset, and the recent developments in the price of bitcoins do have some of the characteristics of an economic bubble," says Professor Magnus Thor Torfason, Assistant Professor of Business Administration at Harvard Business School.


The value of bitcoins can only keep going up, right? Right?!

Torfason is currently working on publishing a paper that focuses on the value of Bitcoin. Though he's cautiously optimistic about the future of Bitcoin, he says that it's hard to recommend the currency to the average PC user. "Even if we assume that bitcoins will eventually be worth ten times their current value, they may drop to a tenth of their value between now and then," says Torfason. "We don't really have good methods for assigning value to a currency like this, so you should treat any investment into bitcoins as an extremely high-risk investment."

You can mine bitcoins, but the gold rush is over

You don't have to put your own money on the line if you want to jump into the bitcoin market. Instead, you can "mine" bitcoins by putting your PC to work crunching code on the bitcoin network. If you're lucky, you could earn a whopping bounty of 25 bitcoins.

Here's how it works: Batches of bitcoins are awarded to bitcoin miners--people who volunteer to install and run a bitcoin client on their PCs. The client uses CPU and GPU processing power to solve very complex math problems, and then shares those solutions with the entire network. The problems are extremely difficult to solve, but easy to verify as correct, and they incorporate logs of transactions on the bitcoin network. As a result, miners track and verify bitcoin payments as they work.

The first client to solve a given block of transactions is awarded a set number of bitcoins--25 as of publication, down from 50 when Bitcoin began--once the work is verified by other clients on the network. That fixed number is halved every four years, until at some point no more new bitcoins will be created.


This fantastic infographic from Bitdata illustrates how bitcoin mining is a crucial part of how the Bitcoin network operates.

The algorithms involved in bitcoin production are far too complex for most non-crypto-nerds to grasp, which is why most people use the term bitcoin mining. It's analogous to toiling in tough conditions in search of gold. And as with gold, only a limited supply of bitcoins exists.

 

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