Published: 12/12/2007

What on earth are bitcoins?

There has been much in the press lately about bitcoins following their dramatic gains in value and hitting a peak of $17k each. That is a phenomenal amount of money for something people don't fully understand and can't physically handle.

So what are they? Back in 2008 a (still) unknown person (or corporation?) by the name of Satoshi Nakamoto started to look at the ways of securely transferring money around the world without the use of banks acting as the middlemen.

Electronic money has a problem. Lets say that I create a piece of money ref ABC123 and I spend it online at my local supermarket. Who is to say I won't then take that same piece of money and spend it on Amazon? Ah you say because you've already spent it. Ah - I say - who knows I've already spent it? Currently if I pay £5 at my supermarket my bank - the central handling point deducts £5 from my account and sends it to my supermarkets bank account. That £5 is now gone.

But bitcoin aims to avoid banks. 2008 had just seen the financial crisis where banks got a (some would say) well deserved bashing. But who would manage the central repository of transactions? How could double spend like my earlier example be avoided? The answer is that each transaction is stored in whats called a blockchain (a database store of information).

A powerful computer (a node) in the network verifies that each transaction is valid. The more computers that do this - the more secure the transactions become. Person A says - I want to send a bitcoin to person B and this is verified against the blockchain to make sure that Person A does in fact have the required number of coins. The computers that do this verification are called "miners" and the reward they get - are bitcoins!

So in short bitcoins are the reward for securing the money transfer process. So if they're just a reward why all the fuss?

Well running the computers that do the "mining" is very intensive (involves difficult computation), expensive and a race to see if you can verify the transaction before someone else. As such the value of bitcoins represent the value of securing the network. Initially 50 bitcoins were awarded per transaction, as at the time of writing that is about 12.5 per reward.

What is interesting:

  1. There will only ever be 21m bitcoins (don't panic - they can subdivide)
  2. They are used quite a lot on the "dark web" as a way of making illegal purchases by keeping off-grid
  3. Their value has rocketed - see this wired article for a look as to why that might be.
  4. Their future is unknown - with the huge increases the currency has become quite unstable and some businesses have stopped investing in them! With the instability in prices businesses find it hard to know how to handle and trade in them
  5. Bitcoin is not the only cryptocurrency! There are at least 15 others and Estonia recently suggested creating their own!
  6. To mine you need super fast processors and regular computers won't really get you going - look at this calculator to see the difference although Minergate is one such tool that aims to get regular users started

Here's why I won't be mining anytime soon ...

Because the "dark web" is still at the heart of many cryptocurrency transactions I don't want my computer to be used to verify their transactions!! Just because you can earn money mining crypto coins - the question to ask is should you? There is certainly an ethical dilemma to the realm of cryptocurrency - something that has yet to be fully realised.