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Bitcoin, a safe heaven or a speculative bubble? Part I

Many of you may have heard about bitcoins but not as many used them. This article is aimed to give you an idea about what bitcoins are and whether you should use them or not.

The Bitcoin or BTC is an e-cash system created by Satoshi Nakamoto which is the name of the group of people who invented this system in 2008 and made it public in 2009. A bitcoin unit is divided down into 8 decimal places thus the smallest amount of a bitcoin unit equals to 0.00000001 satoshi.

The bitcoin or the cryptic currency is a new form of electronic money which are created based on cryptography or with other words, by solving some complex mathematical puzzles. Their number is said to be limited to 21 million and this is because once every 4 years the number of bitcoins that can be generated halves. If in 2009 once every 10 minutes 50 bitcoins were created, now only 25 can be generated and this number tends to 0. Giving this situation, the number of bitcoins is said to be limited. Creating bitcoins is not a job for everyone. The process is too intense for one computer, thus a network of computers working together is called a “miner” which works on a mathematical puzzles in order to generate bitcoins.

Bitcoin is like digital gold. By its design this currency can be created in a limited number as gold exists on a limited amount on earth. The information about those currencies is not stored on a server that can be shuted down or controlled by the government or other financial institutions. Based on a peer-to-peer technology (computer systems connected via the internet which enable files to be directly shared between systems without the need of a central server), the bitcoins can only disappear if the internet is somehow closed. There are the so called “blocks” which store the transactions made using bitcoins. When making such a transaction there is an authomatic check on this blocks in order to avoid double spending of the same bitcoin. There is an entire process which doesn’t allow users to make 2 transactions using one bitcoin. In order to use this technology you have to install a software which creates a wallet (or an address) related only to your computer. While installing the wallet there is a process of synchronizing with the entire network of blocks.

Each bitcoin is a piece of computer code that has been generated through computer processing which is known as “mining”. Each owner transfers the bitcoin to the next beneficiary by digitally signing it. This means that at the end of the bitcoin’s code is added the public key of the person that is going to receive it. There are 2 type of keys, one public that is added to its code when using a bitcoin and the private key which is a secret number saved on your wallet and helps you spend the bitcoin.

There is a lot of talking about bitcoins and whether they may become the next online currency or not. The first advantage could be that it can’t be controlled, on the other hand these transactions may not be as anonymous as they are said to be.

For example, in America, the process of creating your own money is illegal but until now the Feds didn’t run any action against the new currency, considering it too “tender”. Instead, the U.S. is applying the money-laundering rules to the virtual currencies considered to be used for illicit activities (like buying guns or drugs). Even the FBI considers the bitcoin a small threat, but what if it will gain strength over time?

In the last 2 months, the value of a bitcoin increased rapidly. If at the beginning of February the value of a bitcoin was approximately 30$, now its value is close to 160$ on the Mt.Gox market. It looks like people doesn’t trust anymore the currencies which are controlled by the government and prefer to save their money on a digital currency as it is the bitcoin. That is why, when the Cyprus crisis started, the value of the new currency appreciated with 57% against the american dollar within a month.

bitcoin/usd price evoltion

An interesting view over the idea of creating a digital currency as the bitcoin is the reaction of people to the incredible wave of corruption and fraud committed by central banks which may be accused to have been generated the need for such a currency. There are fears that because of the actions that financial institutions are taking in order to save a country from bankruptcy may lead to even worse consequences. In this case, people are encouraged to put their money safe by buying gold, silver and recently they started thinking of bitcoins as a safe haven asset.

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