By Bishoy Ayoub  Mon Jun 3, 2013

The Bitcoin Phenomenon: Here to Stay or Gone Tomorrow?

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Bitcoin was born for the Internet. A virtual currency with no central authority, bitcoin brings the freedom of physical money while concealing your identity for online purchases.

Its decentralized, open-source nature gives users complete and exclusive control over their money. All transactions made with the virtual currency are public, even though its users are kept anonymous and disconnected from any and all types of authorities. Concerned about the downside? There isn’t any; only the possibility that it will never gain the widespread popularity and acceptance that it needs, to become a legitimate form of currency.

What are bitcoins?

The price of a bitcoin can unpredictably rise or fall over a short period of time due to its young economy, and sometimes illiquid markets. This high ranging volatility comes with the prospects of an anonymous currency. The agency that backs bitcoin is a network of users that uses a process called mining. Miners are awarded new bitcoin each time they find a solution to a mathematical problem and/or convert codes to create a new block.

The first 210,000 blocks contain 50 bitcoins and new blocks are formed thereafter to include new bitcoins, but with less value. The next 210,000 blocks will contain half of the original amount: 25 bitcoins. A controlled money supply by the network ensures that $21 million bitcoins are never exceeded. This is the maximum figure because the number of blocks is multiplied by the coin value of a block to generate the number of coins in existence. The reward for solving a new block to create more bitcoins is automatically adjusted so that every four years, half of the amounts of bitcoins are created. The amount of processing power directed at mining constantly changes and more difficulty is faced with creating new bitcoins.

Bitcoin markets remain competitive and price is derived from the core of its supply and demand. Like stocks, bitcoin users can choose to sell or hold on to their virtual currency which can drive up market value of all other remaining coins.

Do you need bitcoins?

Anyone who feels the need to anonymously make a purchase can use bitcoin. Much of bitcoin’s popularity can be attributed to the low costs of alternatively handling money backed by a central government.

You can obtain bitcoins by accepting them as payments for goods or services, find someone to trade local cash for bitcoins through a local directory, participate in a mining pool, or purchase them through the Bitcoin Exchanges. They can be divided down to eight decimal places, which can deal denominations as low as .00000001. Related software can be modified to configure smaller amounts.

Satoshi Nakamoto, bitcoin’s hailed inventor, took a great deal of effort and time in creating the virtual currency. The pseudonym was adopted in 2008 when the now famous developer introduced it as a peer-to-peer electronic cash system. A fraction of one bitcoin at .00000001 actually takes the name after its inventor. A one hundred millionth of a bitcoin (the smallest denomination of a bitcoin) is called a “Satoshi.”

Bitcoin is deflationary by nature, which is extremely uncommon with any type of currency. Since the supply is limited, deflation will become prevalent if money becomes scarce by the rise in popularity. Higher demand will increase the value of bitcoins and as the value increases, the number of bitcoins required to make purchases will decrease. (Continued on page 2)

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