Opinions on Bitcoin, the electronic payment method vary widely. To some, it represents no less than the dawning of a new age of individual empowerment and the beginning of the end of the nation state as we know it. Others dismiss it as a fad that rivals the famed medieval tulip craze, the very definition of what we now call an economic bubble.
So what is Bitcoin and how does it work? Well, unlike traditional currency, which is generated through a central authority like an issuing bank, Bitcoins are dynamically generated as and when required through a decentralized peer-to-peer network of nodes, aka ‘miners’. Each ‘miner’ is a set of computer resources (sometimes just a regular computer like the one on your desktop) that has been devoted to dealing with Bitcoin transactions. Once there have been enough of these transactions, they are grouped into a ‘block’. This additional block of transactions is then added to the master ‘block chain’ that is maintained across the greater Bitcoin network.
The key thing to note here is that the process of producing a ‘block’ is very hardware intensive and requires a great deal of computing power. So, in return for volunteering their hardware, miners that manage to generate a block are rewarded with a bounty of Bitcoins and given any transaction fees from that block. This system of granting rewards to miners is actually also the mechanism by which the Bitcoin money supply is increased.
For a Bitcoin to have real world value, it has to be accepted for payment. If you take a close look at dollar bill it says “This note is legal tender for all debts public and private”. That means you have to accept it as payment, at least in the US. Acceptance of Bitcoin is strictly voluntary, which leaves room for a great amount of uncertainty as to its viability.
There are two thing we do know for sure. First, if you had invested in Bitcoins a year ago you would be sitting pretty. Each $13 coin you bought is now worth over $1200. You have plenty of room to take profits if the bubble does burst.
The second is that, whatever it’s utility, Bitcoin is a target of opportunity internet fraudsters.
As mentioned, the computational demands of producing a block are very high so the more processing power an entity can use, the more transactions they can handle and the more Bitcoins they are liable to receive. And what better source of computational power to a hacker than his own network of zombie PCs relentlessly crunching out Bitcoin transactions?
It’s not surprising to find botnets setup just for that purpose but there is more.
By default, this virtual currency is secured using public key cryptography. The only factor that secures this coin is the private key, but if any third party can obtain the private key, they will find it extremely easy to steal every Bitcoin based on the number of keys found.
If you receive an email about a Bitcoin Alarm, don’t open it! It is spreading a Trojan virus that pretends to be a legitimate news app, providing Bitcoin price updates. Unbeknownst to the user, it also contains a Trojan named NetWiredRC which is capable of stealing all credentials including username and password.
While the future of Bitcoin is not clear, you should clearly approach the subject with caution.