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Entrepreneurs Panel

Debbie Pierce
Tony Caldeira
Jeremy Roberts
Brian Hay
David Pollock
Charlie Mullins
Jennie Johnson
Julie Meyer
Laura Tenison
Michael Oliver
Steve Purdham
Richard O'Sullivan

Bitcoin

Bitcoin is a virtual currency that was launched in 2009. But what exactly is it and why is it proving popular?

Jamie McMullan, co-founder of web development firm Silverchip, gives us the lowdown.

EN: What is bitcoin?

Bitcoin is a decentralised peer-to-peer digital currency. The currency is owned by everyday individuals with no Government involvement or control.

EN: How does the bitcoin concept work?

Bitcoins are a purely digital currency stored in encrypted digital wallets online such as Bitcoin Wallet or MultiBit. The coins themselves are ‘mined’ (or ‘minted’) using data servers that run Bitcoin mining software.

The mining software itself uses a widely known hash algorithm (SHA-256) to control the speed in which Bitcoins are mined. Miners compete with each other to reverse the SHA-256 codes to create blocks. When you are successful you receive a block and it is this block which contains Bitcoins.

Bitcoins are then digitally traded from exchanges or by users to each other for goods and services or for real world currency.

EN: Where can you buy bitcoins from?

Bitcoins are available from Bitcoin exchanges, some of the most notable being Mt.Gox (https://mtgox.com/), Bit Bargain (https://bitbargain.co.uk) and Block Chain (https://blockchain.info/).

EN: What can you buy with bitcoins?

There are currently hundreds of places accepting Bitcoins on the web, selling anything from lasers, web hosting and precious metals, to e-cigarettes, computer equipment and handmade cosmetics.

Bitcoins can’t be traced, so what security issues does this form of currency have?

Bitcoins are stored in wallets that are owned by users and secured by wallet providers. There are two main problems with this. The wallets (and the Bitcoins within them) are only as secure as the systems that store them. Although security is getting tighter, there are still high profile hackings and thefts of Bitcoins from these wallet systems. Many wallets have had to shut down as a result.

And anonymity with the money is another problem. Bitcoins are increasingly used in illegal trade and on websites on the deep web for unsavory services and products. The fact the money can’t be traced to an individual as such, combined with the fact that the systems are decentralised means that Government organisations will have a hard time tracking digital criminal activity.

EN: There is a limit of only 21 million bitcoins and this is set to be reached by 2014. What will happen when the limit is reached?

When the limit of 21 million bitcoins is reached, miners will switch to solving blocks for transactions fees. This means that as a transaction takes place, a miner will verify them for the retailer. There is a time implication here as blocks take time to solve. This is where retailers who offer larger fees for their transactions to miners will attract more miners, thus negotiating quicker processing times.

The value of Bitcoin has fluctuated greatly as a result of the economic climate, so how can you be sure you are getting what it is worth when using it for a transaction?

This is the one fundamental element of Bitcoin that is creating lots of uncertainty as to whether or not they are ready for commercial use. The past couple of months have seen massive swings in Bitcoin prices and while this may seem appealing to some individuals and investors, for businesses using Bitcoins for cash flow, it could have serious implications. The answer is you can’t be sure, real world value is simply dictated to you by the current exchange rate.

EN: Bitcoin is a virtual currency so what are the security risks associated with it?

The major risks lie with the hacking of Bitcoins wallets and, for any business basing their finances on Bitcoins, the fluctuations around real world exchange rates. The encryption the wallets are using is still military style. However, as the last couple of months has proved, this isn’t necessarily a foolproof system.

The other big concern is their potential to be used for illegal transactions and to support criminal networks. The big advantage and disadvantage is that the banks and wallets are owned and controlled by individuals. As a result, funds can’t just be frozen by a major Government. Transactions are very difficult to trace and anonymity is high enough to help disguise criminal activity.

Why use bitcoin?

Bitcoin is decentralized at the moment which means it is not controlled by any Government or bank.

There is a set rate in which they are generated, so there is no chance of hyperinflation.

And another advantage is the fact that it is extremely difficult to track transactions as all currency and transactions are encrypted.

EN: Who created the bitcoin concept?

It isn’t clear whether a single person or a group created bitcoin. All we know is it was created under a pseudonym of Satoshi Nakamoto, who designed the concept in 2008 and launched the network in 2009.

EN: Will bitcoin ever be regulated?

The whole purpose of bitcoin is to remove the need for regulation and to take the power away from a few top-level organisations and hand it to ‘the people’.

The network is controlled by multiple completely independent cells, so no individual has or could have ultimate control over bitcoin.

EN: How can bitcoin benefit business owners?

Bitcoin could be a great option for businesses looking for low (or at the moment nil) transaction processing fees. Further to this as the money is stored across a network and not in one location, funds can never be frozen (as is often reported the case with payment systems such as PayPal).

As the currency is still in its infancy and susceptible to large peaks and troughs in exchange rate, it is better to consider bitcoin as an investment as opposed to a complete business currency.

EN: What types and how many (roughly) businesses use bitcoin?

As it stands around 900 websites accept bitcoin as a form of payment. You can buy anything from web hosting, t-shirts and electronics to lasers and even knives. Bitcoins are a firm favorite at the moment with websites who trade in illegal merchandise given the fact they are encrypted and offer a great level of anonymity.

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