Bitcoin is the internet’s version of money. These are pieces of unique digital money that can be transferred from one person to another.
The coins are generated using an open-source computer program to solve complex math problems which is called mining.
Each coin is defined by a public address and has its own fingerprint and a private key or a string of numbers and letters that give each a specific identity.
The private key is essentially a private number that allows Bitcoins to be spent. Every Bitcoin wallet contains one or more private keys, which are saved in the wallet file. The private keys are mathematically related all Bitcoin addresses generated for the wallet.
The coins are also characterized by their position in a public database of all Bitcoin transactions known as blockchain.
The blockchain is maintained by a distributed network of computers around the world. And as the Bitcoins allow people to trade money without a third party getting involved, they have become the currency of choice for technophiles, speculators and of course criminals!
Bitcoin heist
Last month, hackers stole nearly £31 million ($40m) in Bitcoins from one of the world’s largest cryptocurrency trading companies.
The theft, which affected the company Binance, was carried out with a variety of methods that included phishing and viruses.
The hackers were able to withdraw 7,000 Bitcoin (£30.9m) by surpassing all the company’s security checks, said the company’s CEO.
Chief Executive Changpang Zhao said that the amount taken made up ‘about 2%’ of Binance’s total Bitcoin holdings.
Complex software
Bitcoins are created through mining. Computers running Bitcoin software solve complex math problems.
The math problems get increasingly harder as more Bitcoins enter circulation. The deliberate slowdown in the rate at which new Bitcoins enter circulation means that rewards are cut in half at regular intervals.
Bitcoin is only worth as much as you and your counterpart want it to be.
It was launched in 2009 by a group of people operating under the name Satoshi Nakamoto and a man called Dr Craig White has since been confirmed as the creator of cryptocurrency.
Decentralised
A key benefit of cryptocurrency is also that they are decentralised, meaning that no one entity controls the currency in contrast to how a central bank controls traditional currency.
The currencies are often built on blockchain networks, a type of digital ledger technology where all transactions are publicly verified and recorded and cannot be altered – creating a chain of information and improving transparency.
Privacy risk?
While Bitcoin offers increased privacy compared to traditional payment methods involving a third-party intermediary such as a credit card provider, it is still not as anonymous as a credit card transaction.
Many people mistakenly believe that digital Bitcoins are more secure than regular financial transactions.
There are several ways in which a person’s identity could potentially be exposed in Bitcoin transactions. And encryption is not as untraceable as people may think.
Technically, using Bitcoin directly involves no personal data so in theory is safe. However, many intermediary companies will require you to provide personally identifying information.
Users who rely on Bitcoin trading exchange – such as Binance, Kraken or Bitfinex to exchange currency for Bitcoin, must divulge private information in order to create an account.
There are also online wallet service providers that manage users’ wallets on their behalf, and this may also pose a privacy threat.
A hacker who accesses a user’s private key can send all that user’s Bitcoins to themselves or anyone of their choosing.
It is also possible to identify users by analysing transactions on the blockchain – a public, distributed ledger in which every transaction is recorded.
Protection
To protect themselves, cryptocurrency investors can securely back up their private Bitcoin keys and use a VPN (virtual private network) when trading.
When you are connected to a reliable and secure VPNB, attackers won’t have a clue that you have a cryptocurrency wallet on your device and won’t target the device specifically.
Users can also separate their wallets – i.e. keep one ‘hot’wallet for trading and currency transfers and a ‘cold’ wallet for long term storage. The cold wallet should always be kept on a device that is never connected to the internet.
The only data that is fundamental to cryptocurrencies is the private key and many companies have developed specialized hardware devices for digital currency transactions which is secure and reasonably user-friendly.
Facebook has now developed a controversial cryptocurrency to rival Bitcoin that some experts say could be used to spy on what you buy.
The Bitcoin-style digital money is called Libra and set to launch in 2020.
The new digital-style coin will be governed by a group of 28 partners called the Libra Association.
Users will be able to save, send and save Libras from a digital wallet called Calibra.
This digital wallet will be connected to Facebook’s messaging platforms Messenger and WhatsApp.
The user could either transfer currency to another user – say a family member in another country – or purchase items or services from a participating online retailer.
The wallet, which will be available via both platforms will eventually be able to pay bills or buy goods in the same way as mobile phone owners already top up their data.
Messenger and WhatsApp platforms already boast more than a billion users.
This move is further proof of Facebook’s desire to move into e-commerce and global payments.
US Dollar
The digital currency will be backed by a reserve of existing currencies from around the world, likely including the US Dollar, the Euro and the Yen.
However, critics have already voiced concerns over privacy and how user data will be handled.
A major worry is the fact that cryptocurrency is largely unregulated and there are fears that Libra could be used by Facebook to spy on people’s online purchases.
Information from what users are buying could be used by Facebook to target offers and attract further investment from firms.
Critics have warned it could be the most “dangerous form of surveillance” Facebook has ever devised.
Following the announcement of Libra’s launch, Bitcoin’s price has already rocketed to £7,340 ($9,310). Experts predict that is likely to exceed an all-time high in December 2017 of £15,700 ($20,000).
It has been backed by Visa and Mastercard, as well as businesses such as Uber, Spotify and eBay meaning eventually users will be able to use the currency to pay for almost anything from their weekly shopping to an Uber journey or their Spotify subscription.
Each company will reportedly invest around $10 million into a consortium that will govern the use of the new payment system.
This will then fund the creation of the coin, which will be pegged to a basket of government-issued currencies and compete with other cryptos like Bitcoin
Cryptocurrency expert Tom Lee told CBNC “The Facebook announcement is a complete validation that mainstream is now focused on cryptocurrencies. I think it really destroys those arguments that say, ‘I believe in blockchain, not bitcoin.”
Phil Chen, decentralised chief officer at Taiwanese electronics giant HTC, said: “If you’re concerned with Facebook knowing too much or having too much access to your private data or social graph, the GlobalCoin will give Facebook even more direct access to your financial information.
“This global coin is the most invasive and dangerous form of surveillance they have devised thus far. This will easily become the most dangerous antitrust case in history.”
Mr Chen concluded: “This project is the antithesis of bitcoin and is another step towards total control of data and users.“
Facebook maintain that one of the reasons they launched Libra was to facilitate financial inclusion.
It would enable millions of users without bank accounts in far-flung parts of the world to transact in ways that formal financial systems have denied them. Because they could send and receive libra on a peer-to-peer basis, without the need for a bank, the transactions would be cheaper and faster, too.
Transactions
When the Calibra wallet for Libra launches, those wishing to use it will need to sign up for an account using a government-issued ID.
Users will then be able to convert their money into Libra and add it to their digital wallet. Once in place, the currency can be used to pay for “everyday transactions, like buying groceries.
Facebook said initially the new payment system will support peer-to-peer payments between individuals, as well as some other ways to pay for goods and services – for example by scanning a QR code.
Eventually they would like to see it work in a similar way of paying with a debit or credit card or using contactless.
Users will also be able to send and receive money between their friends and families just by sending them a message. This will also work with any businesses they interact with on those platforms.
