Bitcoin 101: What you need to know about the cryptocurrency

Bitcoin is taking the world over, and everyone needs to know what it is. It is the most popular cryptocurrency, having been found in 2008.

Bitcoin is strictly a digital currency. This means it’s not a hard currency that you can pocket and use at your favourite pub. Do not be fooled by those pictures with coins and a B. Bitcoin is credited with ushering in the era of cryptocurrency. Satoshi Nakamoto created it, and he was the first to mine the currency. For a period of time, Satoshi tasked himself with making all the changes to the source code of Bitcoin. He later handed over control of the repo and disappeared into thin air.

Bitcoin has a very volatile price. Currently, the trend for bitcoin is rising. This is the reason that has brought it into the limelight. Most people are now joining on to the craze for speculative purposes. Having jumped from USD1000 to the current value of USD6500 over the course of this year, you can’t blame them. However, like with anything speculative you need to tread carefully.

How to get Bitcoin

In getting bitcoin, there are two things involved. You either mine it yourself or you buy it from someone. In its early days, bitcoin was easy to mine. This is no longer the case, and you are better off finding it through other ways.

Mining Bitcoin

Due to the mining power working on bitcoin already, it’s not a good investment to go into mining at now. It’s almost impossible to mine any coins with consumer grade hardware. Even with powerful server CPUs and GPUs, a number of coins you will mine won’t cover theĀ costs incurred.

If you want to get your feet wet, there are ASIC mining units you can get. These are specially coded to only mine bitcoins. They are many times more efficient than GPU mining rigs. Also, a cheap $30 miner will perform better than a Core i7 desktop in bitcoin mining.

If you already have a mining rig setup that you need to use, take a look at mining alternative coins. Other coins have ASIC resistant algorithms, which means GPU or CPU mining will always stay profitable to some extent. But purchasing bitcoin mining equipment is probably not a good idea. Unless you have loads of cash to buy specialised mining equipment.

Buying Bitcoin

At this point, the right way to venture into bitcoin is by purchasing the coins from exchanges.

Buying Bitcoins is not straightforward. You need to do a bit of research before you jump in and make the purchase. Firstly, you need to steer clear of scam sites. Second, you should use a site that has enough security. If your exchange is hacked, they go down with your money as well. You also generally have to hand over a lot of personal information to the exchange people. If they scam you…well.

When doing your research look for the payment options you have. In most cases, buying bitcoins through credit card is very expensive. This is primarily due to the need to secure exchanges against credit card fraud.

Bitcoin Security

bitcoin lockAs with anything digital, there’s an inherent insecurity in bitcoin. The greatest strength of the currency is also its weakness: it is not regulated. With fiat currencies, banks can track money. Not with bitcoin. All you have is a string of characters for an address. Thus, there is a need for tight security on your coins.

Mostly, the bitcoin network is secure. There hasn’t been a case of an attack on the network before, although theoretically, it’s possible. However, the wallets and exchanges are not as secure. These are just like any other networked service prone to hacks.

Hacked Wallets

Bitcoin wallets fall into multiple categories. There are hardware, software, online and mobile bitcoin wallets. These wallets store bitcoin in different ways. Each one has its own advantages and disadvantages.

Online and Mobile wallets give the easiest access to your money. However, any online service is not secure. In light of that, you might need to keep a little of your bitcoin in the online wallet for daily use. Like you have always been doing with your money.

Hardware wallets have the private keys written into the firmware of a device. They are the most secure, as a hacker would need physical access. Use these for your savings. Slightly less secure are desktop wallets. These keep private keys encrypted on a disk. An attacker who gains access to your computer will be able to use your bitcoin. Assuming they can crack the password if any.

Hacked Exchanges

Black Hat Hackers flock where the money is, and bitcoin exchanges are one place money is. A hacker who takes over an exchange gains access to all the bitcoin on the exchange.

At one point the world’s largest Bitcoin exchange, MtGox ceased operations in 2014 after a security breach. They later filed for bankruptcy protection in Japan. In the process customers lost around 750,000 bitcoins, worth aboutĀ $500 million at the time. Thus, your best bet would be to never store your eggs in one basket.

51% Attack, or Majority Attack

The 51% attack targets the Bitcoin network itself. All the other attacks target users’ wallets and exchanges and do not exploit bitcoin. This attack exploits the way the network verifies the authenticity.

An attacker with 51% of hash power will have majority hash rate on the network. In that case, the attacker can verify a malicious chain and the network will accept it instead of the correct chain. Thus, an attacker that controls more than 50% of the network’s computing power can, for the time that he is in control, exclude and modify the ordering of transactions. This allows him to:

  • Reverse transactions that he sends while he’s in control
  • Prevent some or all transactions from gaining any confirmations
  • Prevent some or all other generators from getting any generations

This kind does not allow a lot of power over the network. If seeking profit, a person will gain more by directing that hashing power towards mining than try to execute the attack. In light of that, probably no one will attempt the attack. But just so you know it is there.

Dodgy or Fake exchanges

Because Bitcoin is mostly unregulated, you cannot cry foul to the authorities. This has led to the rise of some unscrupulous exchanges. Some exchanges will just gobble up your money, and leave you crying foul. Always look for reviews of the exchange you want to use. PS: If you can’t find any negative reviews its time to get wary. The reviews will point out potential scam sites.

Try to stick to popular and large exchanges. That way you are mostly insulated from scams. Keep in mind this does not make you secure. Even large exchanges can steal your money.

Phished Accounts

Online accounts are always a phishing ground. Phishing involves baiting to give over your account details to an attacker. With Bitcoin, the incentive is even larger. Once an attacker has your account access information can spend all your money. And never be tracked due to the nature of the coins.

You can read more about phishing and how you can keep yourself safe. Also, enable two-factor authentication for added security. A hacker will need both your account details and your phone to access your account.

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