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Understanding the concept of Bitcoin

Introducing Bitcoin, the new, newest thing in the global medium of exchange. We know our current mediums as variously, cash in hand, stock values on a piece of paper, gold bars in a vault, sterling silver on our wrists, real property immovable on the ground, in the ground (oil, coal, diamonds), and under the sea.

The thing about Bitcoin is that as ordinary individuals, we may only have a vague idea of what Bitcoin is — gathered say from media commentary. Most of us don't yet have a sense of whether such an intangible product is for real, no feeling for where it is, what it is, where it came from, whether it is something we will ever use, or whether it could possibly impact our financial lives.

Bitcoin is a peer-to-peer electronic cash system that would allow online payments to be sent directly from one party to another without going through a financial institution, according to a white paper by Satoshi Nakamoto who built the first Bitcoin protocol in 2007.**

Simply stated, Bitcoin is virtual currency, but it is also regarded as a security (XBT), fluctuating in value depending upon the perception of such value in the open investment marketplace.

On September 17, 2015, the US Commodity Futures Trading Commission officially properly defined Bitcoin, the cryptocurrency, a commodity and subject to its authority and oversight.*

This new concept is not only a challenge to understand, but the user must have access to the internet via a computer, or a smart phone, etc to engage.

Then, too, the algorithmic cryptography*** behind this brain child is akin to a foreign language for most of us. After all, many of us maths-challenged barely made it out of basic maths classes only to crash on arrival at beginning algebra. Personally, yours truly desperately memorised algebraic formulas for exams. Once that dreaded class was over, like most people, I promptly forgot it all. No. This is not a good confession from an accountant. And yes, I had to relearn — by hiring a tutor.

Where did the virtual concept come from? According to Blockchain: “Bitcoin is a clever and genius puzzle. Since the early 1990s, it was known that there was strong cryptology to support digital exchange securely and privately, but nobody knew how to implement it.” “The technology for this revolution — and it surely will be both a social and economic revolution — has existed in theory for the past decade. The methods are based upon public-key encryption, zero-knowledge interactive proof systems, and various software protocols for interaction, authentication, and verification, etc” — Timothy May, 1992.

How will using Bitcoin affect individuals? The Bitcoin project released under the Massachusetts Institute of Technology Licence Initiative, an open-source non-profit site, contains good beginner information, provides information for both individuals and businesses.

Summarised are five reasons to use Bitcoin as listed on the Blockchain Blog website.

1 It's made for our generation. Bitcoin is made for the internet-generation. We are quickly moving past the days of carrying around paper cash or pulling out your credit card. Bitcoin goes several steps further than the convenience of credit cards by equipping users with a payment option that is significantly lower in fees, provides virtually instantaneous transaction time, and is accessible through the dozens of Bitcoin wallets.

2 It's fast, secure and global. Bitcoin doesn't discriminate. You can use it anywhere in the world, to send value almost instantly, nearly for free. Transferring bitcoins costs just a few pennies and you can send as much value as you want. It's important to remember that bitcoins can't be counterfeited or duplicated.

3 Bitcoin is not subject to inflation. The total number of bitcoins are capped at 21 million, which is different than other currencies. 4 Bitcoin was designed with your privacy in mind. …..users can choose whether they want to be completely transparent with their finances or keep them very private.

5 Bitcoin can provide financial freedom. If you don't have access to a bank account, you are part of the “unbanked.” Bitcoin can allow you to be your own bank. See full article at: https://blog.blockchain.com/2015/04/06/the-top-5-reasons-to-use-bitcoin/#sthash.yloTCYQF.dpuf

Caution. There are downsides to any new technology. Bitcoin is still very, very new and as in all things financial, you must do your own research.

In forthcoming articles — once a month, we will explore this new virtual currency in more depth.

* Bitcoin Is Officially a Commodity, According to US Regulator

The Commodity Futures Trading Commission makes its mark. Kawa Luke, Bloomberg, September 17, 2015


** Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto.


*** What is cryptography? The science of coding and decoding messages so as to keep these messages secure. Coding (see encryption) takes place using a key that ideally is known only by the sender and intended recipient of the message. See the full explanation of modern cryptography. http://searchsoftwarequality.techtarget.com/definition/cryptography

Want to learn more? See Journey into cryptography, Computer Science. Khan Academy. How have humans protected their secret messages through history? What has changed today?

Explanatory videos from ancient cryptography, modular arithmetic, primality test, randomised algorithms are yours to view for free.


**** How Bitcoin and the block chain are a transformative technology, Blockchain Tutorials, June 2015


***** Get Started with Bitcoin. The Bitcoin Project 2009-2015 Released under the Open Source Initiative The MIT License (MIT) https://bitcoin.org/en/

Warning: Disclaimer — this article is for general financial information only. It is not intended for, and cannot be used as an endorsement for purchase or sale of Bitcoin or any of its derivative names.

The author is not responsible for any reader activity, investment losses or gains, or the use of virtual currency in any personal financial situations. The author does not own any positions in Bitcoin, and does not accept payment or make payments in Bitcoin.

It is highly recommended that you, the reader, seek a fiduciary-qualified financial professional highly- experienced in these matters for your personal financial planning.

Martha Harris Myron CPA PFS JSM Masters of Law: International Tax and Financial Services, appointed to the Professional Tax Advisory Council, American Citizens Abroad; principal, The Pondstraddler Life Consultancy, providing international financial planning for Bermuda residents, their multinational families and connections. Contact: martha@pondstraddler.com

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Published December 12, 2015 at 8:00 am (Updated December 11, 2015 at 7:14 pm)

Understanding the concept of Bitcoin

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