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The basics of bitcoin

In this month's column, Kevin Davison, of Kadence Solutions, discusses how bitcoin is grabbing a lot of attention lately but for most people it remains a bit of a mystery

The media is rife with explanations about the current value of Bitcoin. The general assumption seems to be that everyone understands what Bitcoin is and why they might find it interesting.

Unfortunately not everyone has that understanding and it remains a mystery to many. Let’s see if a little light can’t be shed on the subject in a way that we can all comprehend. Those of you with some knowledge of Bitcoin will find this very oversimplified.

The initial concept of Bitcoin was to create a non-physical currency that was not tied to any bank. Bitcoin would be “minted” by end users and the resulting currency would be open and available to all without influence by any government or bank. Because of that open methodology the ledger used to document all transactions, called the “Blockchain”, is public with some of the details of every transaction visible to all.

Bitcoin transactions can be viewed in real time at a number of visualization websites such as Every Bitcoin user would possess an electronic “wallet” that lives on a computer, or on a mobile device rather than a bank account at a third party institution. In order to purchase goods a pre-agreed amount of Bitcoin would be send to the seller using an account code that they give you.

A Bitcoin wallet has two account codes, one code is kept secret like a bank account number, and the other is given out and only allows deposits. This is not dissimilar to the Interac E-Transfers that can be done with most bank accounts.

So far this is all very simple. Where most get confused is with how Bitcoin is obtained. It’s actually quite simple to purchase Bitcoin much as you would gold, silver or any other currency. “Mining” currency is where the confusion lies. The overall concept is not all that different from a gold rush where miners dig or pan for gold and barter what they find in exchange for goods and services.

Many people are familiar with the idea of letting your personal computer do work for scientific organizations. For example your computer could perform complex calculations put towards the Search for Extra-Terrestrial Intelligence (SETI), or towards finding a cure for cancer.

In these situations your computer would be used alongside thousands of others to allow those scientific projects to benefit from using many computers to perform the calculations required for them to reach their goal. Bitcoin mining is a very similar process. Imagine putting together a jigsaw puzzle with the final reward being a beautiful piece of artwork.

In the case of Bitcoin mining, computer hardware would calculate small pieces of mathematical problems which would result in the creation of additional Bitcoins. As more coins are “mined” the puzzles get harder meaning greater and greater computing power is required to unlock each new coin.

While it seems inconceivable now, due to Bitcoin’s current value, there was a time when it was easy for one computer to mine several coins a day. Many of those who participated in the early days of Bitcoin mining have later discovered a forgotten stash of Bitcoin on an old computer!

The calculations required for mining now require significant processing power. More than any single computer can readily provide. Mining pools have formed to allow individual users to pool their computing power. These mining groups have called into question the open concept of Bitcoin and the safety of the network. Currently the groups have all agreed that no single pool should obtain more than 39.99 per cent of the power required for mining. Should this agreement change Bitcoin could lose its decentralized nature.

Whether or not Bitcoin remains a viable currency or not remains to be seen. Whichever way the end result falls learning a little more about new technologies is always a good thing.

Kevin Davison is a Guelph-based computer consultant for Kadence Solutions. He has over 20 years of experience in computer and network management. Kevin also possesses expertise in telecommunications systems, home automation, security and various residential and commercial electronics.

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