The concept of peer-to-peer money goes against so many of our (frequently wrong) preconceptions with respect to how we perceive money and understand its basic functions. To help counter them, here are FAQs to some common questions usually posed by those lacking familiarity with Bitcoin and/or on their way to enter the world of what we like to refer to as the money of the future.
- How does a Bitcoin wallet work?
- Why will there never be more than 21 millions of Bitcoins?
- When is the Bitcoin production expected to come to an end?
- Will the 21 millions of Bitcoins in the future be enough?
- Is Bitcoin a ponzi scheme?
- What’s so special about Bitcoin?
- How is Bitcoin backed?
- Does Bitcoin have an intrinsic value?
- But Bitcoins are intangible: isn’t that a drawback?
- But Bitcoin is deflationary: isn’t that a drawback?
- Is Bitcoin safe and secure?
- Is it true that Bitcoin has been hacked?
- Can you trust a monetary system used by anonymous users?
- Is Bitcoin the preferred currency of criminals and evildoers?
- Can Bitcoin be banned?
- With increasing difficulty in obtaining Bitcoins via mining, will it still be profitable to mine them at “home”?
- Is the difficulty in acquiring Bitcoins through mining set to increase continuously?
- If the use of Bitcoin grows exponentially, would the miners have to work increasingly more in exchange for increasingly lower amounts of Bitcoins?
- Can mining end up in the hands of a monopoly?
- Can Bitcoin mining end up being the privilege of a few billionaires?
- How sustainable is the mining technology race amongst the Bitcoin miners?
- Who will protect the Bitcoin network when the system ceases to reward miners with new Bitcoins?
- Will the mining of the last Bitcoin see the end of the mining itself?
- Can Bitcoin be destroyed by a currency speculation?
- Will the tangible Bitcoin coins ever circulate alongside other currencies?
- Will Bitcoin free us from Banks?
- Can Bitcoin improve the economic situation of the disadvantaged?
- Will Bitcoin help distribute wealth more fairly?
- Will Bitcoin help prevent wars?
- Do we actually need more Bitcoins in circulation to boost the economy?
1. How does a Bitcoin wallet work?
The Bitcoin client will automatically generate a portfolio that contains several public addresses and corresponding private keys. Public addresses remain visible and are passed on to others to receive payments. Private keys, however, can only be found in your wallet (i.e. located in the file wallet.dat) and are intended for your private use only.
Think of your public addresses as inboxes for everybody to see and to deposit their Bitcoins into; you are, nonetheless, the only one who can gain access to them using the private keys you have. Each public address is “opened” with a specific private key that is secure and cannot be replicated. If you receive one Bitcoin that has been sent to one of your public addresses, the only way to transfer it to someone else is by using the private key corresponding to the said public address. By saving your wallet you are also saving the private keys that allow you to make us of your Bitcoins associated with this wallet. It is, however, advisable to keep back-ups of the wallet.dat file archive
2. Why will there never be more than 21 millions of Bitcoins?
The 21 million limit imposed by the protocol is arbitrary and of little importance; what matters though is that, according to the rules implicitly accepted by all those who use the system, this limit cannot be exceeded or altered; nor can be the rate at which the money supply increases. In this respect, Bitcoin is absolutely predictable – something that is absolutely essential for a fully functional monetary system.
3 . When is the Bitcoin production expected to come to an end?
The bitcoins are generated as a reward for the work done by miners, and the reward is halved every 4 years. By 2030 nearly all Bitcoins will have come into existence via this process although a certain number will still have to be generated at ever increasingly slower pace. Eventually, over the course of several years, only very small fractions of Bitcoin will enter the economy while the curve representing the increase in the money supply will continue to asymptotically approach 21 million.
4. Will the 21 millions of Bitcoins in the future be enough?
The scarcity of Bitcoins is never going to be a problem, because every Bitcoin can be divided down to the eighth decimal (potentially even more) which means that even today you can easily pay someone the amount of 0.00000001 of bitcoin. In the future, if necessary, use the units could be renamed microbitcoins, nanobitcoins, etc.
5. Is Bitcoin a ponzi scheme?
A ponzi scheme is based on empty promises. Bitcoin is not a company, it does not promise nor is it able to to: it is simply a protocol, a software tool, the code of which can be freely examined by anyone at any time.
6. What’s so special about Bitcoin?
It is the only system that allows you to transfer any amount of wealth instantly, to anyone, from anywhere and to any place, at anytime, without having to pay excessive fees or to worry about fraud or the debasement of the currency and, perhaps more importantly, without having to ask anyone’s permission to transact and being compelled to identify yourself.
7. How is Bitcoin backed?
Just like gold Bitcoin is backed by its monetary qualities, no more no less. Those who use Bitcoin do not have to trust the promises of any one government, but rather the unalterable laws of mathematics.
8. Does Bitcoin have an intrinsic value?
First of all, nothing can be said to have an intrinsic value, the value is attributed to things by humans. Arguably Gold qualities are intrinsic to gold and Bitcoin qualities are intrinsic to this crypto-currency, but the value does not lie in the gold or Bitcoin in and of itself as it is up to human beings to assess these qualities and determine what is their real value to them.
9. But Bitcoins are intangible: isn’t that a drawback?
On the contrary this is an advantage. Thanks to this property (which is, by the way, lacking in the precious metals), Bitcoins can cross borders instantaneously, and you can access them from anywhere. At the same time, the use of Bitcoin allows to avoid arbitrary restrictions imposed on the transfer of value (as opposed to digital money that moves through the channels of traditional financial system).
10. But Bitcoin is deflationary: isn’t that a drawback?
In contrast to what tends to happen to fiat money, it is more than likely that the value of your Bitcoins will retain a tendency to increase in relation to the products you can acquire with them. This is excellent news for the productive population, and correspondingly bad news for those today controlling and/or benefiting from the current monetary system. By preventing devaluation of the currency, Bitcoin encourages savings and long-term investment, while discouraging irrational consumption and unsustainable debt.
11. Is Bitcoin safe and secure?
According to experts, a transfer between Bitcoin address is several times safer than a transfer between bank accounts (excluding the risk involved in situations of possible interference or attacks in the banking system from third parties). Bitcoin code is open to inspection of all stakeholders, and cryptographic architecture supports future upgrades to address the possibility of potential security challenges in the future (if needed decades in advance).
12. Is it true that Bitcoin has been hacked?
No it is not. Hacking into the databases of a bitcoins exchange website is NOT the same as attempting to hack Bitcoin. To claim otherwise would be like saying that breaking into the databases of a bank is a hacking of US dollar.
13. Can you trust a monetary system used by anonymous users?
Anonymity is not something that is imposed on its users by Bitcoin, it is rather an option that Bitcoin enables. Moreover, mutual trust is not always a must or a prerequisite between the parties involved in a transaction. To prevent fraud, Bitcoin users have different reputation systems and escrow services (similar to those offered by eBay).
14. Is Bitcoin the preferred currency of criminals and evildoers?
Certainly Bitcoin can be used for illicit purposes as can the dollar, the ruble, the peso, etc. In many ways, Bitoin is arguably much more efficient as a medium of exchange than all of these paper currencies which is why ever more people are adopting as the currency of their choice; among them also those seeking to make use of Bitcoin in ways that may not always be necessarily legal. But this is no reason to give up on Bitcoin or even question its credibility just as we have not given up on automobiles simply because both of the technological advances perform better than their predecessors, horse-powered carriages and smoke signals, and thus too can be used for illegal purposes.
15. Can Bitcoin be banned?
A government might try to ban the use of Bitcoin, but controlling Bitcoin users would extremely difficult and even more so expensive. To dismantle Bitcoin one would first have to embark on an impossible task of dismantling internet and even then, should they succeed in whatever degree, Bitcoin would still quite possibly be able to survive on the margins of the web.
Various bans have been tried to put an end to BitTorrent, Wikileaks, use of illegal drugs, tax evasion, illegal immigration, illegal hiring but none of them have done a very good job of eradicating any of those things; nor do they have a chance of succeeding with Bitcoin.
16. With increasing difficulty in obtaining Bitcoins via mining, will it still be profitable to mine them at “home”?
Mining was rarely very profitable for those who mined Bitcoins immediately with purpose of immediately liquidating them: at the outset, for example, one could obtain hundreds of Bitcoins in just a day of mining, but had no way of selling them for more than USD 0.0001.
Mining is, therefore, only profitable for those who understand the fundamentals of Bitcoin, and therefore believe in the bright future of this technology. So it all ultimately depends on your time horizon as a miner. If you had mined your Bitcoins in early 2010 and would have clung on to them ever since you would have indeed made a nice profit in today’s prices.
17. Is the difficulty in acquiring Bitcoins through mining set to increase continuously?
No it is not. In fact, the difficulty in acquiring Bitcoins by way of mining hinges on many factors, the most important of which being the computation power that brings the total of the miners into the business.
The difficulty is automatically adjusted every ten days so that the increase in the money supply occurs at a scheduled pace. Hence the difficulty may also decrease as it has on several occasions (usually due to the drop in price which makes mining on the margins less attractive).
18. If the use of Bitcoin grows exponentially, would the miners have to work increasingly more in exchange for increasingly lower amounts of Bitcoins?
The system is designed in such way that the block generation occurs approximately every ten minutes, regardless of the number of transactions contained in any given block. Furthermore, increase in a number of transactions, does not directly translate into more work for the miner (in fact, it could even mean more Bitcoins by way of fees). And while more Bitcoins will be generated in the future, it should be noted that the said restraint on the money supply by way of increasing mining difficulty can lead to a higher price of Bitcoin.
19. Can mining end up in the hands of a monopoly?
The big difference between mining Bitcoins and the issuance of fiat money by a central bank authority is that mining is open to anyone willing to get involved, meaning that no one party is able to monopolize it. No one can – or ever will – take over the mining of Bitcoins. It is, however, true that this is an ever more competitive market, but this is good news as it means that the network is safe.
Moreover, the incentive to mine is directly proportional to the price of bitcoin which means that
20. Can Bitcoin mining end up being the privilege of a few billionaires?
Those investing in mining farms have very little assurances (remember, you cannot monopolize mining bitcoins), meaning the future profits they may enjoy from mining Bitcoin are anything but guaranteed notwithstanding the efficiency of the process. A look at precious metals can help understand this phenomenon: anyone can get involved mining precious metals, for example, provided, of course, that they have a certain amount of knowledge and resources. As a consequence, there are thousands of mining companies and many more groups and individuals that engage I this, at times, very profitable business. It still, despite all the potential profits associated with it and ever-increasing difficulty of entry to new players (mostly due to the robust regulation and interference from the state), has never been monopolized. In the case of Bitcoin, on the other hand, the doors are wide-open (and cannot be closed): if you ever want to get involved in mining nobody will ask you for a license.
21. How sustainable is the mining technology race amongst the Bitcoin miners?
In fact, the “technology race” among those mining Bitcoins is the key to the sustainability of the whole system. With every innovation in mining hardware or software the process of mining Bitcoins becomes more and more efficient and the Bitcoin network ever more secure.
22. Who will protect the Bitcoin network when the system ceases to reward miners with new Bitcoins?
As the reward for solving each block becomes smaller and smaller the transaction fees will become more and more central to the business. In the future, the miners will be motivated to keep the nodes generating the amounts of payments from fees that may accrue more than from direct mining activities.
23. Will the mining of the last Bitcoin see the end of the mining itself?
No it will not, simply because what miners are after are not, strictly speaking, Bitcoins themselves, but rather the processing of the next block of transactions. Whoever finds it gets their prize in Bitcoins (while it is still there) plus the amount corresponding to the fees.
24. Can Bitcoin be destroyed by a currency speculation?
In a free market, all one has to do as a speculator is to buy when few are buying and sell when few are selling. Like this process or not, it helps to moderate price swings and bring liquidity to places where it is needed the most.
Moreover, since the number of Bitcoins in circulation is limited, anyone who intends to buy hundreds of thousands of Bitcoins will end up generating such increase in price that is very likely to deplete their cash supply before they arrive at their first 10,000. The price dumping, on the hand, will temporarily depress the price, helping to expand the Bitcoin market to more participants.
25. Will the tangible Bitcoin coins ever circulate alongside other currencies?
Banknotes and coins tangible Bitcoin are intended as collectibles that may serve to introduce to the world of Bitcoin people lacking minimal technical knowledge – base the functioning of the Bitcoin economy.
In addition, the manufacturer of these products could retain private keys corresponding to units sold, with the intention of using them in the future. Do you know him? Do you trust him? Do you trust his surroundings and environment? The great advantage of Bitcoin is exactly that, i.e. the absence of the necessity to rely on the issuer for his ability or willingness “to do the right thing” as Bitcoin is built upon the foundation of the logical and unswerving laws of mathematics.
26. Will Bitcoin free us from Banks?
Not necessarily so. The problem of the current monetary system, however, does not lie directly with banks but rather with fiat money imposed by states – which makes it possible, among other things, for the existence of the fractional reserve system with the central bank as a lender of last resort at its core.
This system benefits the banks at the expense of the productive population, but can only function at a gunpoint – and this is the direct product of the State, not the banks.
Banks operate as allies of the state (the current regulatory framework leaves them no choice), but they are not prime culprits for the looming disaster.
27. Can Bitcoin improve the economic situation of the disadvantaged?
The currency does not produce wealth. The good money is needed so that resources are properly utilized, but the production of wealth is nothing but a result of voluntary and free interaction of individuals. That being said, however, it is true that, in a world of free moneys, different solutions to social problems would not be so often hampered by the inefficiencies of the system that we have inherited.
28. Will Bitcoin help distribute wealth more fairly?
If the recession continues to aggravate, the assets of those privileged by the current monetary and financial system can lose their value very quickly. Unfortunately for them, the very design of Bitcoin prevents the granting of privileges.
29. Will Bitcoin help prevent wars?
Wars cannot be financed in the absence of violence and fraud. How many people would support a waging of war in a distant country if they had to pay for such an aggressive undertaking directly out of their own pockets? The reality, however, is that state compel us to finance their wars through government borrowing and inflation and this is only possible by having control over the monetary and financial system. Pacifists should be the first to embrace Bitcoin.
30. Do we actually need more Bitcoins in circulation to boost the economy?
The currency is a social institution that arose spontaneously as a mechanism to facilitate trade, preserve the economic value and provide a common measure of value. The free currency (not monopolized by the state) can help allocate resources based on their productive use thereby facilitating the creation of wealth; one of the most important qualities of good money, however, is their relative scarcity. More money is not wealth in and of itself and more of it in circulation – no matter how you distribute – will not solve the problems of economic stagnation and poverty. In fact, the use of force to distribute wealth via control of the monetary and financial system is by far the most common cause of recessions and subsequent economic hardships.