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Saturday, December 9, 2017

What is Bitcoin, and how you can mine it at your home (but shouldn't)!

You'll be needing some really special - and a bit costly - equipment to get started with mining Bitcoins.
  • Worth less than $1,000 on Jan 1, 2017, Bitcoin flirted with $20,000 this week.
If you've seen this ad below somewhere on the Web - or anything similar to it, both in the factors of message it wants to bring across and annoyance - congratulations; you're in the real world.
Hmm... I live near Umm Suqeim in Dubaibut all's peaceful and quiet over there.

Now, on to the unreal stuff.

Bitcoin, as you may know, has been in the headlines for quite some time now, thanks to its meteoric rise. As we write, it's actually down 20 per cent at $13,482 on Luxembourg-based Bitstamp after rocketing 40 per cent in the 48 hours before that.

And it actually flirted with $20,000, touching a ridiculous $19,500 on the US-based GDAX.

Bitcoin's roller-coaster ride is making a real roller-coaster look like your garden-variety merry-go-round. And it's so divisive; Japan recognises it as legal tender. JPMorgan Chase CEO Jamie Dimon says it's a 'fraud'. And investus maximus Warren Buffett dismisses it as a 'mirage'.

But for all its ups and downs, many are still mesmerised by the thought of investing in Bitcoin - in cryptocurrencies, generally speaking - because of the mouth-watering and tempting value it gives. It was worth $997 on January 1 this year, with a 2017 low at $752 in mid-January - so with that peak figure above, it's up an eye-popping 2,493 per cent.

If you're ready to give in to the temptation (or to those clickbait ads), we've prepared a little guide for you, in the hope you'd better understand what in the world this craze is all about. And we'll try to make it as simple as possible.

What exactly is Bitcoin?

As we said, it's a type of cryptocurrency that can be used for payments, one that aims - and actually can - replace cash, cards, online payments and every other payment method you already know. It's a decentralised currency, meaning it has no central bank nor someone or group controlling it.

How does it work?

As they are not real money, you can consider them as credits - 'tokens', as it is widely called by its users - which you can exchange for goods and services. Think of it as an in-game purchase in a video game using the currencies in it, to a certain extent.

Is it secure and reliable?

That's what Bitcoin touts so much because it uses blockchain technology (quite sure you've heard of that). Simply put, when you pay using Bitcoins, it's sent via an encrypted way, guaranteeing it won't be hacked.

Who are we to blame for all this madness?

Someone who goes by the alias 'Satoshi Nakamoto', who apparently felt that the world needed a new type of currency and released Bitcoin in January 2009. Nakamoto's real identity has yet to be deduced until now; the closest was Australian Craig Steven Wright, but there's no hard evidence that he's Nakamoto. (Trivia: The 'Satoshi' is the smallest unit of Bitcoin, equivalent to one hundred millionths of one Bitcoin - 0.00000001 BTC; one BTC is then equal to 100,000,000 satoshis.)

Eh? So Bitcoin has units too?

Yep, using the all-too-familiar metric system. To save my breath, just check the table below from BITSUSD:

You can also use their online converter to find out how much Bitcoin currently is.

Is it true that there's only a limited number of Bitcoins?

Yes (unfortunately?). Nakamoto made sure of that when he created that finite number of Bitcoins - a total of 21 million. In early January 2014, nine million have been mined. Last we checked, about 16.73 million have been discovered - almost 80 per cent of the total - meaning there are only five million left for us to scramble for.

Wait, 'mined'?

You read that right. To gain Bitcoins, you need to mine them, akin to how we obtain gold and other precious metals and minerals - but digitally.

I'm confused.

Me too.

Come on, get serious.

Okay, okay. To start off, originally, for every block successfully mined, 50 Bitcoins were rewarded. But here's the interesting thing: the reward gets halved after every 210,000 blocks, or about every four years. At present, the reward is 12.5, as we're in the third 'reward era'.

Now, take all those 21 million Bitcoins and do the math; it is widely accepted that the last Bitcoin will be mined somewhere near October 8... 2140 - or about 123 years from now.

And this is by design; Nakamoto created Bitcoin with the intent of giving miners a harder time to discover them as more of it are mined. Clever.

Fine. So how does mining exactly work?

Here's the juicy part. While with gold you can make do with some good ol' handy tools, mining for Bitcoin is a totally different league.

But to put it in layman's terms, you need a computer, a specialised, mining-specific software (readily available on the Web) and a whole lotta patience.

When Bitcoin mining started, even cheap PCs were good enough to get you your first rewards. But as more are discovered, you need to rev up your machine to keep up with the complexities of mining it. In 2014, a PC capable of locating Bitcoins on its own cost around $12,000, but, apparently, today it's getting a bit 'affordable' (thanks, competition). (Here's one that popped up in Google ads, apaprently available for us here in the Middle East.) In other words, faster machines are being made today to cope up with the increasing difficulty of mining.

Thus, the birth of ASIC - application-specific integrated circuit - which was designed specifically for Bitcoin.

Anyway, once you've got those in place, here comes the fork in the road: do you want to (A) mine on your own, or (B) get some help doing so?

If you choose B, then this is the more highly-recommended one. You can join groups or pools that share the same goal as you do. The more you are, the more computing power you'll have - but, of course, you'll be sharing whatever Bitcoins you dig up.

Which brings us back to option A: the danger here is that mining is so complex that you might dig up for months - years even - and still come up empty-handed.

'Complex', you say?

Again, yes. Bitcoins are mined - using the specialised software and hardware - by solving complex mathematical puzzles.

The puzzles are determined by transactions being sent at that time and the solution to the previous puzzle - meaning the solution to the present puzzle is different from those before it. If you want to change an earlier transaction, you'll have to solve each before it - which makes the entire thing fool-proof. Good luck with that.

This is also the way miners verify that a Bitcoin used is the real thing.

Which explains why it could take some time to process a payment for ice cream using Bitcoin.

You forgot to explain what blockchain is.

Oops, sorry. Blockchain was also the brainchild of Nakamoto, and he/she (or they; it's speculated that it may also be a group) created it to ensure that Bitcoins are safe to use. Basically, it's a continuously growing list of records, called blocks, which are linked (thus, the name) and protected using the secure method of cryptography (was the Morse code the prototype of this?).

To paraphrase what we've mentioned earlier - and to put it in the simplest way possible - the cryptography used to keep it secure allows each transaction to be tied to the previous records. Furthermore, these transactions are distributed among members of a blockchain distributed ledger, meaning everyone can view it, assuring transparency.

To double down on that point earlier, if you attempt to mess around with data on the ledger, you'd have to change every other record that has been there before it. Again, good luck with that.

Okay, assuming I do mine some Bitcoins; where do I store it?

Like your cash and cards, you stow them away in a digital wallet, which, in turn, you can use to transact. A lot of services offer this. The danger with digital wallets for cryptocurrencies is that it can be hacked.

This is, apparently, a major flaw of digital money.

I heard some major exchanges will be offering Bitcoin futures.

Yes, but given the roller-coaster ride and wild volatility of Bitcoin, a lot of questions remain if this will be actually a good investment.

Can you lend me money so I can invest in Bitcoin?


Fine. I'm not a geeky/nerdy enough to mine; how can I still obtain Bitcoins?

You can either buy them on exchanges, receive them as payment or track down an ATM that converts your cash into Bitcoin and vice-versa.

What if I paid with Bitcoins by mistake? Can I reverse the transaction?

Unfortunately, no. Once you've sent them out, even a divinely-powered Control-Z won't take your action back. Oops.

There's a debate actually going on about Bitcoin's irreversible process: depending on where you're from, it's either good because it's that secure, or plain bad because of obvious reasons.

Are there any alternatives to Bitcoin?

Of course; a lot of digital currencies have spawned. Just google it.

Can I mine on my mobile?

Yes; there are apps that'll help you with that, but it doesn't compare to the power of a full-fledged, Bitcoin-hunting PC.

Is Bitcoin legal in the UAE?

Good question. While there are a lot of clickbait ads on the Web saying stuff in the lines of 'Emiratis making money with Bitcoin, blah, blah, blah...', the Central Bank of the UAE has said it has not issued any licence related to cryptocurrencies, as we reported in October. Governor Mubarak Rashed Al Mansouri warned against engaging with digital currencies, citing the 'high risks' involved. The Dubai Financial Services Authority also warned against cryptocurrencies in September.

In short, if you want to mine for Bitcoins in the UAE, you're on your own.

Bitcoin - and the rest of the cryptocurrency world - may still be in its infancy. But with the way it's going, it won't be surprising if a lot will be more interested thanks to its tempting value (could it lead to a 'Miners' War' of sorts?).

It offers potential, but at the same time a lot of questions are still there - but we're sure to get answers, even if it's slowly but surely.

I just wish I'd still be here when the final Bitcoin is unearthed, er, 'uncyberspaced'.

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