The Case for the Bitcoin Cryptocurrency, by J. McG.

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A major theorem of cryptography is that anything that be done with a trusted authority can be done without1 a trusted authority.  This theorem can be applied to currencies, too. Anything that can be done by a central bank can be done without a central bank .  The central bank for the United States of America, as you probably already know, is the US Federal Reserve.  The stated dual mandate of the US Federal Reserve System is:
 
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

To state this in other words, the dual mandate is:
1.  Stable prices
2.  Maximum employment
 
However, the real dual mandate for the US Federal Reserve during the past five years has been :
1.  Bail out the US Government.
2.  Bail out the Big Banks.

The US Federal Reserve System is the trusted authority that is now losing the trust of the average American and people worldwide.  The US Federal Reserve System has been monetizing the debt of the US Federal Government and buying the toxic mortgages being held by major US banks.  Debt monetization, quantitative easing, discount window lending, or whatever new name that the Federal Reserve comes up with, it simply means more money printing.  This results in price inflation for real things, such as food and gas. Debt monetization is advanced warning that a fiat currency is about to die or a government is about to go bankrupt and renege on its obligations.  The US Dollar is a fiat currency just  like all the other worldwide central reserve currencies.  Fiat currencies have no intrinsic value except the value that is forced by the government upon the people.  Sooner or later, all fiat currencies revert to their true value of zero.

Now, because of the Internet, there is an alternative currency called Bitcoin.  Bitcoin takes the basic theorem that anything that be done with a trusted authority can be done without a trusted authority and applies the theorem to the combined fields of cryptography and currency, which is now known as cryptocurrency.  Bitcoin is the most popular cryptocurrency that exists today. The best way to start learning about Bitcoin is to download the free application at the following link:
 
http://bitcoin.org/

A good definition of Bitcoin can be found in the Intro part of the readme file in the download.
   
Bitcoin is a free open source peer-to-peer electronic cash system that is completely decentralized, without the need for a central server or trusted parties.  Users hold the crypto keys to their own money and transact directly with each other, with the help of a P2P network to check for double-spending.   
 
The application costs nothing to download and it is available for the major operating systems (OS):  Linux, Windows, and Mac OS.  The download takes a short time depending on the Internet connection speed.  However,  it may take over a day for the application to fully sync up with the Bitcoin system. Bitcoin is a peer-to-peer application.  There is no central infrastructure, server, or database.  Each user is both the client and server.

In Bitcoin, blocks are the files that contain all the transactions. The first time a user downloads the app there will be tens of thousands of blocks to load. However, once these blocks are loaded, a user just has to load the recent transactions. On a average day, there are about 200 blocks to load. The app is fully synched when all blocks have been loaded. The green check mark reflects the app is in sync.
 
The units of currency are called bitcoins (BTC).  Bitcoins have value because work is needed for its creation.  Bitcoins are mined.  The mining is done virtually by miners throughout the world with computers that have fast central processing units (CPU) and powerful graphics processing units (GPU).  However, the average users can just buy bitcoins through various exchanges and sites located on the web just as one would buy gold or silver coins. One of the main benefits of Bitcoin is that a user can transfer cash from one user to another user.  A user can buy things from various vendors located anywhere in the world by way of the Internet.  All of this can be done without using a bank,  money order, Western Union, or even PayPal.  The file that holds the bitcoins is called wallet.dat in Windows.  The wallet.dat file is just like a real wallet. If a user loses the wallet or the wallet is stolen, then the cash is gone, too.  Multiple backup wallets can be created and stored; however, Bitcoin prevents double spending. In Windows, as seen in the screenshots below, wallet.dat is located under Users ->Username -> AppData ->Roaming ->Bitcoin. The backup copies of the wallet should be stored at various locations, such as on a secured cloud server or a on a flash drive. The wallet.dat file should be encrypted before its stored. Bitcoin advises that encryption passwords and the wallet passwords should be at least 20 characters long containing uppercase letters, lowercase letters, numbers, and special characters.

"Your Bitcoin Address" that reflects the unique identifier for each Bitcoin owner. Each wallet can have multiple addresses. The benefit of anonymity is that a person can buy things or send money to people or organizations without anyone knowing their identity. Just for practice or as a learning experience, you can send bitcoins between two addresses on the same computer. Or download Bitcoin on two computers, and send money between the two addresses. Also, you will see that bitcoin transactions usually takes seconds to occur between the sender and receiver.

Bitcoin has now adapted to furnishing the app for Android cell phones. Now, users can transfer and make transactions with bitcoin using Quick Response (QR) codes. As seen below, QR codes are the checker board barcodes that also represent the Bitcoin address in a different format than the alpha-numeric format. An Android handset with the Bitcoin app can scan QR codes. 

Bitcoin is not just for computer nerds and crypto-geeks. Survivalists apply the basic cryptography theorem that anything that be done with a trusted authority can be done without a trusted authority to many aspects of daily living. Unfortunately, the US Dollar and the Federal Reserve System penetrate all areas of life for the average American. The average American struggles paycheck to paycheck, year after year, due to the actions of the US Federal Reserve System, which is creating more and more US Dollars every year. Bitcoin provides a viable alternative to the US Dollar and the US Federal Reserve Banking System. Year to date, Bitcoin has gained over 100% in value versus the US Dollar and the other major world currencies. Bitcoin was launched back in January 2009 by a person or persons named Satoshi Nakamoto. At this time, the total market value of all bitcoins is approximately $125 million. There are over 10 million bitcoins in circulation with each worth at around $12.25. The total amount of bitcoins that will be mined is 21 million and the mining operations will stop in the year 2140 by designed. Anyone can be a miner or a person can be a member of a mining pool like Bitminter. There are many mining pools on the Internet. Mining pools combine the computing power of individual miners in order to mine more efficiently. Mining can be costly due to the mining rig that a user may have to set up as well as the electricity to power the rig. So, each user will have determine if its cost effective to become a miner.
  
YouTube is a good source of information and education about Bitcoin from users around the world. Most of the content is very informative and straightforward. Be careful if a video, or some company, states that it can double your bitcoins if you just send your bitcoins to them. This is the equivalent of someone saying, "Send me an ounce of silver and I will send you back two ounces of silver the next day." This is a common scheme which appeals to the greedy as well as the naive user of Bitcoin. Please remember, there is no chargeback system with Bitcoin as there is with debit and credit cards. Once the bitcoin is sent, then its gone. The below video is a good start for a beginner. There are more detailed videos at YouTube as you become more comfortable with Bitcoin and have more questions that need to be answered.
  
Cited Works:

Dan Boneh,  Stanford Online Cryptography Course:  Introduction-Course Overview (Stanford University)
Federal Reserve Bank of Chicago,  The Federal Reserve's Dual Mandate, (October 2012)

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This page contains a single entry by Jim Rawles published on January 12, 2013 1:35 AM.

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