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Bitcoin: hype or revolution?

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Micha Ober

Page 1: Bitcoin: hype or revolution?

teaser For some time now, news about alternative currency Bitcoin have been going around in the media - mostly when the exchange rate set a new record or a trading place had been robbed. Bitcoin seems to be a system of extremes: extreme gains and losses, complete decentralization, detached from all authorities and state control. But what exactly is Bitcoin? Are there reasons to use Bitcoins in everyday life? Or is it just a tool for illegal activities? In this article we will be looking for answers to these questions.

Before we discuss historical and current developments, we will explain the basic operation system of this currency - after all, this is the only constant since Bitcoin has been introduced. The idea behind Bitcoin, however, is already much older than the currency itself: in order to fight the email spam problem, a method with the name Hashcash was proposed in 1997 by Adam Back. The computer of the e-mail's sender was required to solve a complex arithmetic problem whose computation takes so long that it is no longer possible to send hundreds or thousands of messages per second. The recipient of the mail can then verify with a simple calculation whether the sender has correctly solved the arithmetic problem (which includes the content and the header of the mail, and thus will be constantly changing). If the result of the calculation was wrong, the e-mail could be discarded as spam. However, this system has not asserted itself.

The Bitcoin Client: the wallet of the future?

Nevertheless, this idea is the starting point for the function of Bitcoin: a very complex computational task whose solution requires a lot of time, and a method to check the result of the arithmetic task with very little effort. Bitcoin uses asymmetric encryption, ie, an account consists of a private and a public key. To send Bitcoins to an account, you need the public key to issue Bitcoins. If you are in possession of the private key, you are in possession of the account. Since Bitcoin operates in a completely decentralized P2P network, there is no entity to whom you can turn to should you ever lose your private key (either by a disk crash or theft). Similarly, registration is not necessary; you simply download the client and are able to send and receive Bitcoins. And this is where the most common misconception appears: in principle, Bitcoin is only pseudonymous, not anonymous. If you post your Bitcoin address on your personal blog, a connection between a Bitcoin account and a real person is quickly made. Payments can be traced, and allow at least to derive from them the probability that an address belongs to a particular person. A complete anonymous use of Bitcoin requires quite a bit of work, and is by no means trivial.