Bitcoin, and the other crypto-currencies that are available, have garnered plenty of attention over the last year or so – and not all of that has been good. Some analysts have found strong correlations between the fluctuating exchange rate of Bitcoin and the activities of malware distributors and other nefarious actors. And the recent Mt Gox (a Bitcoin currency exchange) revelations that as much as half a billion dollars of Bitcoin had been stolen, rendering the company insolvent, have highlighted the volatility and transience of virtual currencies.
With that happening – is it possible to safely use Bitcoin?
Let's start with the basics – what is Bitcoin? According to their website
"Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system."
Think of it as electronic tokens. The token has a value (Mt Gox traded bitcoins rates that fluctuated between $50USD and $100USD) and individuals can exchange them as if they were real currency.
So – how do you get your hands on bitcoins? Like other valuable objects it requires work. Bitcoin mining requires processor power in a computer.
You start by downloading a piece of software to your computer called the Bitcoin Wallet. As the process of mining for bitcoins is very processor intensive, it's generally suggested that you join a "pool" – or a group of other miners who combine their computing power. This is critical because the mining process requires the solving of complex algorithms. A pool is able to break large problems into smaller chunks. As a result, the profits are shared between the pool.
In short, what Bitcoin represents is a currency that almost anyone with a computer can create, given enough processing power and time, which bypasses traditional banking and financial regulations. It's little wonder that the FBI said " "bitcoin will likely continue to attract cyber-criminals who view it as a means to move or steal funds" in a 2012 report.
Can Bitcoin Mining Be Secure?
The short answer is that it can be secure. But we're not sure if it safe yet.
If you use your own computer or network to mine bitcoins and exchange them for real currency through a safe mechanism then it is possible to use bitcoins safely.
Governments are starting to react to the proliferation of bitcoin exchanges. For example, the Monetary Authority of Singapore (MAS) has said that it will " regulate virtual currency intermediaries in Singapore to address potential money laundering and terrorist financing risks".
Similarly, according to a statement the New York State Department of Financial Services "will consider formal proposals and applications in connection with the establishment of regulated virtual currency exchanges operating in New York".
These seem to be responses to the collapse of the Tokyo-based Mt Gox exchange which is reported to have suffered $500M is losses as a result of Bitcoin theft.
This is a sign that Bitcoin is being recognised as having real value, that criminals are using it and that it requires regulation. As that spreads globally, Bitcoin mining and exchange will become more secure.
Until then, Bitcoin mining can be done safely but it requires caution.
This article is brought to you by Enex TestLab, content directors for CSO Australia.