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As with any investment, a vital consideration is the safety and security thereof. When it comes to an investment in an intangible digital currency, investor's security run rampant. With daily attacks in cyberspace - some with disastrous and widespread ramifications - you may ask how can you place trust in bitcoin as a means of investment?
You're not alone in your questioning.
The truth is, that it's in fact far safer to transact in bitcoin than with traditional banking systems. It all boils down to the security provided by the underlying protocol, called the Blockchain.
Let's examine this pioneering process that maintains the integrity of the Bitcoin network, and secures the bitcoins in circulation.
The Blockchain is a shared public ledger where every single confirmed bitcoin transaction is recorded and made public. It's the linear, chronological log of completed transactions, contained within 'blocks' that continues to expand with each new set of recordings.
A block is a record in the blockchain that contains and confirms waiting transactions. Currently a new block is added to the blockchain roughly every 10 minutes. These blocks are mined then added to the end of the blockchain, and are never to be changed or removed.
A pivotal concern regarding the development of a peer-to-peer payment system, and a currency free of centralised control, was the issue of double spending. A mechanism was required that could ensure, while still keeping Bitcoin public, that coins used in transactions were in fact free to be transacted with and hadn't been spent elsewhere already.
To counter this potential problem, the peer-to-peer network introduced the blockchain. The chronological manner in which blocks are added to the blockchain mitigates the risk of double spending in that once a transaction has been locked in, no further verification of that particular coin, or part thereof, can occur for a different transaction from the same payee.
If we imagine the blocks in the blockchain as individual lego or building blocks spread across a toddler's floor, the concept becomes quite simple to grasp. As said toddler places one block on top of the other, it becomes unavailable to place elsewhere. (Let's also perhaps imagine that there is superglue on the block at the time - not that toddlers should be playing with superglue!! But for my analogy it's required.) Assuming that the block has been secured with our non-toxic, child-friendly superglue, as he places more and more blocks on top of one another, we can quite evidently see the order that they have been placed, and it is impossible to remove one for under a stack to attempt to place it somewhere else. This is the blockchain simplified to the maximum.
The decentralised nature of Bitcoin, meaning that there is no central control point or intermediary financial institutions overseeing - and charging for - processing transactions, provides a network free of corrupt and political influences.
Miners (those who verify transactions and secure the network) are incentivised for successful processing, by being awarded fresh currency for every completed block (currently 25 bitcoins per block) as well as the transaction fee based on the amount of data being processed, not the monetary value.
The fact that the blockchain is a public record reinforces the security, as attempts at fraudulent or sinister activities are quickly revealed and thwarted. In a centralised system, these would be far more difficult to identify or trace, shrouded by administrative and legislative bureaucracy. With an open record of transactions, bitcoin owners are able to see precisely where their coins are at any given time, providing a level of transparency - and as such security - not provided by banking and financial institutions.
We’re warned on an almost daily basis of the care we need to take with our identification and personal account details online. A quick browse through your ‘junk’ or ‘spam’ folder will provide sufficient evidence of the rampant level of cybercrime and scams. Carbon copy branding of trusted institutions urging us that we stand to lose our fortunes if we don’t heed the call to confirm our account, personal or login details by simply clicking on the ‘'assumingly harmless link'. Sadly, despite fair warning, some still fall prey, parting with their precious identification and financial information freely.
Even as scam-savvy individuals, we are at risk with our general, everyday transactions. Traditional payment systems collect your personal information and store this information on servers, making them 'honey pots' for determined cyber criminals. Blockchain transactions, on the other hand, are pseudonymous. This means that your name, security number, physical location and bank account information is never shared - only your wallet ID which is a 16 character unique identifier made up of letters and numbers.
Any attack on your bitcoin wallet, assuming you’ve left your private key online or on your computer would possibly hand the successful hacker your bitcoin balance, but your private details would remain that. Private.
The blockchain works on the premise that miners (or nodes, as they are called within the protocol) use their collective computational power to solve mathematical algorithms that verify the transaction and release new bitcoin into circulation. This process requires significant computer power to execute and is another feature that helps secure the network.
In order to make any significant attack on the network itself would require a 51% share of the total power of the network. While certain mining pools have come close to the mark, the network self-regulates with additional nodes coming onto the network and others dropping off too frequently to pose too much of a threat to the balance of power.
Simply, the computational power required to launch an attack on the network is simply too great and costly for any single or group of miners to acquire and activate. Not even the combined power of all of Google's supercomputers x1000 is sufficient to do so. Even in the unlikely event of a node acquiring the required power, the effort wouldn't last long enough to 'break' the chain further than 6 transactions. This is a deterrent as miners can make far more profit following normal protocol than what they ever could attempting to hack the system.
While many view bitcoin as simply another cryptocurrency, those that understand the protocol of the innovative blockchain will see that the true value of bitcoin isn't in the digital currency, but rather in its underlying system that sets it free from central control, opening the door to a new age of finance and transacting, using a secure framework that offers us exceptional security of our money and investments.