Bitcoin and virtual currency

What is Bitcoin, and will you be paying for your coffee in bitcoins anytime soon?
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01 .Bitcoin: virtual or viral?


What you need to know about Bitcoin:

  • Bitcoin is a web-based payment system.
  • Bitcoins have value and can be used for payment.  
  • Bitcoins are cyber currency and not minted into physical coins.

Bitcoin has been heralded as both the internet’s premier currency and as a conduit for malware. It’s been in the news lately because the first two Australian ATMs recently opened in Sydney, but Bitcoin is already dogged by stories of trading market crashes, disappearing funds and claims that rogue Android apps are mining (making) bitcoins. 

The Australian Taxation Office is looking into Bitcoin and other cyber currencies and how to classify investments and income. So just what is Bitcoin, and will you be paying for your coffee in bitcoins anytime soon?

What is Bitcoin? 

Bitcoin is a peer-to-peer system to send payments from one person to another over the internet. Bitcoin payments don’t go through traditional financial systems. Transactions are managed in a Bitcoin wallet, a program that lets registered users store, send and receive payments. 

The cyber currency uses individual bitcoins, which have a value and can be bought, sold and exchanged. The recently opened Bitcoin ATMs let you withdraw real currency converted from your bitcoin wallet or add to your balance by depositing money that is converted back into bitcoins. A Bitcoin wallet can be used on a computer, smartphone or tablet.

Bitcoin is a bit of a frontier currency because it isn’t controlled by a central bank and its use is unregulated. In Australia, the ATO is expected to soon release taxation guidelines for Bitcoin and other cyber currencies. The US IRS (tax office) announced that bitcoins should be treated like property and federal taxes should apply. 

Australia isn't to be outdone when it comes to cyber currencies. Dogecoin was created by a software developer late last year and has since gone from strength to strength. There are other cyber currencies such as Litecoin and Peercoin.

Where did Bitcoin come from? 

The idea of Bitcoin was developed by Satoshi Nakamoto in a 2008 paper outlining how to create a peer-to-peer payment system. The following year, the first Bitcoin program was created and bitcoins released. No-one owns the Bitcoin network as such, and anyone can download the Bitcoin “wallet” program to join the network. There is a Bitcoin Foundation, whose mission is to promote Bitcoin as a viable, safe currency. It wants to standardise Bitcoin so it’s robust and ensure it’s safe from being hacked. 

How do I get bitcoins? 

As of May 2014, it costs about $443 to buy one bitcoin. So as you can see, they don’t come cheap. You might not want to buy them until you know exactly what you’re going to do with them. You’ll also need to pay a commission to buy and sell bitcoins like you do when exchanging foreign currency. 

The creation of individual bitcoins is pre-defined by the original Bitcoin code and cannot exceed 21 million. As of May 2014 there were almost 13 million bitcoins in the system, according to, which tracks transactions in real time. 

There are several ways to acquire bitcoins: 

  • Earn bitcoins on your computer by mining
  • Transfer bitcoins with another user. 
  • Buy bitcoins on an exchange
  • Accept payment in bitcoins. 

Bitcoin mining is where people use their computers to take part in processing and can eventually earn bitcoins for themselves. Bitcoin mining on your computer will earn bitcoins using special software to solve equations. To do this, you use mining software to which you devote some of your computer’s processing capacity to work towards bitcoins.

Bitcoin transfers

Bitcoin transfers can be carried out using a Bitcoin e-wallet to send and receive payments over the internet through a computer, smartphone or tablet. It’s like sending payments via PayPal or electronic bank transfer. To create a Bitcoin wallet, you need to install a Bitcoin wallet program. Buying bitcoins is possible from one of the many Bitcoin exchanges. A Bitcoin exchange is an online marketplace for buying and selling bitcoins. 

Bitcoin exchanges

In Australia, you can start on This site links to local bitcoin exchanges such as Bit Trade Australia, Btc Markets or Bitcoin Australia

Paying with bitcoins

Bitcoin payments can be made at certain online merchants as well as some cafes, restaurants and other shops. It hasn’t yet taken off in Australia, but the introduction of Bitcoin ATMs may spur along Bitcoin payments.

Read on to find out about some of the risks that may exist with Bitcoin and other cyber currencies.


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  • Bitcoin isn't yet regulated by a central reserve bank.
  • No agency controls the value of bitcoins.
  • Bitcoins can be hacked or compromised. 

Bitcoin and other cyber currencies have been accused of being a convenient front for money laundering and cybercrime and a way to pay for illegal items such as drugs. Criminals may find it an appealing way to trade money away from the scrutiny of law enforcement and regulatory bodies.

Critics say it’s not properly regulated and values are volatile.If you're keen to try it, there are two main risks with Bitcoin – losing your money and infecting your computer with malware. Recently a program called DarkWallet was touted by an anonymous group that could protect users identities for Bitcoin transactions.

On the financial side, Bitcoin isn’t controlled by a central bank that manage the value of the currency and currency fluctuations can't be prevented. Sceptics also argue the currency is vulnerable to theft from hacking. The Japanese Bitcoin exchange Mt Gox recently suffered a theft of (reportedly) 700,000 bitcoins and has ceased trading. 

On the security side, getting viruses and malware onto your computer can compromise your bitcoin stash. For example, a recent CoinThief malware attack on Mac used a fake Angry Birds game to infect Apples and steal bit-coin related login details.

How does the Bitcoin system work? 

Bitcoin works a bit like email. No one single entity owns or controls email, and there are lots of programs to send and receive email that you can use. 

  • Bitcoins are bits of computer code that match a formula. 
  • Bitcoins are created by using computers to carry out huge volumes of computations to try different combinations and eventually find one that matches the Bitcoin formula. 
  • The process of creating new bitcoins is called mining. 

The protocol for computing the code was developed from the original paper on peer-to-peer payment network. The Bitcoin network relies on a database, which is a kind of public ledger that records all the transactions in the system and who owns the individual bitcoins. It is known as a “block chain” because blocks or bundles of transactions are added to the database every 10 minutes. The Bitcoin block chain is a complete historical record of all Bitcoin exchanges. 

Some Bitcoin e-wallet programs will download the list of blocks when you first start up as a reference point to add your transactions to this record. Each time a transaction is made, it’s broadcast to the Bitcoin network and each payment is digitally signed to verify it and prevent double-dipping of bitcoins. 

Bitcoin uses cryptography to protect transactions so they can only be locked and unlocked by right sellers and buyers to prevent theft. 

Bitcoin wallets: cloud, computer and mobile 

There are three types of bitcoin wallet that can be used to store and transact Bitcoins: 

  • Cloud-based wallets that use a web browser 
  • Software wallets that run on your computer, and 
  • Mobile wallets that use an app on a tablet or smartphone. 

A Bitcoin program sends and receives transaction to other users in the network. Each user has an address – an alpha-numeric string of between 27 and 34 characters, a bit like an email address that identifies you and the destination for your bitcoins. You can get an address within your Bitcoin program by clicking “New Address”. 

The Bitcoin Foundation has links to download a wallet and is a good place to start if you're keen to learn more about different Bitcoin wallets. 

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