Bitcoin is a new consensus network that allows a peer-to-peer payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that that is powered by its users and has no central authority or middlemen. From the user point-of-view, Bitcoin is pretty much like cash for the Internet. It is the first implementation of a concept called “crypto-currency.” Bitcoin is nothing more than a mobile app or computer program that provides a personal wallet for Bitcoins and allows users to send and receive Bitcoins with them. This is how it works for most users.
With such a new application that is developing and spreading, there are concerns over security. Behind the scenes, the Bitcoin network is sharing a public ledger called the “block chain,” containing every transaction ever processed, allowing a user’s computer to verify each transaction’s authenticity. Digital signatures corresponding to each send address protects the authenticity of each transaction, opening full control to all users to send Bitcoins from their own Bitcoin addresses. On top of that, anyone can process transactions using the computing ability of specialized hardware and be rewarded in Bitcoins for this service. This is often referred to as “mining.”
The technology behind Bitcoin has a strong security track record, and the network is probably the largest distributed computing project worldwide. User error is the most common vulnerability of Bitcoin. Wallet files that contain the necessary private keys can be stolen, lost, or deleted. This is fairly similar to physical cash stored in digital form. However, users can employ sound security practices to protect their money or utilize service providers that offer good levels of security and insurance against loss or theft.
Years after its inception, the rules of the protocol and the cryptography used for Bitcoin are still working, which is a solid indication that the system is well designed. However, security flaws have been found and addressed over time in various implementations of software. Just as any other form of software, the security of Bitcoin software depends on the speed and effectiveness with which problems are found and fixed. Bitcoin will gain more maturity as more such issues are discovered. While there have been thefts and security breaches, there are misconceptions about these unfortunate events. None of these events involve Bitcoin itself being hacked, nor do they imply inherent flaws in the Bitcoin system; just like a bank robbery doesn’t mean a compromise of the dollar.
It is accurate enough to say that a complete set of good practices and intuitive security solutions is needed for better protection of the money belonging to users. Over the last few years, such security features have been quickly developed, such as wallet encryption, offline wallets, hardware wallets, and multi-signature transactions. While most systems relying on cryptography in general, including traditional banking systems, are vulnerable to quantum computing, such computers don’t yet exist and probably won’t for a while. In the event that quantum computing becomes a relevant threat to Bitcoin, the protocol could be upgraded to use algorithms that are post-quantum. Although Bitcoin is still a developing concept, it is safe to say that the technology behind it is overall reliable.