It’s shrouded in mystery and technical jargon, but it’s everywhere: in the news, on the radio, across the web. Terms like “cryptocurrency” and “blockchain mining” aren’t making Bitcoins any easier for the rest of us to understand, let alone figure out how to use. But if the headlines are any indication, we all might want to get with the program before it’s too late.
What are Bitcoins?
Bitcoin is a digital or virtual currency that is growing in popularity across the world. This revolutionary method of payment is not controlled by any central authority, like the Federal Reserve, but rather by a system of computers and computer codes that allow people to pay others quickly and easily regardless of their location or their country of origin’s traditional form of currency.
Who makes them?
Bitcoins were first introduced on January 3, 2008 by an anonymous computer programmer using the name Satoshi Nakamoto. Bitcoins at their core are simply long, digitally encrypted online addresses that have a monetary value, which are recorded in an online ledger of sorts known as the “blockchain”. The people who maintain this blockchain are called miners and they are responsible for both the creation of new bitcoins as well as facilitating transactions. These miners in exchange are paid a few of the newly created bitcoins every so often, thus providing them an incentive to lend their computer power to the overall effort.
What is the value of a Bitcoin?
Each Bitcoin can be broken down into one hundred million units, which are called Satoshis, named after the currency’s creator. The value of a bitcoin varies based on basic principles of supply and demand. At the time this article was published, the value of a bitcoin is around $675.00 US dollars. It is a type of deflationary currency in which the value is somewhat volatile in its fluctuation. In September of last year the value of a single bitcoin was somewhere around $150.00, while just a couple of months later in late December the value was recorded at nearly $1150.00 per coin. The fluctuation is a result of a sudden increase in the popularity and interest in the concept of this universal currency.
Here’s a good video explaining what Bitcoin is.
So, can I shop using Bitcoins?
Yes. Since its introduction in 2008, the bitcoin has become an accepted form of payment at nearly 40,000 merchants both on-line and in person, in addition to becoming an increasingly popular method of payment between private parties.
There are currently over 12 million bitcoins in circulation, and that number continues to grow every day at a rate of about 150 bitcoins per hour. In order to maintain some system of value, their numbers have been capped at a maximum of 21 million, which is expected to be reached sometime in the year 2140.
Can you invest in Bitcoins?
If you want to invest in bitcoins there are numerous exchanges across the globe that will gladly take your cash (in whatever form your country uses) and exchange it for the current value in bitcoins. Many people around the world have put a lot of faith into this new digital money and have invested millions into the virtual coins.
What are the benefits of using Bitcoins?
One of the major appeals of using this new form of cyber cash is the anonymity that users maintain while conducting these peer to peer transactions. Ironically, this anonymity is created by making all transactions open to public view. This way everyone can see and monitor transactions that occur to ensure they are conducted in a fair and proper manner, leaving the details of whom, what, when and where as unnecessary parts of public information.
Think of it this way: when transactions are recorded between bank accounts if there is ever a problem or dispute later on, the banks can trace the transactions through your bank account information. They have all of your personal information (name, social security number, etc) in order to set your account up, so therefore you never have an anonymous transaction when using banks or credit cards. They keep an eye on everything and hold you accountable when something is not quite right.
But imagine eliminating the need to identify an individual by making every transaction public – thereby allowing anyone and everyone to be the monitor of each transaction and removing the personal details. Bitcoin’s unique process has captured just that idea.
How does a Bitcoin transaction work?
When a transaction occurs, one party basically transfers the unique key that is associated with that online address (or account) via the blockchain. The blockchain then adds more cryptic information to the end of that code and sends it to the new owner. This process keeps any money from being spent twice and is done in public for everyone to see. The new key is unique since the blockchain adds to the original key code, allowing the recipient of the money the security of knowing it is uniquely theirs to now spend.
How are Bitcoins protected?
Since bitcoins are essentially the keys to an online address that has money in it, it is important to keep them protected. This is where the bitcoin wallet comes into play. Bitcoin wallets are online services that keep track of your bitcoins (or the keys to those online addresses), as well as manage any transactions that you wish to complete. They are a type of software that puts all of this technical code and logarithmic equations into basic understandable terms.
A transaction takes place when an individual wishes to exchange some of their digital currency with another individual or business in exchange for a product or service. Wallets may seem like the perfect solution to keeping track of all this except for the fact that they too are simply an online program or mobile application and while they seem secure now, hackers are always developing new ways to try to break the code.
Since the online address and the all-important key are essential parts of any transaction, many people recommend keeping your keys separate in an offline hard drive or other location that could not be hacked into. After all, he who holds the key, holds the cash.
How do I get started with Bitcoin?
If you are ready to invest some of your actual cash for some of this new virtual currency, there are several ways to go about doing it. The first thing you need to do is choose which wallet (or program) you want to use. There are several types to choose from depending on where you think you might use Bitcoins the most. There are desktop wallets, mobile wallets or web wallets that allow you to use them on either your desktop or mobile device.
If you chose a web wallet, it is recommended that you use great caution, because whichever service you select will be hosting your investment. It is critical that you research the program you decide to go with to make sure they are reputable and well established, not a fly-by-night sort of organization that disappears overnight with all of your cash.
If you chose a desktop wallet, you should go with something like Bitcoin-Qt, which is the original Satoshi wallet and offers the highest levels of security, privacy, and stability. A trusty mobile wallet would be something like Bitcoin Wallet or Blockchain which are easy to use and reliable, while also being secure and fast.
Once you have chosen your wallet, you are ready to make a deposit into it. You can buy Bitcoins directly from an on-line exchange by using your bank account. Coinbase is an exchange that is highly rated and is located in the United States.
You can also decide to fund your new wallet by accepting Bitcoins as payment for goods or services from someone wishing to pay you that way. When you set your wallet up, whichever program you end up chosing will tell you what your Bitcoin Address is. This is critical information to give anyone who wants to send you Bitcoins so they know how to get them to you.
Another alternative to buying Bitcoins from an exchange or having to sell something to get some is to use a service that helps you find people in your community that are willing to sell you Bitcoins directly, like LocalBitcoins.com. Many new Bitcoin users feel more comfortable going somewhere familiar or nearby to start their Bitcoin journey.
How safe is Bitcoin?
Since there is no government oversight of this currency, there is also no insurance to back it up if an economic disaster occurs. Additionally, there are no refunds or reversals in the bitcoin system. Once a transaction has taken place, if you do not receive the goods or services you were paying for you are simply out of luck. Additionally, the fluctuations in the value of a bitcoin can be extreme as shown recently in the varying values over the past year. As stated previously, the value of a single bitcoin increased nearly $1000 in just over two months’ time.
So, what’s the big deal with all the skeptics?
While there is a large attraction to this anonymous method of payment, there are an equal number of people who oppose it for several reasons. First off, since this currency cannot be traced to a specific individual’s name, it was used widely in its early days as drug money or for payments of other illegal goods. The Huffington Post reported last year that online gambling accounted for a huge part of Bitcoin activity. It is also widely used for money laundering schemes.
Additionally, Silk Road was an online drug market that was closed down by the US Government in 2013. When the dust settled it was estimated that approximately 9% of transactions that took place in this illegal market were done using Bitcoins. The FBI seized a total of 144,000 bitcoins from this major bust, worth about $28.5 million dollars at the time. With this controversy constantly in play, it is difficult for many people to stand behind the concept of this virtual currency.
Many other troubling incidents have occurred recently prompting numerous people to second guess the future of Bitcoin. One such incident involved the CEO of a Bitcoin exchange being arrested on money-laundering charges.
What does the future for Bitcoin look like?
Another recent concern that has many people thinking twice about investing into this new currency is the closing of Mt. Gox, the world’s largest exchange up until this past Tuesday when it was forced to close its doors. It was discovered that there were more than 740,000 bitcoins that had gone missing over the past few years, adding up to millions of dollars that the Tokyo Exchange could no longer account for. Where these coins went is a mystery, but one thing for sure is that many people have now lost a huge portion of their investment completely.
Because this online currency is unregulated and anonymous, there may never be a way for users to find out who may have stolen the thousands of missing bitcoins — and unfortunately, no way to recover them.
James Angel, a professor of finance at Georgetown University, recently said, “Having Mt. Gox shut down is to Bitcoin what having the New York Stock Exchange shut down is to our equity market.”
Mt. Gox issued a short statement saying, “In light of recent news reports and the potential repercussions on Mt. Gox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.”
Unfortunately, one of these exchanges suddenly shutting down is not a new thing for Bitcoin. The current statistics show that around 45% of bitcoin exchanges fail, and when they do they take their clients investments down with them. Of these, approximately 13% closed down because of hacking and issues about missing funds, and another 33% simply closed without any explanation.
The most recent shutdown of Mt. Gox must have been somewhat anticipated to bitcoin controllers since the Bitcoin Foundation announced earlier in the month that some exchanges had already put a hold on any withdrawals after being hit by security attacks. At that time the foundation released a statement saying, “Somebody (or several somebodies) is taking advantage of the transaction malleability issue and relaying mutated versions of transactions. This is exposing bugs in both the reference implementation and some exchange’s software.”
So where does this leave the many people who have lost their investments? Since the cyber-currency is not subject to regulatory oversight, it also comes with no government guarantees. Clients could file lawsuits sighting negligence on the part of Bitcoin and its exchanges and attempt to recover some of their losses. There is however no guarantee that this would result in a ruling in their favor.
So, should you get behind Bitcoin?
The bottom line on investing in Bitcoin is that while it has many advantages, the risks and disadvantages are also many. There are quite a few people who believe in this virtual currency and have backed it with millions of their own dollars, but the volatility of the value and stability of the money itself is still a large source of debate. While it may offer a good number of people a new and revolutionary method of making payments for goods and services, it remains a shaky new territory for most people. The best advice may be to only invest what you can afford to lose.
1. What is BitCoin – CNN Money
2. Blockchain to buy Bitcoin trading platform – Bloomberg
3. Bitcoin Exchanges closing – Business Insider
4. The Promise of Bitcoin – Wired
5. Japan to regulate Bitcoin trades – Nikkei
6. Bitcoin Shop starts trading – Market Watch
7. The Doomsday Cult of Bitcoin – NY Mag