I’ve been hearing a lot about Bitcoin how it’s exploding in popularity lately, but until recently I had absolutely no clue what a Bitcoin was, how it worked or why anyone would ever want them. So I dug in, did some research, and found that Bitcoin is actually a pretty fascinating concept.
What is Bitcoin?
Simply: Bitcoin is a new, experimental, purely digital form of currency that could forever change how business is conducted online. Bitcoin is a decentralized currency, meaning there is no central bank or government controlling the currency. Instead, everything to do with Bitcoin operates completely over a peer-to-peer network. The below video probably explains the concept much better than I can, so check it out:
When you think of currency you traditionally think of physical bills and coins, be they US Dollars, Euros, etc… However currency in its most basic form is simply a medium of exchange. When you hold a dollar bill or a euro note in your hand, that piece of paper has value simply because governments say it does. Each currency has a different value relating to another and you usually have to convert if you’re going to be spending money in a country other than your own.
As Bitcoins are completely digital, they are a worldwide currency. They have a consistent rate whether you live in the United States or in Zimbabwe. This allows people to process transactions and do business across borders very easily.
Where Did (and Do!) These Things Come From?!
Bitcoin was created by a person(s?) using the pseudonym “Satoshi Nakamoto”. The true identity of who Satoshi Nakamoto is/was is unknown. He developed the Bitcoin system and software that is used to run the system in 2009 but hasn’t been heard from since 2010.
That’s the vague creation story of the Bitcoin system, but how actual coins are created is very well-known.
Coins can be created by anyone, but the supply is extremely limited. In fact only 21 million Bitcoins will ever be created.
Coins are created through a process called mining. In order to mine coins a user must run a software program that makes their computer perform very long and tough hash calculations. Whenever one of these calculations is completed and a new Bitcoin block is found, the owner is credited with 50 Bitcoins. However this “reward” will be cut in half roughly every four years as the 21 million coin ceiling is neared.
If you have no interest in dedicating all that computing power and electricity cost to create bitcoins, don’t worry, you’re not out of luck. All you have to do is set up a Bitcoin wallet and it’s as simple as exchanging your traditional currency for Bitcoins on any Bitcoin exchange. You can also set up your wallet and simply choose to accept Bitcoins as a form of payment if you’re selling things on your website, Craigslist or really anywhere at all.
Where Can I Use Bitcoin?
- As mentioned above you can send Bitcoins to anyone with a Bitcoin key (such as 1NbGtgD24aQhkWMDv44dmAHfyqNxotM9qS if you want to show gratitude for this post
) - Any retailers on this list. Including names you recognize such as WordPress, Reddit, Wikipedia, Wikileaks, Archive.org and Namecheap.com.
- You can even pay for your Pizza Hut, Domino’s or Papa John’s pizza with bitcoins by using pizzaforcoins.com
Bitcoin As An Investment?
What really brought Bitcoins to my attention in the first place was all the chatter they’ve been getting lately as an investment opportunity on some forums I visit.
As of this writing there are 10,858,400 Bitcoins in existence and each coin is worth roughly $40 USD meaning the Bitcoin economy is roughly $434 million. The BTC/USD exchange has exploded in 2013 as you can see from the chart below.
source:bitcoincharts.com
This shows that Bitcoin is being adopted very quickly. However the whole Bitcoin investing world seems like extremely high risk-high reward speculation at this point. The day-to-day swing in price are very wild and the current run up in price certainly looks bubble-ish. Most likely due to people bidding up the cost of coins because the are afraid of getting left behind on the next big thing.
The upside potential for Bitcoins is absolutely gigantic. If they start to gain more traction with mainstream retailers and if they become a more common alternative for the average person the value of Bitcoins will soar due to the very limited supply.
But,and there’s always a “but”…
The Risks Of Bitcoin
The biggest risk to Bitcoin and those counting on it as an investment, is the lack of widespread use. For there to really be something to drive up the price of coins, they need to be accepted as payment and many more mainstream retailers. If an iTunes or an Amazon.com ever hops on the Bitcoin bandwagon they’ll surely explode in value.
Another risk to the success of Bitcoin are the governments that control all that “other” currency. Right now the value of Bitcoin is entirely contingent on being able to turn it back into traditional currency at any time. To do so means having access to the different banking systems of the world. If the government were to step in at any point and disrupt access to that Bitcoins would essentially cease to be a liquid asset and surely plummet in value.
Government intervention is a real possibility due to the anonymity of Bitcoin transactions. Because transactions are totally anonymous (They only require a transaction ID. No name, phone number, email, etc…) coins can very easily be used to launder money, sell drugs, gamble or any other number of things big brother would take exception to. Take it from someone who had thousands of dollars sitting in an online poker account: It’s not a great feeling to see the government step in and block all the routes of access to your money!
Conclusion
After spending most of this week reading everything I can find on Bitcoin, I’m intrigued by the possibilities. I don’t think I’m going to really get involved with them just yet, the risk is just too high for my tastes, but I’ll definitely be keeping a close eye on any new developments that happen with the system.
Traditional currency certainly isn’t going anywhere anytime soon, but I think there is always room for a new alternative. Whether that alternative is Bitcoin or something else remains to be seen.
What do you think about Bitcoins? Do you use them already? What would it take for you to start?
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I’ve read some things that show that bitcoins aren’t as anonymous as they seem. Yes, there is just a transaction ID, but that ID can be traced.
At the end of the day, BitCoins are no different than all of the other payment systems that sprang up in the 90′s and died out when Paypal came out with the capability of moving real money from person to person online.
I don’t think anything on the internet is completely anonymous, but I didn’t have to provide any information whatsoever to get my key in order to be able to send and receive payments. I guess it could be traced to an IP maybe.
I don’t trade Forex and can appreciate commodities for the fact that there’s and underlying asset being traded. For some silly reason I just can’t wrap my head around a non-existent currency. Then again, my kids play Runescape and spend hours earning Iridescent dragon armor (or something like that) and then sell it to someone for real money, so who’s to say!
Part of why I wrote this was to help myself get a better grasp on how it all worked
I’ve never played, but I’ve heard that at one point in time the gold that you can get in “World of Warcraft” was being bought and sold by people for real money. Just goes to show, anything can be used as a currency if others find value in it.
This is a very interesting concept and this is the first time I have heard of Bitcoin. Thanks for sharing!
You forgot to mention hacking as a risk to bitcoins. There are a few stories out there about it (http://www.wired.com/wiredenterprise/2013/03/digital-thieves-pull-off-12000-bitcoin-heist/)
The are also the prefered currency of the silk road (an online drug order service) so they have already attracted the attention of law enforcement.
I’m not saying bitcoins are a bad idea, but like every other system of money, nothing is perfect.
A bitcoin exchange getting hacked != bitcoin getting hacked. Not saying it couldn’t happen though. It’s probably safe to assume that ANYTHING on the internet can be hacked.
Yeah, Silk Road is what I had in mind when talking about that piece. I just didn’t mention them by name
How very interesting; I’ll look into it further.
My biggest worry about bitcoins is that they are used almost entirely to finance black and grey market transactions. I would not be surprised if the government regulators and enforcement agencies eventually wake up from their slumber and shut the whole thing down.
It’s definitely the biggest risk. I think for bitcoin to be a viable alternative “legit” businesses need to adopt them quickly enough to outpace the black market reputation.
That said, illegal activities can be carried out with any currency or item of value. It will be interesting to see how governments handle things going forward.
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