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What is Bitcoin and Why Should I Care?

Updated on November 4, 2017
One of many Bitcoin images.
One of many Bitcoin images. | Source

Introduction

Money is money, right? Well, not exactly. While traditional currencies, and even most non-traditional (airtime, loyalty points, etc.) always have a governing authority – one to validate worth and transaction authenticity – there is a new form of money that lacks centralization. Introducing Bitcoin.

First introduced in 2009 by Satoshi Nakamoto, an unidentifiable alias for the person or group responsible for its creation, Bitcoins are a new form of digital currency. Because it is decentralized, it’s the first electronic currency that isn’t backed or regulated by a single entity. The Bitcoin software is an open source project which has led to over 100,000 people worldwide making transactions daily. There are no banks, middle men, or organization in which Bitcoin is traded, so transactions are direct person to person. The network is comprised of users, with no bank or payment processor to come between trades. Bitcoin’s complete decentralization makes it an innovative and unique form of digital currency.

Where are Bitcoins Stored?

The first step to owning Bitcoins is to have a place to put your money. Bitcoins are stored in a “digital wallet”, of which two separate types exist – one that is third party cloud based, and one that is software based. Digital wallets are a virtual bank account.

The cloud wallets are available on the web and are simple and convenient to use. However, they are less secure than keeping your money in a software wallet, as the servers are susceptible to hacking. There have been reports of Bitcoin theft through cloud wallets, though there are reputable companies worth using. A few examples: Blockchain, Coinbase, Coinjar, Coinpunk and Coinkite.

Software wallets are downloaded directly onto a client’s computer or smartphone and are not reliant on a third party, therefore rendering them more secure than web wallets. Nonetheless, they are subject to user deletion and virus attacks, so it is important to be cautious when storing the currency on a personal computer. Some reputable software wallets: BitcoinQT (original Satoshi wallet), Armory, and Multibit.

There are also mobile versions of both types of wallets that offer convenient access to accounts from a tablet or smartphone. The important thing to remember is no matter which type is chosen, users should always backup and encrypt the wallet so that withdrawal transactions require a password.

How Do You Get Bitcoins?

Once you’ve set up your digital wallet, the next step is to fill it. Just like traditional currency, acquiring Bitcoins can be difficult. They can be purchased through marketplace exchanges, using different traditional currency. Bitcon vending machines are springing up all over the world. A Bitcoin vending machine allows you to feed your money into the machine and the Bitcoin is instantly transferred to your digital wallet. Because the value of Bitcoins changes frequently, much like stocks, many people invest traditional currency because the value of Bitcoins can rise dramatically.

If you sell a service or product, you can offer customers the option to pay in Bitcoin, which will grant you the opportunity to earn Bitcoin. A Bitcoin merchant account can simplify the process of accepting the currency as payment. Bitcoins can be directly transferred from one person to another using software or mobile apps, similar to sending cash currency digitally.

Additionally, you can “mine” Bitcoins, however the process is dependent on your computer hardware and is often very competitive and difficult. Bitcoins are minted at approximately every 8 minutes in a batch form called a “block.” These blocks are locked with a series of complex mathematical equations, which requires quick and precise computer analysis to decode, thereby releasing the Bitcoins.

What are the Advantage to Bitcoins?

Bitcoin is a unique currency that has a wide range of advantages which make it a worthwhile investment. Bitcoin is worldwide, so it offers flexibility in payment that isn’t available with traditional currency. You can send and receive Bitcoin anywhere in the world at any time. The Bitcoin owner has complete control over his money, so there are no concerns regarding different limitations of a specific country’s currency standards, such as holidays, exchange rates, etc.

Because Bitcoin isn’t linked to a specific identity, but instead to a wallet ID, transactions are considered to be more secure, and identity theft is significantly lowered. Also, it’s difficult for merchants to add additional charges to a product or service without it being obvious, so essentially Bitcoins protect against hidden fees. By backing up and encrypting your digital wallet, you can ensure your money is protected at all times.

While transactions are maintained in a public log known as the block chain, no personal information is available to the public, making it truly a user run network. The currency can’t be changed by any entity, government, country, person or organization.

For sellers, there are fewer risks to accepting Bitcoin than other traditional currencies. They are secure, cannot be reversed, and carry no personal information. Bitcoins help deter any loss that can occur from fraudulent activity. It is extremely difficult to cheat or fraud anyone using Bitcoins, because of the block chain ledger.

What are the Disadvantages to Bitcoins?

Because Bitcoins are still a relatively new currency, it hasn’t completely hit the mainstream market as a viable form of money. The price of Bitcoins fluctuates daily, so it can be difficult to determine a net worth of a Bitcoin wallet. However, as more businesses begin to accept Bitcoins as payment, it is expected that the price will stabilize.

Currently, major companies like TigerDirect and Overstock.com have begun accepting Bitcoins for payment, but the digital currency hasn’t made headway yet in most major companies as a payment option. Despite being secure, Bitcoins have a volatility about them due to the fact that there is a limited number of coins, and that mining them is difficult.

Bitcoin isn’t perfect, and like any new trend, there are some kinks that have to be worked out in order to realize its full potential. Also, because personal information isn’t tied to the transactions, many people use digital currency like Bitcoins for illegal activities, such as weapons or drug trafficking.

Short Video on Bitcoin Basics

What Can I Use Bitcoins For?

Everything has pros and cons, so it is important to weigh each one and decide if Bitcoins are something you’d like to participate in. Keep yourself informed, understand the risks and benefits, and decide what you will do with Bitcoins once you have them. As previously stated, Overstock.com and TigerDirect already accept Bitcoins as a valid form of payment, and many other big businesses are jumping on board.

Bitcoins can be used for just about anything, much like traditional money. One Bitcoin user even purchased a brand new car with his earnings, so anything is possible. The first place to start is by searching a merchant directory to discover all the places accepting bitcoin near you. Coinmap and Bitpay Merchant Directory are both great places to start, and the latter even lists charities in which you can donate Bitcoins.

Gyft.com accepts Bitcoins in exchange for gift cards which can be spent at retailers you already shop at, such as Amazon, CVS, Target, Staples, and Sears. You can even buy a pizza, if you’re hungry enough to spend your hard earned coins on the guilty pleasure.

Since it is a digital currency, many of the first things available for Bitcoin purchasing are IT related products. If you need internet service or web hosting, there are a few providers who accept Bitcoins in exchange for service and domain names. You can now even use Bitcoins to pay for upgrades on WordPress, so you can update your website or blog. Get disposable email addresses or VoIP phone service using your saved coins.

You can even pay for financial services with Bitcoins on sites like Bitcoin Financial, or book your next vacation with Expedia. From flowers, to dental services, to just about anything you can think of, there is at least one provider out there willing to accept Bitcoins for purchase. As the market becomes more knowledgeable about Bitcoins and the price begins to stabilize, more businesses are expected to jump on board, so the list of retailers accepting the currency grows every day.

So Why Bitcoins?

Bitcoins are only regulated by the public, which means there are no taxation standards or real government control. You are able to purchase securely and confidentially, and do business all over the world without international fees or regulations. Many small businesses are shifting to the currency because of the small transaction fees.

Stay up to date with the latest Bitcoin information, and you’ll find that the trend is growing. While the currency has had its up and downs recently, if the upward trend continues to progress then Bitcoins could become a solid investment. Sure, there are advantages and disadvantages to using Bitcoins, and you need to decide what’s best for you financially. Despite being around for five years, Bitcoin is still considered to be in its infancy, so the future of the currency remains largely in question. Though if the pattern of trends is to be considered, Bitcoins will be a viable form of currency.

Bitcoin Moves Into Wall Street

Bitcoin is starting to become much more accepted by the mainstream financial institutions. On Tuesday, October 31, 2017 the CME Group announced that it was going to launch Bitcoin futures contracts starting in the fourth quarter of 2017. Terry Duffy, the CME Group Chairman and CEO said, "As the world's largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investor with transparency, price discovery and risk transfer capabilities."

The cryptocurrency market capitalization has steadily grown over the years and is now estimated at $172 billion, with Bitcoin representing more than half of this value.

Reference

"CME Group Announces Launch of Bitcoin Futures". CME New Release. October 31, 2017.

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