Bitcoin is an emerging asset class, like stocks and bonds. The main question for investors: is bitcoin’s value based on anything real? Like with stocks, the true worth of bitcoin is not clear – it may be worth $0 one day and $1 million the next. This makes investing in bitcoin extremely risky. If a person invests in Bitcoin, they could be putting money into something that turns out to have a value of zero, but they also stand to gain anything up to 100 times their initial investment. Consequently, as with any investment, there are potential losses because there is so much uncertainty around Bitcoin’s valuation and its volatility may make matters worse.
However, confidence in Bitcoin has been shaken by price crashes, government regulation, and security concerns. In 2013, China banned financial institutions from handling bitcoin transactions. Then in February 2014, the Mt. Gox Bitcoin exchange in Japan declared bankruptcy after hackers stole hundreds of thousands of bitcoins. The U.S Treasury has ruled that virtual currencies are a form of money and therefore subject to securities laws.
What Is Bitcoin?
Bitcoin is a decentralized, digital currency. It has no central bank or country and exists only in cyberspace. You can use bitcoins to buy things from an ever-increasing range of vendors, both online and in some physical stores that accept it as payment. Bitcoins were first used in 2009. Approximately 12 million are now in circulation. Their numbers are expected to exceed 21 million by 2033. Since the bitcoin has no physical presence, holders do not need vaults or safes to keep them safe, like with cash or gold bullion.
What Are the Advantages of Using Bitcoin?
It is cheaper to use bitcoins than other currencies and payment methods. This is because bitcoins are not printed by governments and, hence, no fees need to be paid to produce them. There are also fewer transaction costs.
People can transfer bitcoins instantaneously across the globe, without needing any third-party intermediary such as a bank or credit card company.
Bitcoin can be bought in fractions up to eight decimal places (0.00000001). This allows users to buy or sell something small without incurring the extra expense of having a whole bitcoin. A whole bitcoin currently trades for about $100 U.S. dollars.
How Are Bitcoins Created?
To “mine” bitcoins, computers use powerful software to solve complicated mathematical problems that verify transactions in the blockchain. A bitcoin is created when a person finds a solution to one of these algorithms. The winner gets to add a record of their accomplishment to the blockchain and receive a series of 12 newly minted bitcoins as a reward. The mining process also creates new blocks, which are added to the end of the chain as more coins are found. As a transaction is verified, the “miner” who found it receives a 50-bitcoin bounty in exchange for their work. This is called proof-of-work or proof-of-stake (depending on who’s doing the verifying).
How Do You Buy Bitcoin?
There are three ways to get bitcoins: mine them, trade them for goods or services with merchants who accept them, or purchase them from a bitcoin exchange.
How Are Bitcoins Stored and Secured?
Bitcoins are held in a digital wallet that exists either online or on your computer. The wallet has a private key and a public key (both long strings of letters and numbers). You use the private key to access your bitcoins. The public key is used to verify your identity when you want to send someone bitcoins and also allows others to find Forex brokers accepting BTC. You can protect the security of your bitcoins by keeping the private key safe.
What’s the Value of Bitcoin?
Right now, they can be bought and sold at a rate of U.S. $400 to one bitcoin. However, many predict that the value will rise quickly as more users, businesses, and investors adopt it as a legitimate currency. For example, there are currently about 1,000 merchants in Hong Kong that accept bitcoins. The company Bitcoinica gave seven bitcoins to the winner of the 2011 “Wired” Raffle (worth $15,000). The winner: Laszlo Hanyecz paid 10,000 bitcoins for two Papa John’s pizzas in May 2010 from someone on the online forum Reddit acting under the alias “BTChipster.com.” Hanyecz now has about 300,000 bitcoins.
What Are the Disadvantages of Bitcoin?
Bitcoins are not backed by any government or central bank. As such, you carry all the risk associated with bitcoin and could lose all your money if it were to suddenly crash. In 2011, Mt Gox filed for bankruptcy after hackers stole about 700,000 bitcoins worth about $450 million at that time. The price fell to $100 the next day.
Bitcoin transactions are not reversible – once you pay someone in bitcoin it cannot be taken back. If a transaction is fraudulent and has not been completed, the bitcoins can be refunded to the sender. However, once you have received your bitcoins and they have turned to black-market money it is difficult to get them back in any case.
There are concerns that governments could ban bitcoin transactions, or that some other virtual currencies will replace it.
What Is Bitcoin Mining?
Bitcoin mining refers to the use of computer processing power, both today by specialized companies as well as by computers of miners around the world looking for solutions to solve algorithms. Bitcoin miners allocate their computing resources towards a blockchain which requires them to find a solution for complex mathematical problems before they can generate a block of bitcoins. The real “seigniorage” of bitcoin is born from the supply of users that are attracted to its qualities. The more people use it, the more valuable bitcoin becomes. This has created a monetary system that is peer-to-peer, transparent, and secure. No one can arbitrarily create new money without being detected.
Bitcoins are unlike any currency or commodity that has ever existed. Considering they are neither issued by a government nor backed by a tangible asset, the recent rapid rise in their value has led to questions about both the long-term viability of this virtual currency and its legal standing. As more people buy into bitcoin, interest in digital currencies will continue to grow and develop. Eventually, the world may be divided not between those who accept digital currencies and those who don’t but among those willing to take a chance on bitcoin and those not willing to risk it.