The Bitcoin conversation has been diverse since the creation of Bitcoin in 2009. Some say it’s the “next revolution,” comparing it to the creation and evolution of the Internet. Others believe it’s too early to tell, and that if we don’t all jump on the bitcoin bandwagon, the whole idea could flop. So what are we talking about? What IS bitcoin?
Bitcoin is “digital currency,” or money. It can be transferred or spent online from person to person. It’s universal and can be translated to euros, yen or any world currency. The key is that there is no central bank or “middle man.” This means no transaction fees, cheaper and faster transactions and more freedom.
Bitcoins are created based upon a mathematical system and open source computer program hosted on the web by regular people. It’s free and anyone can use it. When transactions are made using bitcoins, cryptographic calculations are performed and a “public ledger” containing each and every bitcoin transaction is updated – like one big general ledger for all users. This is called the “blockchain.”
You don’t keep them in your wallet – At least not your physical wallet. Bitcoins aren’t really tangible items. This is money based on mathematics, not gold or paper. That being said, multiple forms of “bitcoin wallets” are available for storage of your private digital keys needed to access a bitcoin address, sign off on transactions and spend your bitcoins. Wallet forms include desktop, mobile, web, paper and hardware.
Bitcoins are built on a peer-to-peer network – There is no governmental authority here, no board of directors and no regulations. You can set up your bitcoin addresses in seconds. You own and control your bitcoins, no central authority can take them away.
Bitcoin transactions are anonymous – Each transaction is accompanied by an account number and a private key linked to the account, not a person’s name. This is great for privacy and security purposes but there is a caveat – black market purchases, ransomware payments (link to ransomware article) or narcotic sales have been performed through bitcoin purchases on the web causing concern regarding this new currency.
They may be safer than credit cards – Unlike entering your credit card information online, bitcoin transactions don’t require as much payment information. There is no expiration date, card number or CVV. Bitcoins use two keys: a public key (your bitcoin address that anyone can see) and a private key (this is kept secret). When you purchase something by “sending” the bitcoins, you electronically “sign” the transaction by combining the private and public keys together, which behind the scene applies a mathematical function to them.
No more bitcoins will be made – Since the inception of bitcoins, a limit of 21 million has been set. Therefore, the value of bitcoins can fluctuate, they can even skyrocket – depending on how long you hold on to them. Bitcoins encourage saving as items may cost less bitcoins over time. Some refer to bitcoins as a “practically deflationary” currency. Unlike the dollar, we can’t print more of these. Rather, bitcoins are generated in a computer calculation process called “mining.”
As of April 2016, one bitcoin is worth $425.47 US dollars.
It may be too early to tell how bitcoins will affect our future. There are certainly obstacles for the currency, including competition with other forms of developing “cryptocurrencies.” Demand and “buy in” will fuel the purchasing power of the bitcoin. Perhaps, this is the new generation of financial services. Perhaps, it’ll never catch on, it’s “too confusing,” too hard to understand, it seems too futuristic. But many people said that about the internet too.