In the news, many of you might have heard about Bitcoins. It is often portrayed as a complicated and shady currency in the media. I will try to give you a simplified explanation of Bitcoin currency, its possible benefits and the potential risks. The idea of Bitcoins was started in 2009 by an individual or individuals under the pseudonym Satoshi Nakamoto. No one really knows the person(s) responsible for the invention of Bitcoins.
What are Bitcoins? How are they created?
A Bitcoin is a decentralized electronic currency. This means that a government does not issue the currency. The U.S. Dollar ($), British Pound (£), Euro (€), Japanese Yen (¥), and all other country currencies are all centralized currencies because their countries’ respective government can issue and manipulate them. Gold for example is a decentralized currency because the government cannot just print or manipulate Gold. Mining companies’ output of gold determines the amount of gold in circulation. Similarly, Bitcoins are created through a “mining” process in which certain computers solve complex math problems. Every time a computer “mines” a new Bitcoin, it becomes harder to mine more Bitcoins. Eventually it will become impossible to mine more Bitcoins once a maximum limit is reached. The person(s) who invented the idea of Bitcoins set a maximum limit of 21 million Bitcoins. Some analysts foresee that the maximum limit will be reached around 2140. Currently, anyone with a computer can mine Bitcoins as long as they have a free application known as a Bitcoin miner.
How do I use Bitcoins?
You can use Bitcoins, just like any other currency to buy real things. Certain online merchants accept Bitcoins. Bitcoins are yet to be accepted widely by physical establishments, but occasionally you will find some establishments that might include high-end car dealerships accepting them. You can go to certain websites or exchanges and exchange currency like U.S Dollars ($) with Bitcoins. In addition you can use Bitcoins in peer-to-peer transactions (individual trade) if they are mutually accepted. Bitcoins are like online cash, but unlike credit or debit card, a Bitcoin transaction does not go through a bank, company or government. This means that the transaction has the potential to be entirely anonymous.
Will Bitcoins be the future of currency?
Many people think that Bitcoins will not become a very influential currency of tomorrow. Since Bitcoins are like online cash, they can, and probably are used by terrorists and outlaws to obtain weapons and drugs in anonymous transactions. On that same note, since transactions are anonymous, taxes cannot be enforced appropriately for each transaction. It will be no surprise that governments, such as the U.S. government will make special rules and heavily regulate purchases involving Bitcoins. Moreover, since Bitcoins are a fully electronic currency, if your computer crashes, or if your Bitcoin account is hacked… very unfortunate! (Bitcoins are not insured and transactions cannot be reversed). Also, Bitcoins are highly speculative because the only thing that makes Bitcoins valuable is people believing they have value in the first place (and you cannot make anything out of an electronic currency). Paper currencies (such as dollars) also do not have value on their own; but their value comes from the fact that national governments regulate their supply and the laws of the country allows debts and taxes to be paid in paper currency. This is not true of Bitcoins. On the other hand, Bitcoins might be attractive for merchants because there is no cost of accepting them and the transaction need not go through a third party such as a bank or clearing house.
I think that Bitcoins are an innovative new idea. But they have huge risks because they have no value on their own. Moreover, it is possible that heavy government regulation would severely hinder the wide use of Bitcoins. Nevertheless, Bitcoins may thrive in underdeveloped countries with loose regulation.