Everything about Bitcoins
Published: 23 Jan, 2014
We dove into the subject of Bitcoins, and we're going to share what we've learned with you. Before we begin this article comes with disclaimer:
Before you invest, please remember to consult with a qualified financial advisor first. Bitcoins, like all investments, carry risk, and this is a new frontier, so the risk is particularly high.
Now that we've got that out of the way, let's take a closer look at Bitcoins.
What is a Bitcoin?
Bitcoin is a digital, cryptocurrency.
Bitcoins are like paper money in that they feature security features (encryption) just like real bills have unique inks and fibres to help avoid counterfeiting.
Bitcoins exist entirely on the Internet, though they can be "cashed out" via currency exchanges. No country or entity issues Bitcoins. No bank controls them.
Bitcoins are a fiat currency that is controlled by anyone, potentially you, me, and Bitcoin users, et al.
Important information and facts about Bitcoins
Here are some particularly interesting facts about Bitcoin that might surprise you:
- Bitcoin was originally developed by Satoshi Nakamoto, a man of total mystery
- Satoshi Nakamoto is thought to be a pseudonym for a group of people
- To stave off inflation, there will only be 21 million Bitcoins - ever
- Bitcoin is open source
- Bitcoin transactions are irreversible
- Blockchain maintains a ledger of ALL Bitcoin transactions
- The "penny" (the smallest unit) of Bitcoin is called a Satoshi, after the creator of the platform
- Bitcoin is abbreviated BTC
How Bitcoin value is calculated
According to the official Bitcoin website, "all that is required for a form of money to hold value is trust and adoption."
Surely enough, Bitcoin value is derived entirely from the growing base of users who are willing to adopt the currency. Long story short, this means that the roughly $11 million Bitcoins in circulation today amount to $11 billion (USD) in market capitalisation. This value can change dramatically, and often - so don't hold us to it.
Still, voices of reason and authority maintain that Bitcoins are a high risk currency, and many banking authorities aren't quite sure how to deal with the rise of a digital currency. Germany, at least, has authorised the use of Bitcoins as a full-fledged currency, for the purposes of taxation - of course.
How to get Bitcoins
Bitcoins can be purchased online or locally, or mined. Mining involves running a specialised piece of processing hardware to "mine" Bitcoins. The mining actually has to do with the distributed processing of Bitcoin transactions.
Because of the ceiling of 21 million Bitcoins, only a limited number of Bitcoins can be processed on a daily basis. Bitcoin mining hardware processes more and more transactions as the currency grows in popularity. This difficulty increases the amount of computer processing power needed to create Bitcoins, raising the value of the currency in the process.
For more details on Bitcoin mining, including mining pools, check out the following resources:
As you can tell, Bitcoin is basically a self-perpetuating currency. You can also purchase Bitcoins online, via exchanges like Mtgox, or locally, by way of local exchanges allowing you to buy from Bitcoin owners near you. Here are some other Bitcoin exchanges:
There are also a handful of exchanges as a percentage of market share, including:
How to use Bitcoins
You can use Bitcoins in a variety of ways, though not nearly as flexibly as any "hard" currency.
There is a growing list of businesses that conduct Bitcoin transactions, including traders that work a lot like a stock exchange, though admittedly, without any insurance on the transactions.
You can also purchase goods and services at a growing number of retailers and online service providers.
You have to store your Bitcoins in a 'Wallet'. There are online and offline Wallets. Keep in mind that, if you use an online Wallet and it is compromised, you Bitcoins are gone, and there is no insurance to give them back.
Likewise, if you store your Bitcoins on a hardware Bitcoin Wallet, and it's stolen, so goes your Bitcoins (or is it "Bitcoinage?"). You can find an assortment of software (offline), Web (online), and mobile Bitcoin Wallets, right over here. There are also a few Bitcoin ATMs popping up around the globe.
The Bitcoin timeline
Here's a look at some of the major milestones in Bitcoin history.
- Late 2008 - Satoshi Nakamoto publishes a paper detailing a peer-to-peer currency system
- Mid 2010 - someone uses 10,000 Bitcoins to buy pizza
- Mid 2011 - Trouble arises: Bitcoins are shown to be vulnerable to hacking and theft
- Early 2013 - the price of Bitcoins surges; the market value of Bitcoin crosses the billion-dollar mark
- Mid 2013 - The Winkelvoss twins (or, the Winkelvii), of Facebook fame, build up a nest egg of more than $11 million-worth of Bitcoins. They declare that they want more
- Late 2013 - SecondMarket establishes the Bitcoin Investment Trust, a fund that will hold only Bitcoins, making it easy to bet on the price of a Bitcoin
- Late 2013 - The Silk Road is seized by the US Government; half of all Bitcoin transactions are said to have stemmed from the underground site
- Late 2013 - The first Bitcoin ATMs start to crop up
- Late 2013 - The value of a single Bitcoin passes the $700 mark
And Bitcoin developments continue to happen.
What do you think about Bitcoins?
For all the chatter around Bitcoins, there are pundits on both sides of the issue. Noble, digital natives have banded together to further the Bitcoin mission. Financial service insiders are, largely, reluctant to fully embrace the world's first successful digital currency.
If you're interested in getting started with Bitcoins, it's important to do your homework and know exactly what you're getting into. There are plenty of risks. And at any time, a major world government or banking entity could potentially deal a deathblow to Bitcoin by shutting down its trade within a jurisdiction.
Already, Bitcoin has been linked to the nefarious underground marketplace known as "the Silk Road", which has now been shut down. Still, even in the wake of that controversy, Bitcoin has only grown in terms of consumer awareness, not to mention value, which currently resides at upwards of $1000 USD each.
So, we'll end by telling you, again, that our best advice is to proceed with caution. There's a lot to be said for Bitcoin. Even if it were to end tomorrow as a viable currency, the Bitcoin journey so far has proven that currency can exist in the purely-digital realm, and that a currency can exist without a centralised bank or even a government. And that's enough to pique our interest.