If you’ve been scrolling through Facebook or browsing the internet, you would have probably seen “Bitcoin” hitting the headlines more than a few times. For the uninitiated, Bitcoin has been around for a decade but interest for the cryptocurrency has only spiked within the last year. Why is that so? More importantly, what is Bitcoin, really? Here are a few things Bitcoin beginners need to know:
What’s Bitcoin About
Bitcoins are cryptocurrencies, or digital currencies – cryptographic codes that are meant as a medium of exchange. Unlike traditional forms of currencies, Bitcoin is not backed by any physical commodity or by fiat. No central bank, state, nor organization has sole control over Bitcoin, making it an unregulated, decentralised currency.
Created in 2008 by Satoshi Nakamoto, Bitcoin was the first decentralised cryptocurrency ever invented. It’s not influenced or dictated by monetary policies and its peer-to-peer payments are unregulated by middlemen. What this means is that no banks and no government policies are involved with Bitcoin transactions nor do they dictate how Bitcoin evolves.
Since Bitcoin is not subjected to regulations, international payments are cheaper. Credit card fees imposed by governments and banks are bypassed, which is attractive for many small businesses. Additionally, identities of Bitcoin users are kept anonymous, making it easy for people to buy and sell anything. Tariffs on goods and services can easily be avoided when Bitcoin is being used as a medium of transaction.
How Does Bitcoin Work
One of the first things every Bitcoin beginner needs to know is how Bitcoin works. Bitcoins are registered to Bitcoin addresses and when transactions are made, they are tracked in a public log known as Blockchain. What this means is that users of Bitcoin can see all transactions ever made with the currency. Although the Blockchain is public, buyers and sellers still remain anonymous as only their wallet IDs are revealed in this ledger.
What Can You Do With Bitcoin
Just like online transactions, you can buy a host of goods and services with Bitcoin. Whether it’s booking a hotel on Expedia or buying Xbox games, Bitcoin can be used just like any currency as long as merchants accept them as payment.
The hype of Bitcoin, however, lies in trade and its investment value. People are excited about Bitcoin’s growing investment value. As of February 2018, 1 Bitcoin is worth more than USD 10 000.
How and Where You Can Get Bitcoins
This is where every Bitcoin beginner takes their first step: having a cryptocurrency wallet. Cryptocurrency wallets are stored in the cloud and on your computer. Once your wallet is set up, you can start exchanging Bitcoins with traditional currency. All you need to do is to make a deposit to your cryptocurrency wallet through your bank or your PayPal account. There are a range of wallets to choose from, each with different perks.
There are various marketplaces, known as “Bitcoin exchanges” where you can buy and sell Bitcoins. Coinbase, Bitstamp, and Bitfinex are some of the more popular Bitcoin exchanges. Besides international platforms, you can also buy and sell Bitcoins on local marketplaces such as CoinHako, Coinbase, and Gemini.
Besides exchanging currencies for Bitcoin, you can also attain Bitcoin through transfers. Just as monetary transfers, you can send and receive Bitcoins through mobile apps.
Bitcoins don’t have a physical form but they can be mined by computers and powerful software. So, how does that work? When Bitcoin transactions are made, a network records down these transactions over a period of time in “blocks”. These “blocks” are converted into codes known as a “hash” which are placed at the end of the Blockchain. All users of Bitcoin will be able to see the newly updated data. As a reward for mining Bitcoin, the person, or group will then be awarded 12.5 Bitcoins which is worth around USD 100 000 as of February 2018.
It’s no surprise, then, that lots of attention have been given to mining Bitcoins. With that being said, there is a limit to the number of Bitcoins that can be mined. Satoshi Nakamoto established a protocol which states that only 21 million Bitcoins can ever be mined, and 12 million have been mined so far.
Besides knowing how the cryptocurrency works, it’s important for Bitcoin beginners to know the risks. Bitcoin’s value can change from day to day and even hour to hour, making it highly volatile and speculative. While its value hit an all-time high in December 2017 at USD19,783.06, it’s valuation fell below USD 7000 in early February 2018.
Besides its volatile value, the anonymity of Bitcoin users also poses problems. Being anonymous means people are able to buy and sell anything using Bitcoin, which creates a good opportunity for illicit activities such as money laundering and drugs.
Additionally, theft is also a rising issue. Cryptocurrency wallets stored on cloud servers and in computers are easy targets for hackers and viruses. On January 26, 2018 around $500 million cryptocurrency tokens were stolen from Coincheck, a bitcoin wallet and exchange service. Since Bitcoin is unregulated, wallets are not insured by FDIC which makes it difficult for victims to reclaim their losses.
Response To Risks
Indeed, Bitcoin’s highly volatile and speculative value is a concern for many merchants as it isn’t a stable enough currency to be a trusted mode of exchange. Bitcoin is also relatively new, and unregulated, so liberally accepting Bitcoin can be a risky move for retailers and merchants alike.
Even so, this hasn’t stopped some merchants from accepting Bitcoin. Retailers and services such as Overstock.com, Expedia, and Microsoft are some major companies that have been receptive to Bitcoin.
Many of these merchants, however, are taking a cautious approach and playing it safe. For instance, Bitcoins can only be used to book hotels on Expedia. As for Microsoft, Bitcoins can only be used to buy games, movies, and apps through Microsoft accounts.
Lack of regulation is a great concern for governments. With the anonymity that comes with Bitcoin transactions, illicit activities are difficult to track and police. Hence, Bitcoin poses both economic and social consequences that governments have to cope with.
In response to these risks, the Monetary Association of Singapore (MAS), has been looking into regulating the exchange of cryptocurrencies. Once regulations are enacted, payment firms and Bitcoin exchanges will be required to hold only one license. MAS also issued a statement on December 19, 2017 to advice caution when dealing with cryptocurrencies.
In the US, concerns over whether current frameworks are competent in regulating cryptocurrencies are on the rise. The US government has been looking for ways to track activities related to Bitcoin transactions in hopes to curb potential illicit activities. Interestingly, despite concerns over the cryptocurrencies’ risks, the US has also revealed plans to convert the US dollar into “digital dollars”.
It is not surprising that governments from around the world have reflected their concerns and intents on regulating cryptocurrency at the 2018 World Economic Forum. For the most part, plans on legislation and strategies for regulations are still unclear. Nonetheless, countries like Russia have already been making moves to introduce government-issued cryptocurrency, which allows them to have full control.
Decentralisation and transparency are the main ideologies that spurred Bitcoin’s creation. While there are lots to gain from cutting away middlemen, lack of regulation also brings about other risks involved with Bitcoin. In its current speculative and volatile state, it is still difficult to determine if Bitcoin can gain traction as a currency. Nonetheless, the spike in interest for cryptocurrency has made an impression, be it pushing governments to plan new legislation or even creating their own cryptocurrencies.