Maybe you’ve heard of Bitcoin in the news but still aren’t sure exactly what it is; this is the article for you. Here’s your beginner’s guide to the Bitcoin phenomenon.
What Is Bitcoin?
Simply put, it’s a digital currency. It enables people to buy and sell without cash or credit cards and goes directly from person to person (that is, without a bank, a credit card processor, or any other authority mediating the transaction). Satoshi Nakamoto is credited with having created the initial Bitcoin software in 2009. He apparently left the network in 2010, but Bitcoin has continued to grow since his departure.
The Bitcoin network uses crytopgraphy to control the movement of the currency (“bitcoins” with a lower case B) from account to account, and it’s therefore called a “cryptocurrency.”
Unlike national currencies, like the American dollar or British pound, there is no central authority like a treasury controlling Bitcoin. Instead, the value is spread among its users across the globe, as is the power to create it. (More on how that process works is explained below.)
Can I Buy Things with Bitcoins?
Yes. Like other forms of currency, bitcoins can be used to purchase goods and services. And although it’s a digital currency, you are not limited to the digital world. More and more merchants and service providers are accepting bitcoins as its popularity grows, everyone from small boutiques to lawyers to household-name stores like Overstock.com, which began accepting bitcoins in January. Bitcoin users may also shop at many stores like Amazon and iTunes indirectly, by purchasing a gift card through Gyft.com with their bitcoins. Around 35,000 online retailers and 1,000 brick-and-mortar stores now accept Bitcoin.
Who Uses Bitcoin?
Bitcoin shows up in the news often related to illicit affairs, such as the Silk Road takedown last October or the Bitcoin exchange CEO recently charged for laundering money. The appeal of Bitcoin to criminals is understandable, as it is a currency that can be used worldwide, transfers directly from account to account, and is difficult (though not impossible) to trace. But it’s also used by regular people as a currency and by many more who trade it as a commodity. Merchants like it because the fees associated with transactions, if there are any, are lower than with credit cards.
Estimating the number of users is difficult, because Bitcoin accounts are not linked to names, so several accounts may be held by one person. There are about a quarter of a million Bitcoin addresses in use.
Does Bitcoin Have a Real-World Value?
Yes it does, because people are willing to pay for it. The Bitcoin market has been famously volatile, and in the past four months its value has risen sharply. In October, the average price per bitcoin hovered around $100; as of this writing, the value is approximately $830 per bitcoin. The value changes constantly.
There are currently over 12.25 million bitcoins in existence. That number will be capped at just under 21 million, which is expected to happen in 2140.
Where Do Bitcoins Come From?
This is where it can get a little complicated.
Bitcoins come from a process called “mining.” Mining bitcoins is the equivalent of printing money; it takes time and skill to do so. But unlike dollars, which are printed only by one authority (the treasury), bitcoins can be mined by anyone with the time, computing power, and know-how.
Bitcoin, again, is a cryptocurrency. Every transaction that occurs from account to account across the globe is added to the “bitcoin blockchain.” This alphanumeric blockchain is viewable by anyone and is the record of all transactions that have occurred, showing where bitcoins are and where they have been.
When transactions occur, they need to be verified. The people who do this and work on the blockchain are called “miners.” They essentially have to solve algorithms associated with the blockchain, which they do with special software. When they successfully solve it, they are rewarded with bitcoins, currently at a rate of about 25 bitcoins per block.
As more people join the Bitcoin network, mining becomes more difficult. Miners used to be able to solve the problems solo, but now they often often join a “pool,” which splits the task among several people. Each person in the pool has an easier task to complete, and is rewarded with a share of mined bitcoins proportional to the work they’ve done.
This is a simplified explanation of how mining works. For more detailed information, you can learn more on Bitcoin Mining.
What Are Some Advantages and Disadvantages to Using Bitcoin?
Some advantages of using Bitcoin:
- Payments are direct, secure, fast, and easy. They are also irreversible, which is great for the merchant but may not be so great for the customer.
- There are no mandatory transaction fees. Fees are optional and are still lower than conventional credit card transaction fees.
- Some anonymity. Bitcoin accounts (addresses) are not linked to names. It is possible to trace transactions back to the individual, but it’s more difficult than with credit cards or other forms of payment.
- It’s believed to be resistant to inflation that many national currencies experience.
Some disadvantages of using Bitcoin:
- It’s very volatile. In theory, as more people join the network, the value will become more stable.
- Your bitcoins can be lost or stolen, just like regular money.
- Not many places accept bitcoins – yet.
