When Mt. Gox lost $460 million worth of Bitcoins, it caused a lot of headlines and generated a lot of discussion. Are Bitcoins really here to stay, are they even a legitimate form of currency? Should they be taxed or subject to government oversight?
These are all good questions, but they are also moderate to advanced level questions. For a majority of people — perhaps even you – these news stories never start from the basics. No doubt you understand the idea of what a Bitcoin is, but do you know exactly what a Bitcoin is? Do you know where they come from, or how you spend them?
You’re not alone. The Wall Street Journal reported that 76% of Americans don’t understand the basics of Bitcoins, or how they work. In the last 5 years, the value of Bitcoin has risen over 6000% and despite a series of scandals and thefts, they are still growing in value. So even if you never use a Bitcoin, now is a good time to learn about them… just in case.
What Exactly are These Things?
Bitcoins are a digital “cryptocurrency” that do not have the backing of any bank, government, or financial institution. They exist on the world wide web, where they can be exchanged for goods and services with no middle man.
One of the most notable aspects of this currency is that since it is unregulated, any buyer and seller can exchange Bitcoins without oversight, and without a third party charging fees or taxes.
Bitcoin is the money equivalent of E-mail. Emails exist only in the digital medium, and are sent directly between mailboxes. We do not need a poster carrier to deliver a message, nor do we need a phone company to get us an open line to talk – email is direct, instantaneous, and has no physical properties. Bitcoins apply the same principles to money.
Instead of being a coin made of metal, or a bill made of paper, a Bitcoin is a piece of computer code. Since each piece of code is unique, they are easy to track. The process for buying and selling Bitcoins allows the buyer and seller to remain anonymous if they so choose, but the travels of each Bitcoin are cataloged in a public record called the Blockchain. The blockchain keeps everyone honest by making sure codes are duplicated or re-used.
Limited Time Only!
There are a finite number of Bitcoins. There will only ever be 21 million of them in existence. Currently, there are 12.3 million of them in circulation, which means there is still a lot of growth for the market.
That said, there is a limited amount of growth. Unlike paper money, which can be printed at will, there will never be more Bitcoins. This is part of the reason they have become some coveted – since they are not tied to any country’s currency, they are free from inflation and the fluctuations of the stock market. The value of Bitcoins is based entirely on supply and demand.
Anyone Can Use Bitcoins, Anytime
Interested in playing with this new currency? Well, there is nothing to stop you. Although the “mining” and creation of Bitcoins is steeped in insider speak and riddles of code, the usage of Bitcoins is surprisingly simple.
Install a Bitcoin Wallet – You can do this on you home computer, your tablet, or your smart phone. Your best bet it to put the Wallet on your phone, where it is easiest to access and use.
Buy Bitcoins – It’s time to fill up your wallet. You will need to go to a “Bitcoin Exchange” website, and use your country’s currency to buy Bitcoins from someone who has them. There are over a hundred exchanges online, as well as a private sellers. It only takes a few minutes to use your money to purchase Bitcoins, which are put into your Wallet.
Spend Bitcoins – Once upon a time it was hard to find a business that accepted Bitcoin for payment, but those days are long gone. Not only do thousands of websites accept BTC for payment (including Amazon and Overstock), but now even some major retailers do as well, like Home Depot, CVS, and Kmart. If you have the Bitcoin Wallet app on your Android you can purchase with your phone on the spot!
So although the concept of Bitcoins may be complex, their usage is not. It is a currency designed for simplicity and convenience, and may very well be signaling a change in the global economy, and how we view money.
After all, Bitcoins aren’t the only digital cryptocurrency on the block any more, Litecoin, Dogecoin, Namecoin, Tonal Bitcoin, and IxCoin (and many more) are all looking to make a name for themselves.
Should You Care?
That’s a question on you can answer for yourself. Even though tens of thousands of Bitcoin transactions happen every day, the vast majority of people have no involvement with them. And they don’t need to be involved. Bitcoins definitely have a purpose, and a bright future, but they won’t be replacing cash anytime soon.
But for businessmen and investors, or for forward-thinking people who don’t trust currency, Bitcoins may be just what you’ve been looking for.
Bitcoins have no tangible qualities (like precious metals or jewels) that make them valuable, and they are not backed by a country or bank. Basically, they have value because people believe they have value. If that sounds scary, remember that the United States is no longer on the gold standard, and our currency has value because we all believe it has value. Which makes it not that different from Bitcoin.