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Posted on Aug 13, 2014

What is Bitcoin?

What is Bitcoin?


Bitcoin has received a lot of attention recently, which means most people have heard about it. But what is Bitcoin? In simple terms it is a new currency that allows you to do similar things that you do with normal currencies like US dollars and Euros. This includes buying things, accepting payments and investing. Now for a bit more detail.


Advocates of Bitcoin believe it’s going to change commerce for the better and forever. Detractors think it is a place for drug dealers and gun runners to hide their transactions. Those in the middle think it has huge potential for good but only if major problems are resolved.


Who Controls Bitcoin?


No single person, government, company or organization controls Bitcoin. This makes it different to all the other currencies in the world which are controlled by governments. It was started in 2009 by a mysterious developer who is only known by the pseudonym Satoshi Nakamoto.


So Bitcoin has no owner and it is not controlled by a single entity. Instead everyone who has Bitcoin owns Bitcoin and it is run via a peer-to-peer network. This means the Bitcoin community controls it.


How does it work?


When you buy something online or in a shop using a digital form of payment – a credit card, a Paypal account or something similar – a middle man takes a cut of the transaction. This is usually 2-3 percent. Buying things with Bitcoin removes the middle man. Instead the transaction takes place directly between you and the seller. The Bitcoin community processes the transaction and there’s a fee to do this. But it’s a tiny fraction compared to the fees taken by banks and online payment services.


You have two hurdles to overcome if you want to buy something with Bitcoin. The first is getting your hands on Bitcoin and the second is finding a seller who accepts it as a form of payment.


There are three main ways to get Bitcoin: you can accept it as a form of payment for your products or services; you can buy it either directly from a seller or through an online exchange; or, you can get it through a concept called mining.


Bitcoins are created by mining which is a process that also helps to control them. A word of warning here though – mining is quite technical. Essentially it involves using computers to solve complicated mathematical equations – when you solve the equation you get Bitcoin. It requires specialist and expensive computer equipment and it is highly competitive. This means it is not recommended for anyone other than those who know what they are doing. As a result most people get Bitcoin by buying it.


Once you have Bitcoin you need to find somewhere to spend it. Increasing numbers of businesses are starting to accept Bitcoin including some bricks-and-mortar shops. Overstock and Dell are two of the biggest companies that accept Bitcoin.


At the moment you can't use it when buying things from the big online retailers like Amazon or Ebay, or the big shop chains or department stores. But you can buy gift certificates for many of these stores using Bitcoin, so there is a workaround.


Is it Good or Bad?


This is the big question. Here are the advantages of Bitcoin:


  • It reduces the costs of transactions which should mean lower priced goods and services
  • It has the potential to give people in countries with volatile economies a more stable and widely accepted currency
  • Because it is decentralized it has the potential to be less volatile and politicized than normal currencies
  • It is easy to use
  • It is harder for fraudsters to steal your identity


Now for the disadvantages:


  • There is more anonymity when transacting using Bitcoin which makes it attractive to criminals and the black market. Expect governments around the world to step up their efforts to intervene and stop this.
  • It is unregulated and participants can and do get ripped off. The most famous example is the MtGox exchange where people bought and stored Bitcoins. The owners ran off with everyone’s money.
  • It is open to cyber attack
  • The market is volatile as speculators try to make a quick profit. At one point in November 2013 Bitcoin was worth almost as much as gold. Over the next 30 days it lost more than half of its value.


So does Bitcoin have a future? The answer to that is probably yes. But the future is likely to be different. This future will probably involve some sort of regulation which will change aspects of the way Bitcoin currently operates. How deep that regulation goes will determine the shape of Bitcoin in the future.


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