The economy of mankind has developed from a simple Barter system, the use of gold and silver coins to the banknote and paper money stashed in maximum security vaults. The process took thousands and hundreds of years and now as we’re developing, very rapidly if I may say, into a digital world, we are faced with the novel notion of virtual coins and the rise of Bitcoins.
Bitcoin was first introduced in a research paper written by an unknown person with the alias Satoshi Nakamoto. It was adopted as an open source software in 2009. It’s basically a software system for online peer-to-peer payment with an electronic currency that is called Bitcoin and all payments are recorded in a public ledger (Block Chain). It allows for direct anonymous transactions between two parties without a bank or any financial institution.
Things to Know:
Using Bitcoin: To start using Bitcoin software, you register to have a Bitcoin Wallet where, like any real wallet, all the Bitcoins are stored. There are many wallet software to be downloaded in your mobile or computer. After you choose one, you put your Bitcoins in it. To send bitcoins to another party you need their Bitcoin address. The address is a single-use token that is generated by the software. It’s like an email address, but used only once for each transaction, so you send the bitcoin to their provided address and if you’re receiving the bitcoin, generate the address and give it to the sender.
Getting Bitcoins: Like paper money, there is a specific amount of bitcoins generated to be used by the public. The original algorithm set the amount of all bitcoins created at 21 million. Right now, there are more than 12 million bitcoins in circulation since 2009. To get the actual bitcoins you have three options:
- Buy them in the exchange market
- Sell products in exchange for bitcoins
- Bitcoin Mining: Bitcoins are actually generated by mining. People who want to generate bitcoins become miners who have special software to tackle bitcoin algorithm in the system, once they solve it, they are rewarded with 25 bitcoins. The algorithms are easy at the beginning, but the software is programmed to get harder and harder as more and more bitcoins are mined. So, by the current rate of creation, the last bitcoin will be mined in 2140.
As the mining becomes harder and requires a huge amount of computer energy and power, many miners join pooled mining so they can combine all their efforts and energy and share the generated bitcoins.
- No Middle Man: The transaction is direct and you don’t need to wait for bank processing or approval. You can send the bitcoins from a country to another one as far as Australia and the transaction will occur within 10 minutes. It also means no bank or government can freeze your accounts.
- Transaction Fees: There is no fees for bitcoins transactions, but a small amount to speed up the process if needed. Also for merchants, there are merchant processors with much lower fees that help them in processing transaction and converting the bitcoins to actual currency and depositing it to their bank account.
- Security: Paying with bitcoins doesn’t require any kind of personal information, so it helps preventing identity theft. It also prevents chargebacks as the shop or website you paid in won’t be able to charge you more or do the “withdraw twice”, a thing we all hate, because they’ll need an address generated by you to do so.
- Backup: You can back up your updated transaction in an offline hardware with encryption, just in case your computer crashed.
- No Taxes: So far bitcoins lives in the cyber world and the lack of a third party makes it difficult to track payments and also to create a valid taxation system.
- Anonymity: The untraceable feature of Bitcoins raises the fear of attracting illegal activities. It’s like an untraceable cash.
- Acceptance: Even though Bitcoins on the rise, you can’t use it for everything you need. As yet governments haven’t took a stand with it or against it.
- Losing Bitcoins: Like a bank account, there is still the risk of getting hacked and stolen, but without the insurance possibility from the Bank. If it’s gone, it’s gone.
- Also, forgetting your wallet password could lead you to lose your bitcoins forever.
- All too New: Bitcoins is, like I said, a novel concept and still underdeveloped. There is many changes on its way and the future is unpredictable.
- Instability of the Market: Bitcoins prices some days get higher than an ounce of gold. Having the daily changes in prices requires merchants to adjust their prices on daily basis according to the charts just to keep up. Such a hassle.
Yet, many international online websites, shops and hotels accept Bitcoins as a method of payment and the Bitcoin Exchanges market is growing. However, the system is as the Bitcoin website describes it, experimental and putting all of your saving in it is unadvised. It still developing and there is no method of prediction to know whether it will be a success or a failure. Nevertheless, it will be very interesting to see whether Bitcoin stays or not. My advice is to educate yourself about it, just in case it grew and countries started adopting it. There is no harm in learning.
For someone as simple as me, who just started to get a hold on online banking, it will take me a while to wrap my head around the basic idea of digital currency, but I’m sure people didn’t like paper money when it was first introduced!