Bitcoin is a fascinating, complicated, new-age currency that exists only online and allows the user to be somewhat anonymous.
If you’ve never heard of Bitcoin you’re probably thinking it sounds a little suspicious and a little dangerous. Even if you have heard of it, you’re probably think the same thing. We’re here to try and dispel that theory and answer some of your questions about Bitcoin.
That being said, it’s much more complicated than we’ll get into today, but these are the basics.
What is Bitcoin?
Bitcoin is a currency designed to pay for goods and services, just like Euros or U.S. Dollars. But that’s where the similarities end.
Bitcoin, unlike a traditional currency, is:
- Decentralized—no government or central bank controls the currency supply.
- Digital—there are no physical Bitcoins or Bitcoin bills. The currency lives entirely online, tracked by blockchains, continuously growing groups of records that provide a complete history of each Bitcoin. (Imagine, for example, that you could use the serial number on a ten-dollar bill to look up every single time it changed hands.)
- “Pseudo-Anonymous”—Bitcoins are tied to a wallet ID rather than your personal information, but this doesn’t make it entirely anonymous (more on that below).
Bitcoin was developed in 2008 by someone with the pseudonym “Satoshi Nakamoto.” This person published a paper discussing how Bitcoins could work and just a year later it started being traded and mined.
The reason people are so drawn to Bitcoins is the lack of middlemen and banks with hefty fees. Since it exists entirely online, your wallet ID (more on that later) is what is used in transactions, not your name and other information, unless you give it.
Is Bitcoin really anonymous?
No, Bitcoin isn’t actually completely anonymous. Talented hackers and government agencies have the means to track pretty much anything, including Bitcoin. Although Bitcoin transactions are randomly transmitted over the peer-to-peer network (making it seemingly anonymous), this system doesn’t always hold up.
If a hacker can connect multiple nodes to the Bitcoin network, the combined data collected from these different nodes might be enough to determine where a transaction originated.
Bitcoins can also be linked to real identities if those identities are used in combination with the Bitcoin addresses in some way. This includes addresses used to deposit or withdraw money to or from an exchange or wallet.
How do you get Bitcoin?
You can buy Bitcoin with cash
You can buy bitcoins with hard cash, credit or debit cards, and wire transfers. But first, you’ll want to establish a bitcoin “wallet,” which will be where your wallet ID is derived from. This is just a place to store your bitcoins, just like your wallet holds your cash and credit cards.
According to this article on cryptocurrency website coindesk.com,
The main options are: (1) a software wallet stored on the hard drive of your computer, (2) an online, web-based service or (3) a ‘vault’ service that keeps your bitcoins protected offline or multisig wallet that uses a number of keys to protect the account.
Each has their pros and cons, but the first two have the most drawbacks. You’ll want to back up your computer regularly if you store bitcoins on your computer and online services are susceptible to hackers.
If you’re an everyday user, these online services are your best option, as long as you don’t need complete anonymity and don’t mind the long setup procedures. However, some people believe that this erases the point of Bitcoin and its anonymity.
You’re probably wondering how much a single bitcoin is worth. That’s a hard question to answer because it fluctuates constantly. At the time of writing, Bitcoin is worth $10,350 US dollars (an all-time high).
You can “mine” it
Bitcoin mining is like digging for gold online—hence the reason it’s called “mining”. With paper money, a government decides when to print and distribute money, but Bitcoin doesn’t have a central regulator, which is what allows anyone to start mining.
Bitcoin miners use a special software to solve math problems (your computer must correctly come up with the right combination of 64 digits) and are issued a certain number of Bitcoins in exchange for solving them correctly.
But don’t worry, there’s not an endless amount of Bitcoins just floating around out in cyberspace. Once there are 21 million in existence, there can’t be any more.
These puzzles aren’t easy to solve and, as I said above, do require a special software. It’s so difficult, that many people can’t accomplish it entirely on their own. Instead, “mining pools” have arisen, where groups split their computing power and, once the puzzle is solved, the winnings are divided based on the amount of computing power each contributed to the calculation. Don’t think that mining Bitcoin is an easy way to get rich. It’s possible you would need to spend more on specialized computer equipment than the Bitcoin you could mine would be worth!
Is Bitcoin mining legal?
This mining process probably sounds highly illegal, but it’s not—at least in the United States (international laws differ in their treatment of Bitcoin).
That said, laws regarding Bitcoin are still evolving and the use and distribution of it is not regulated and is still fairly risky, especially when it comes to taxes.
But where the biggest issue arises is in the purchases people make with bitcoins.
How can you use Bitcoin?
The U.S. Treasury Department’s Financial Crimes Enforcement Network, states that, as of 2013,
“…using bitcoin to purchase well-natured goods and services is not illegal. However, those who mine bitcoins and trade them for traditional currency or operate exchanges on which bitcoins are bought and sold are labeled “money transmitters” and could be subject to special laws that govern that type of activity.”
This doesn’t include the fact that many people use bitcoins to purchase things on the dark web. Drugs and gambling are among the most popular uses for Bitcoin.
So where can you use Bitcoin legally? Probably in more places than you’d think. Microsoft, Dell, REEDS Jewelers, and a few airline sites all accept Bitcoin as a legitimate payment.
Also, the easiest way to get your bitcoins turned into cash is via gift cards. For U.S. customers, places like Gyft, eGifter, and GiftCardZen offer many options. Typically, you can use these gift cards at places like Amazon, Walmart, and Target.
Is Bitcoin safe to use?
Just like thieves steal your wallet, hackers will be after your Bitcoins, so it’s important to make sure your store it in a safe place.
We mentioned Bitcoin wallets above, and getting one is among the more secure ways to store and use Bitcoin.
Ledger is a Bitcoin security company that offers a range of Bitcoin storage devices. The Ledger Nano S is Ledger’s most secure wallet.
TREZOR is another option. It’s the original hardware wallet that was built to secure bitcoins. It generates your Bitcoin private keys offline.
Should you invest in Bitcoin?
Now that you know the basics of Bitcoin, you may be wondering if it’s the right investment for you. There are a couple things to consider before you take the plunge.
Mining Bitcoin is expensive
If you’re thinking of actually attempting to mine Bitcoin, you could be spending a lot. Unless you’re a serious computer genius, you’ll need to buy software that will calculate the complex 64-digit codes that lead to a single bitcoin. This software is not cheap—typically it ranges in the thousands (although, there are some sketchy free or cheap options). In addition, you’ll need to consider the actual cost of Bitcoin, which, as I said earlier, fluctuates constantly. While the price appears to be climbing, who’s to say it won’t suddenly decrease in price again.
Bitcoin is not regulated by an agency
If you want to invest some of your savings into Bitcoin, know that it’s not like investing in the stock market, and owning Bitcoin is not like having cash in the bank.
Bitcoins are not traded on Wall Street and can’t be bought or sold through a brokerage. So everything is up to you. Due to its unregulated nature, Bitcoin fluctuates constantly in price, more so than other currencies. There are certainly a lot of safer investments than Bitcoin that you should consider if you’re risk averse. It also has no tangible value like gold—therefore, Bitcoin is worth exactly what people perceive its worth to be, which can be a little scary.
Demand is high
Since there is a limited amount of Bitcoin, and after 2040, no more will be created, getting in on the ground floor can be a great idea (not to mention, it’ll help diversify your portfolio).
It has also been rumored that Bitcoin will someday (and maybe even someday soon) be bought by governments to be held as reserves just like gold. While this could have a lot of negative ramifications, it also means the limited Bitcoins would suddenly be in very high demand.
Buying and holding Bitcoin
Buying Bitcoin and holding onto it in hopes it will appreciate in value, is the most common form of “investing”. As with all investing, you should never invest more than you are willing/able to lose. This is especially true with Bitcoin, since it’s still a very risky investment.
The most important thing to keep in mind when buying Bitcoin is to make sure to buy only from exchanges that have proven their reputation.
Another key tip is to make sure you don’t buy all of your Bitcoins in one trade. Instead use a dollar cost averaging method—buy a fixed amount every month, week or even day throughout the year. This ensures that you buy the most Bitcoin when it’s on the rise, and less when it’s going down in price.
Although the most well-known, Bitcoin isn’t the only cryptocurrency. Let’s take a look at some of the other major players.
Unlike Bitcoin, Ether can only operate through its own network—Ethereum. There is a limited amount of Ether, that was generated during their 2014 “presale.” 60 million were created during this time.
Ether is not necessarily intended for day-to-day use like Bitcoin. It can be used by application developers as a currency on the Ethereum network. It’s used for things like ride-sharing, betting and investments.
Price at the time of publishing: $473.90
Litecoin, as its name suggests, is a simple form of Bitcoin. Anyone can mine Litecoin using their home computers. According to their site, Litecoin is “a peer-to-peer currency that enables instant, near-zero cost payments to anyone in the world.”
Like Bitcoin, you can get Wallets for your Litecoin to keep it secure from hackers.
Price at the time of publishing: $97.22
Bitcoin has become increasingly popular due to its relative anonymity—which allows for legally-questionable purchases. But it can be used for every day, legal purchases as well. Via gift cards and “wallet” exchanges, you can buy items for Walmart or Amazon, and even buy discount plane tickets. The cyrptocurrency is also quickly becoming a mainstream investment option—one that the average investor has to take note of.