The concept and technology of Bitcoin was introduced in 2009 by Satoshi Nakamoto. By 2011 it began to gain global attention. It’s now viewed as an innovative digital asset that can be traded directly with other vendors through a peer-to-peer payment network without an administrator. Although it’s similar to using credit cards, the Bitcoin network has no owner or regulator. Here’s a summary of why this form of cryptocurrency and others have become popular.
What Is Cryptocurrency?
Cryptocurrency is an alternative currency that falls under the umbrella of what financial institutions call “digital” or sometimes “virtual” currency. Bitcoin marked the beginning of cryptocurrency, although the concept of exchanging money electronically had already existed for a few decades. Some people may be confused by these terms since Europe and the United States have slightly different definitions. In the US, for example, virtual currency does not have status as legal tender, but is permitted to operate as real currency in digital transactions.
In 2014 the IRS began categorizing bitcoin as property instead of currency. Essentially, it is now taxed as property while treated like a coupon. It can be purchased for online games, airline frequent flyer programs and online credits. Not all vendors allow bitcoin to be transferred back to actual cash after it is purchased, while others allow it to be convertible currency.
A factor that distinguishes cryptocurrency from other digital cash is that it is based on a secure transaction process known as cryptography, which divides digital value into units. Cryptocurrencies are not considered legal tender but can be used for legitimate online transactions.
One of the attractions of decentralized cryptocurrencies is that they are not regulated by government, although US regulators are starting to question whether or not supervision of the network is needed. For now using Bitcoin does not require permission or assistance.
- online gambling
- sending payments and tips
- trading or investing
- online shopping via 100,000+ merchants
- transactions through PayPal and partner CoinBase
How It Works
You are considered a bitcoin owner if it is associated with an address, in which you will be assigned a private key. The only way to make transactions is if you know this key. You will also need to use a digital signature in order to complete the transaction. Then you will be able to make purchases with bitcoins. A lost private key will render your bitcoins unusable.
In order to make transactions, your digital credentials that prove ownership and information on bitcoin holdings are stored in a “wallet.” The wallet also represents your public and private keys. Funds are associated with bitcoin addresses instead of physical locations. Bitcoin exchanges are used for converting bitcoins into legal tender.
Transactions are based on the Bitcoin network’s inputs and outputs just like payments and purchases. An input means payment sent to you, whereas output means making a purchase. Multiple inputs require multiple bitcoins but each input requires a digital signature. Record keeping with this technology is called mining. Several transactions made at once is known as a block, which is connected to the previous block by a “chain.”
- When Bitcoin is capitalized it refers to the technology and network
- When bitcoin is expressed in lower case it refers to a user account
- BTC is the symbol used for bitcoin
- mBTC refers to millibitcoin with a value of .001 bitcoin
- a microbitcoin is worth .000001 bitcoin
- Bitcoin Foundation is a nonprofit organization promoting cryptocurrency
- Merchants process payments through BitPay, CoinBase, Circle and other new platforms
- fees are lower than traditional wire transfer services
Warnings and Considerations
The Securities Exchange Commission issued a warning in 2014 about bitcoin hazards. One major drawback is that cyber criminals can misuse bitcoins, which may lead to regulation. Some financial experts have warned that bitcoins might inspire Ponzi schemes while others are unconcerned. Additionally, not all users consider it user-friendly.
In June 2016 bitcoin prices fell nearly 25 percent in a one week period, due to technical glitches. It caused a major exchange called Bitfinex to temporarily shut down. Five years earlier the value plunged 90 percent for about four months. Its overall trajectory since then, however, has pointed upward.
Other issues are that bitcoin users may not be entitled to refunds or chargebacks. Keep in mind that government, financial institutions and educators are in the process of debating whether or not these online transactions should be considered an exchange of currency.
The bitcoin market has experienced volatility due to lack of liquidity, which has affected the stability of storing value in an account. Still in its infancy, there are many issues to be worked out to determine the risks of buying and selling bitcoins, which can be done both online and offline at a bitcoin ATM. There are now over 15 million bitcoins in circulation.