Have you heard about Bitcoin? Are you considering investing in it? Don’t spend any money until you read more about it, its features, how investments work, and what the risks involved are.
What Is Bitcoin?
It is a digital currency and payment system attributed to a mysterious programmer or group of programmers who called themselves Satoshi Nakamoto and released it in 2009, as open source software.
We’re actually talking about a peer-to-peer system in which transactions between users take place directly, involving no intermediaries. Transaction verifications rely on network nodes. Each transaction appears listed in a public ledger called blockchain.
Since it does not rely on administrators or central repositories, this currency is decentralized, and it is the first one of its type. Used to reward mining, bitcoin can also pay for services and products, and allows exchanges with other currencies, in both legal and illegal markets.
What’s the difference between Bitcoin and traditional currencies? Traditional currencies rely on government support and have some sort of tangible form. Bitcoin is intangible and has no backups, but this doesn’t seem to make it less appealing.
Ever since its release in 2009, when its value was almost symbolic, the currency increased its value exponentially, exceeding $10,500. While the technology Bitcoin relies on is fascinating, it often fuels online crimes and even violence, being chosen by many criminals, offenders, and scammers due to the anonymity it ensures.
With no centralized regulations or innate legal frameworks to influence it, Bitcoin value depends on the market. Since it continues to receive a lot of attention, and more and more internet users choose it as their transactions currency of choice, its value is on the rise.
Users store Bitcoin in digital wallets they can save locally, on their phone or hard drive, or online, with their Bitcoin exchanges. Saving locally is similar to keeping money under the mattress. The money is as safe as the digital wallet – if the wallet is gone, so is its content.
To send and receive money, users only need to point their web exchange or Bitcoin client towards the Bitcoin address of the corresponding wallet. It takes only minutes for the virtual money to leave one wallet and show up in the other.
Not many websites accept Bitcoin, but there should be enough options in all fields of interest. In real life, spending Bitcoin is not that easy, but it is not impossible either. Keep reading to find out more on the subject!
How Does Bitcoin Work?
Leaving technical details aside, all you need to do in order to use Bitcoin is to install the wallet on your mobile phone or computer. The installation will generate a first Bitcoin address. If you want, you can create more. To receive money, all you need to do is disclose your address to the person from whom you are to receive money. A new address is necessary for each transaction.
Main Bitcoin Features, Terms, and Processes
- Block Chain – It is the public ledger supporting the Bitcoin network. It includes all confirmed transactions, and it helps calculate Bitcoin wallets balances and verify transactions. The block chain’s integrity and chronological order is enforced with the help of cryptography.
- Transactions and private keys – Transactions are value transfers between wallets, included in the block chain. Every Bitcoin wallet keeps a private key that it uses to sign transactions. The key is the proof that the money came from the owner’s wallet. It also prevents interferences with the transaction, once initiated. Transactions broadcasting and confirmation doesn’t usually last more than 10 minutes, the process being called mining.
- Bitcoin mining or processing – It is the consensus system used to validate and include waiting transactions in the block chain. It ensures the chronological order of the transactions in the block chain, protecting network neutrality, and allowing different systems to agree on the system’s state. To receive confirmation, transactions require inclusion in a block with strict, network-verified cryptographic rules. The rules aim to prevent the modification of previous blocks, as this would invalidate any following blocks. As an activity, mining resembles a competitive lottery in which individuals cannot easily add new consecutive blocks in the chain. This way, users cannot control the transactions in the block chain and cannot replace block chain parts to roll back their spends.
- Wallet security – Just like real life wallets, Bitcoin wallets need securing. Bitcoin lets users transfer and control money in any part of the world, but these great features bring about high security concerns. To reduce risks, it is recommended to use both online and local wallets. Online wallets should only store small amounts. Local wallets should be stored on several media, with regular back-ups, all encrypted. Lost wallets cannot be recovered or redeemed, so the responsibility falls entirely to the user.
- Bitcoin price variations – With no government backup, Bitcoin’s value fluctuates unpredictably over short periods. That is why it does not represent a solid alternative for savings or investments. You should think of Bitcoin as of a high risk investment opportunity, great for unexpected ventures, appropriate for certain transactions, but never a reliable business opportunity. Use it to send and receive payments, keep a small balance, if you can afford to lose it, but convert the rest of the funds to traditional currencies.
- Irreversible payments – Bitcoin transactions are irreversible. The only way to recover your investment is to convince the receiver to issue a refund. Therefore, carefully check any potential business partners or sellers before sending money to them. Transactions to wrong email addresses are unlikely, as the system detects typos and doesn’t normally let you make payments to invalid addresses.
- Anonimity – Contrary to the general idea, Bitcoin transactions are not anonymous. Every user needs to male efforts to protect their privacy. All transactions are stored in the public ledger and remain on the network, so anyone has access to the transactions and balance of your Bitcoin address. The identity of the address owner, however, remains unknown, at least until its disclosure during purchases or various other circumstances.
- Unconfirmed transactions – Bitcoin transactions are not irreversible from the beginning. They receive a confirmation score indicating how difficult to reverse they are. Every confirmation is received within an average interval of 10 minutes. Transactions paying the lowest fees or with atypical details will receive their first confirmation later.
- Constant development – As open source software, Bitcoin remains an experiment. New features are being developed constantly, and new challenges appear as more and more people and businesses adopt Bitcoin. Users may face slower confirmations, higher fees, unforeseen technical issues.
- Taxes and regulations – Although Bitcoin is an unofficial currency, any incomes or gains you obtain with it are subject to taxes. It is every user’s responsibility to check the local and federal regulations and comply with them.
Bitcoin and Ransomeware
You’ve surely heard about the Ransomware attacks that have caused victims around the world. While Bitcoin has nothing to do with the software blocking access to people and institutions’ data, threatening to delete it or make it public, it is the currency of choice for the ransom requested.
Although the attacks only got in the news a couple of months ago, they have been occurring for years, ever since the digital’s currency price went up. It all makes sense. Why would criminals risk their identity and safety with traditional bank account numbers, when they can transfer the money a couple of times to make sure its trace is lost and then use it anyway they want?
However, as mentioned above, transactions in this currency are not anonymous. As a result, investigations have revealed that some of the reward money went to North Korea. If you come to think of it, the international sanctions they have received prevent their access to several important financial markets, so using Bitcoin surely makes sense.
If you are thinking that the best way to keep your money safe is to use the criminals’ currency, think again. Although the news reports didn’t pay too much attention to this, numerous Bitcoin users lost their savings. While banks, insurance companies, and other financial institutions reimburse their clients for such losses, no one reimburses Bitcoin users for their losses.
Bitcoin and the Economy
This cryptocurrency is gaining popularity by the day. More and more people agree that this is the future of worldwide economy. We’re already doing business online, so it seems only natural to store finances, complete transactions and keep savings in the same environment.
The cryptocurrency’s evolution seems to confirm that, but we are still a long way from official implementation. Any currency, no matter its nature, needs clear rules and regulations, and strict control measures, and Bitcoin lacks all of these.
It also needs a certain degree of stability, which is also lacking. In fact, Bitcoin value has known huge swings over time. For example, $1,000 worth of Bitcoin bought in 2010 would be worth about $35 million right now. Nevertheless, $1,000 worth of Bitcoin bought at the beginning of 2014, would have been worth only a quarter in the same period of 2015.
Otherwise put, by investing in Bitcoin, you can get rich or end up bankrupted overnight. That is why specialists warn against keeping all one’s savings in Bitcoin. The cryptocurrency operates alongside traditional currencies backed by the government, so it is safer to roll and play with a predetermined amount and keep the rest of in traditional currencies.
Bitcoin in the Future
It is difficult to predict how this currency will evolve over time. Programmers themselves argue on the subject, and open-source software can be modified by anyone. Judging by the tendencies noticed so far and by the appearance of other cryptocurrencies, it should be safe to say that Bitcoin isn’t going anywhere.
However, there is also reason to expect significant efforts to get rid of it. Governments and authorities have no control over money gained, spent, and transferred right under their nose. They can’t control transactions and they can’t assess fortunes. Do you really think they are happy with this situation?
Analysts agree they are most likely doing everything they can to put an end to Bitcoin use and regain control. On the other side of the barricade, the obvious interest is to maintain privacy and confidentiality.
What will happen remains to be seen. One thing is certain: no matter which party gains the upper hand, and how things will evolve, Bitcoin’s value will continue to swing, wilder than ever, so beware!
Before we can draw a conclusion, let’s review the facts:
- Bitcoin has been around for years, and it is gaining popularity by the day.
- Its value increased exponentially throughout the years, but the major short-term swings make it unstable, uncertain.
- It does not offer anonymity, but it is still the safest bet for users who wish to keep their identity a secret and prevent third party access to the their money and financial information.
- The technology behind the currency is highly advanced and could change our daily lives if it were implemented in some public programs (imagine having public ledgers at the DMV, when you need to register your car in another state).
- The use of this cryptocurrency is a threat to government interests and need for control, so it’s safe to expect huge efforts to prevent it.
From all these and everything else discussed above, it should be obvious that every Bitcoin user should be cautious, ensure their wallet’s security, and not invest more money than they can afford to lose in this cryptocurrency. It is important to monitor the currency’s value and pay attention to the news in order to anticipate huge value swings.
Those who are thinking of using the currency for less than legal purposes should also think twice, as, although, in theory, the parts involved in the transactions are hard to trace, in practice, there is no telling when the authorities come up with a new method.
With Bitcoin, we’re witnessing evolution. To find out where it will take us, we’ll just have to wait and see.