Bitcoins: The Currency of the Future?
On a recent flight, I came across an article by Jill Coody Smits about Bitcoin. You’ve probably heard the term Bitcoin thrown around recently on Twitter, the News or in conversation – but what exactly is it?
What exactly is Bitcoin? This is an up and coming currency, which began in 2009. It is an online-based currency structure where individuals or businesses can pay each other (assuming the individual or business accepts bitcoins for payment) in real time. Bitcoins are transferred through bitcoin “wallets” as a method of payment between users.
How does it work? To use or accept bitcoins as payment, an online wallet must first be obtained through Bitcoin. The wallet is similar to an App that would be installed on a computer or cell phone. Each Bitcoin user’s wallet is stored on a Bitcoin network, which is where the transfers between wallets occur. To fill a wallet, a bitcoin user can either purchase his/her own bitcoins or earn them. To earn bitcoins, a user will either complete simple tasks (such as providing feedback on a website) or watch videos; this method is similar to having a job that pays in bitcoins, rather than in dollars. Once purchased or earned, the user owns those bitcoins and can use them as payment to businesses or individuals who accept bitcoins.
The Bitcoin network tracks each user’s balance, similar to the tracking one would see through an online banking system with your financial institution. The difference is that if a bitcoin is not owned by a user, it cannot be spent.
Is it secure? Bitcoin transactions are made through the online Bitcoin network. A transaction must first be confirmed before going through the Bitcoin network. In order for a transaction to be confirmed, it is sent through the mining system. This system processes transactions through a block chain, similar to a batching system found in certain accounting software programs. Mining ensures all transactions are confirmed in order, “protects the neutrality of the network, and allows different computers to agree on the state of the system.”
Within the block chain are blocks (similar to a batch in the batching system mentioned previously), which contain sets of transactions. Each block has strict cryptographic rules that must be verified by the Bitcoin network in order to pass through the confirmation process. The mining system also prevents individuals from adding consecutive blocks to the block chain.
What are the cautions? During my research, I came across four primary concerns (although this is not a fully-conclusive list and one should perform his/her own research before participating). Cautions I noted are as follows:
1. Lack of regulations: Bitcoin is transferred under a “peer-to-peer network” that is not regulated under any centralized or government authority. It is commonly used by people who are unsure about the current banking system. Because of that, concerns have been raised by the US Treasury that there is the potential for money laundering due to the lack of regulations within the network.
2. Volatility: Bitcoin is still new; thus, it is a volatile currency. Similar to investments in stocks, Bitcoin values can fluctuate overnight, so Bitcoin does not recommended cashing out a 401(k) to invest it in bitcoins in order to save for retirement.
3. Public record: Bitcoin is not anonymous. Because the wallets are kept on a Bitcoin network, all transactions are stored publicly and permanently on the network. Thus, all users can see the balances and transactions within each Bitcoin address (or wallet); however, unless a user knows your address, your wallet is not linked directly to your name. An example of a Bitcoin address would be: 1A2Yvc9muUTrCsQSf1e9WKMabJwT5KuMHT. If that Bitcoin address was my Bitcoin wallet, other users would be able to see the balance and transactions in my wallet, but unless I told them, they would not know that wallet belongs to me.
4. Instantaneous Transactions: Bitcoin transactions can be confirmed within 10 minutes of submission. This quick response drastically decreases the security of the transaction; thus, dishonest users could try to reverse the transaction and cheat other users. For larger transactions (such as $1,000 or more), Bitcoin’s website suggests waiting for six or more confirmations in order to increase the security as “each confirmation exponentially decreases the risk of a reversed transaction.”
For additional information related to the cautions of Bitcoin you can visit the BitCoin Website by clicking here.
How can I participate? First and foremost, research, research, research! Bitcoin is still a new concept, so researching it and understanding what it’s about is key to effective participation.
After researching, if it seems like a good fit, the next step is to download an online wallet. There are different wallets for different devices. For instance, a desktop wallet would be different than a cellular phone wallet. To obtain a wallet, visit the Choose Your Wallet page on the Bitcoin website.
Once a wallet is selected and downloaded, it’s time to purchase or earn bitcoins. Bitcoins are used internationally, so it’s important to obtain bitcoins in the currency of the country where they will be used. To purchase bitcoins, one first must find a bitcoin exchange. Enter the country and choose a preferred exchange. Note: before choosing an exchange, be sure to research the validity of the exchange. To earn bitcoins, there are various websites, such as www.reddit.com or www.bitcoinget.com, with “job postings” for earning bitcoins.
Overall, the above information related to Bitcoins is a summary of how Bitcoin works. There is additional information that was not included; thus, before choosing to participate, it’s crucial to do your own research.