What is bitcoin?
Bitcoin is a digital currency created in 2009 by an unknown person using the alias Satoshi Nakamoto. To most Americans that name seems rather unique, but in actuality it’s as common a name as Steve Smith. In any case, bitcoin is a non tangible and unregulated currency that only exists online. Because it’s not controlled by a central authority like the US Federal Reserve, bitcoin has become a volatile and controversial currency.
Where do they come from?
Bitcoins are created using a process called mining. Mining is when users attempt to figure out a complex mathematical equation related to the current number of bitcoins available in the open market. Let’s explain that another way. Satoshi Nakamoto only created 21 million bitcoins. As more are mined, the harder it is to solve the equation and unlock new ones. The mining process is like finding a missing puzzle piece. Whoever finds the piece receives a certain number of bitcoins. It takes an incredible amount of computer processing power to find the missing piece. Users will often create “pools” or groups of people (miners) to earn bitcoins quicker. If you’re thinking about becoming a miner, think twice. Your personal computer is not powerful enough. The best miners, using CPUs on steroids may find $3 to $5 worth of bitcoins a day. Analysts don’t expect users to unlock the last coin until sometime after the year of 2150.
What are the benefits of using them?
Twenty-five percent of Americans don’t have a bank account and with bitcoin, that doesn’t matter. As long as you have access to the internet you can use the digital currency. You can also perform financial transactions privately. If you’re shopping online or transferring money, no personal information needs to be exchanged between parties. Think of it as cash. When you hand someone cash you don’t need to present an ID or sign. However, if you were to issue a check or use a debit/credit card, you would have to provide certain personal information. This level of privacy makes it extremely attractive to people worried about identity theft or having their transactions tracked and reported. However, it also makes the purchasing of drugs and other illegal products much easier and harder to track. Another benefit of bitcoin is it’s decentralized, meaning no government agency, or bank regulates it. This means no one can seize your assets, charge you a transaction fee, reverse a transaction, and much more.
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Are they safe?
That answer is still up for debate. In some cases, yes it’s safe to use since each user and transaction has a unique, encrypted number, which is verified by other bitcoin protocols (think mining). This ensures the money you send or receive goes to the appropriate person. On the other hand, bitcoin isn’t safe since it’s unregulated. There is no way to detect or report fraud or protect your money. Most bank accounts today are FDIC insured. So if for some reason your money was stolen, it’s ensured up to $250,000. With bitcoin there is no safety net. If someone hacks your computer and steals your bitcoins there’s nothing you or the feds can do.
How much are they worth?
Bitcoins trade on an exchange similar to stocks and commodities. Mt. Gox used to be the largest, conducting more than 90% of all trades. It was closed in 2014 because someone stole 745,000 bitcoins valued at $400 million dollars. Since then, other exchanges with more secure measures in place have popped up. Basically each bitcoin is worth the same amount. Prices have been as high as $1,100 per coin and as low as $13. Because of the safety and regulatory issues surrounding the currency, bitcoins are extremely volatile. They are currently valued at $460 per coin. Keep in mind, there may me days where the price jumps 20%-30% and the next day it’s down 20%-30%.
(Photo: CNN Money)
Should I buy them?
Bitcoin is unregulated, volatile, and extremely risky. With that being said many think it could be the currency of the future and could make you some serious money. Lots of companies from Amazon, to Overstock.com, to Expedia now accept bitcoin. But it’s too early to tell if it’ll ever be regulated, protected, or used by the masses. If you’re a risk taker and like the idea of bitcoin, give it a shot. Buy in small increments to be on the safe side. This will help you smooth out some of the price volatility. If you’re a conservative investor, don’t even think about it.
How do I get started?
Setting up a bitcoin account is pretty simple. Since bitcoin is a digital currency you will need a digital wallet to store them. There are lots of bitcoin wallet providers out there but the best is Coinbase.com. It’s free and really easy to set up. Bitcoins are currently valued at about $460 per coin but you don’t have to buy a whole one. If you have $100 you can exchange that for the equivalent portion in bitcoin. Your wallet displays bitcoins with eight decimals. So if you exchanged $100 of bitcoin at a $460 per coin value, your digital wallet would show as 0.21739130 BTC, with the US equivalent being $100.
Investor Takeaway: Bitcoin does have its benefits, but at the same time it’s extremely risky and new. If you decide to get involved just know you’re going to be in for an interesting and volatile ride!