The relatively new virtual currency Bitcoin taking the (financial) storm
Bitcoin is a software-based payment system where you don’t need any form of traditional currencies such as cash or credit cards. It was designed as a peer-to-peer electronic cash system. They are “mined” like gold. This virtual currency has been gaining a lot of traction in recent years due to its decentralization, convenience, and transparency. Once considered a black-market currency, Bitcoins are now seen as a potential investment tool, along with the traditional investments and actual currencies.
The soaring demand for Bitcoins continues to rise and has reached the media’s scrutiny and fascination. As of December 2013, Bitcoin soared to $1,200 compared to 10 cents in the early days.
However, since Bitcoin is the world’s first virtual currency (or “cryptocurrency”) and is relatively new to many people, it’s not surprising that a few have only learned to understand Bitcoin, let alone use or invest in it. Given its promising stand both as an investment and electronic currency, it’s important to gather some knowledge about this largely unregulated market platform.
How did Bitcoin originate and how does it work?
Bitcoin was developed originally as a way to barter on the online black (anonymous) market Silk Road. Today Bitcoin has evolved to cover many sectors and grown into several different uses. Since its emergence in 2009, Bitcoin has spawned several other imitations and has helped pave the way for the virtual currency’s rapid progress as its market capital now amounts to over $6 billion.
When the algorithm was developed under the pseudonym of Satoshi Nakamoto – an individual or individuals – set a limit on the number of Bitcoins that will ever exist: 21 million. Currently, there are about 12 million Bitcoins that are in circulation. So it means that about nine million are yet to be discovered. Since its emergence in 2009, the use of Bitcoins has soared.
Bitcoins act like cash, but they are “mined” like gold. There are three basic ways to obtain Bitcoins: buying them outright on an exchange, receiving them for goods and services, and mining new Bitcoins.
For instance, one person buys a cell phone from another person using a Bitcoin. To make sure that the Bitcoin being used is the real thing, miners start to verify the transaction. In the Bitcoin world, not only one transaction that many individuals are attempting to confirm and validate. In fact, there are many transactions. These transactions are collected into boxes with virtual padlocks called the “blockchains.” A blockchain is a shared and decentralized public ledger on which the whole Bitcoin network depends. It presents all confirmed transactions. With the blockchain, Bitcoin wallets can compute their spendable balance and new transactions can be confirmed to be using Bitcoins which are actually owned by the one who spends it. A blockchain’s integrity and chronological order are applied with the presence of cryptography.
Many attest that the independent algorithm-based currency like Bitcoin is deemed safe to invest in and to use. According to some, no individual or group of individuals can freeze someone else’s Bitcoins. Besides, it’s almost impossible to figure out the keys required to use another individual’s Bitcoins, so it gives the impression that it is safe to use. Once a Bitcoin is verified, it is stored in the blockchain (the shared public ledger) which comprises 140,000 copies globally, suggesting that it is quite safe.
Why is Bitcoin not safe to use?
Some say that Bitcoin is not as safe as an investment tool because of its security issues. The blockchain is of particular concern. While a blockchain is considered as solid, its security has yet to be proven. According to some people, it will take much more time before all of its features are fully understood and all the protections are totally secured.
Since Bitcoin is still an unprecedented technology, all of the applications and services using Bitcoin are still new. So it’s understandable if it faces so a lot of security issues for the first time and its flexibility on its transactions can get so confusing at times. This might have led to the losses of Mt. Gox in February 2014. The Tokyo-based major exchange, that once handled over 70% of Bitcoin transactions, posted its loss of around 850,000 Bitcoins worth half a billion dollars. Because of the huge loss, Mt. Gox suspended its trading and operations. It also filed for a form of bankruptcy protection. This collapse has led to the questioning of cryptocurrency and Bitcoin’s status as a potential mainstream currency. The value of Bitcoins severely plummeted and China banned it altogether as a currency, and this would probably scare off many prospective investors.
Bitcoins have the potential as a mainstream currency, but it still has a long way to go
Bitcoins have indeed been gaining quite a bit of buzz these days, but just like any cryptocurrency, the Bitcoin has a long way to go before it replaces traditional currencies or credit cards as tools of commerce. While Bitcoins have shown some potential as an investment tool and electronic currency, it is still not something that you must have in your business portfolio. It will take time for cryptocurrencies such as Bitcoins to evolve as a realistic alternative to other traditional and electronic payment systems.