Before we start exploring what is Bitcoin we need to start with understanding what is money. Today, all modern societies use some kind of ‘money’ as a convenient way of exchanging goods and services. Money is more than a tendering system. At its core money represents value. If I perform some work or sell an item then the money is exchanged to the value of what the work or item is valued at.
Down through the ages, money has been through various physical incarnations. Money has taken the form of promises scratched into soft clay which was then fired, large wheels of limestone rock, metal coins, paper notes and now plastic cards. In each case, ‘money’ involved some kind of physical object. But now ‘virtual money’ is on the scene and has removed the need for these physical objects.
What are Bitcoins and how do they work?
So when you want to buy something normally using your bankcard, you give your card details to the shop, and the shop then asks the bank if you are good for the money. The bank checks its records to make sure there are sufficient funds in the account and then approves the transaction and updates its records.
What if you want to remove the bank from that system? Who else could you trust to keep your money and these transaction records?
The answer is, you wouldn’t trust anyone with your hard-earned money. Well, not one single person anyway. But what if you trust everyone as a whole.
Let us use this Analogy. If one person told you the sky was pink then you just straight up wouldn’t trust that person. But if everyone in the world had a record stating that the sky was indeed pink then you would then trust that this was the case.
The idea is you do not have one central record of transactions, looked after by one bank. Instead, you distribute many copies of this ledger all around the world. Each owner of each copy has a record of every transaction and each copy is identical.
So to buy something using Bitcoins, you give the shop your details and instead of asking one person, the shop now asks everyone if you are good for the money. If everyone says yes then the transaction is approved and everyone around the world updates their record. This is a way that prevents any possibility of forged transactions and eliminates any errors in transactions.
Now the last piece of the puzzle you need to grasp is that all of these ledgers and records are not actual people. They are computers. Lots of computers all around the world.
Bitcoin: The cons
- Price volatility. The value of Bitcoins has been very volatile, ranging from US$0.03 to over US$1,200. Even today, only some companies accept Bitcoin — but only in a half-hearted way. They will accept Bitcoin via a third party, but will then immediately convert it into their own trusted currency. The problem is that the value of Bitcoins is volatile – its price relative to other financial assets varies a lot. So, as an asset, a Bitcoin is risky to hold — without warning, its value might go up, or down. Bitcoin is twice as volatile as gold, and three-to-four times as volatile as the major currencies.
- Hacking concerns. While backers say the blockchain technology behind bitcoin is even more secure than traditional electronic money transfers, bitcoin hot wallets have been an attractive target for hackers.
- Limited (but growing) use. More companies say they now accept Bitcoin but the majority of companies have not accepted the new currency. For bitcoin to become mainstream more companies will need to accept this as a tender for their service or product.
- Not protected by SIPC. The Securities Investor Protection Corporation insures investors up to $500,000 if a brokerage fails or funds are stolen, but that insurance doesn’t cover cryptocurrency.
Bitcoin: The pros
- Private, secure transactions anytime — with fewer potential fees. Once you own bitcoins, you can transfer them anytime, anywhere, reducing the time and potential expense of any transaction. Transactions don’t contain personal information like a name or credit card number, which eliminates the risk of consumer information being stolen for fraudulent purchases or identity theft. (Keep in mind, though, that to purchase bitcoins on an exchange, generally you’ll first need to link your bank account.)
- The potential for big growth. Some investors who buy and hold the currency are betting that once bitcoin matures, greater trust and more widespread use will follow, and therefore bitcoin’s value will grow.
- The ability to avoid traditional banks or government intermediaries. After the financial crisis and the Great Recession, some investors are eager to embrace an alternative, decentralized currency — one that is essentially outside the control of regular banks, governing authorities or other third parties.