Perhaps you heard about the story of a Norwegian man who purchased $26.60 USD worth of Bitcoins — 5,000 in all —back in 2009. He forgot about the purchase until April 2013, when he heard about Bitcoins in the news. So he looked up his Bitcoins and discovered they were now worth an incredible $886,000 USD due to the currency’s dramatic rise in value.
It’s stories such as these that have many wondering about bitcoins. So what are Bitcoins, exactly? How do they work? And are they a safe, legitimate form of currency? These are just a few of the questions that we’ll explore in this article.
The Bitcoin was invented in 2009 by a developer who went by the pseudonym of Santoshi Nakamoto. Bitcoins are a new, completely digital form of currency, also called a cryptocurrency, as cryptography is utilized in the creation and transfer of this currency.
A small number of actual Bitcoin coins do exist, but most users never touch an actual Bitcoin, opting instead to digitally store their Bitcoins in an e-wallet. Before the arrival of Bitcoins, currency was always tied to a particular nation. But Bitcoins are different. Bitcoins are an innovative type of technology that utilizes peer-to-peer technology, which is independent of any bank or nation. Quite simply, Bitcoins are a publicly-owned form of currency. No single entity, nation, company or group ‘owns’ or controls theBitcoin. The Bitcoin software is open- source, meaning it’s essentially in the public domain; this means anyone is free to use or improve the technology.
You store Bitcoins in a digital wallet, which is connected to the web via a computer or mobile device. This makes Bitcoins very secure. Users are encouraged to store a backup of their Bitcoin e-wallet on a hard drive, thumb drive and/or in a print-out to provide an added measure of protection. Aside from this, there are very few precautions required. There’s no need to worry about someone racking up charges without your knowledge. You maintain control over your Bitcoins at all times!
A network of volunteers tends to the day to day operations for Bitcoin; these volunteers or ‘miners’ are rewarded for their work with newly minted Bitcoins.
Miners work on the Block Chain, a public database that records the digital exchange of Bitcoinsworldwide. The BlockChain is used to record Bitcoin transactions; it’s also programmed in a manner that prevents users from spending a Bitcoin more than once. The miners verify the transactions, which are then added to the Block Chain database. This is how new Bitcoins are placed into circulation.
Retailers favor Bitcoins due to the fact that they carry no or very low transaction fees, far lower than the 2%to 3% that’s typically charged by credit card companies. Using Bitcoins also allows you to avoid the fees associated with money transfers. Bitcoins are especially favored for money transfer transactions that entail crossing borders. Bitcoins are also faster, as a cross-border transfer takes mere minutes, whereas a bank transfer takes hours or even days! Some will pay a voluntary fee for faster transaction confirmation. But most importantly Bitcoins can be used to purchase anything, unlike credit cards which exclude certain type of purchases that the credit card companies may find objectionable.
Bitcoin users enjoy this form of digital currency because it’s anonymous. The government cannot track bitcoins. And your e-wallet is not associated with or connected to your name. Bitcoin transactions do not require you to share your identity in any way; the transfer is performed from one Bitcoin address to another. So individuals can perform Bitcoin transactions in a manner that ensures your privacy (although some areas have required the use of an intermediary agency which collects information on the people who are exchanging Bitcoins.)
Many are also using Bitcoins in place of the local currency in an attempt to avoid inflation. WidespreadBitcoin use is common in Argentina, among other locations. Although notably, China has prohibited the exchange of Bitcoins for the local currency.
Some have been off-put by the relative volatility in Bitcoin value, but as more and more use Bitcoins, the currency value has stabilized tremendously; it’s expected to continue along this trajectory in the coming years.
At the beginning of 2014, there were more than 2 million Bitcoins in circulation worldwide and about35,000 online retailers currently accept Bitcoins. It’s estimated that approximately 25 new Bitcoins are put into circulation every ten minutes. But notably, the supply is regulated by the pre-established BitcoinProtocol, which caps the total supply at 21 million.