Chances are you have heard about Bitcoins because lately the news has been full of stories about them. If you have not already, you will.
What is a Bitcoin?
A Bitcoin is a form of intangible virtual currency that is not backed nor regulated by any governmental entity. Despite this, Bitcoins are actual currency in that they are accepted in trade for real goods and services and can be exchanged for other, tangible currency.
So, then, WHAT is a Bitcoin?
This is where the explanation gets complicated. The Bitcoin is the brainchild of a computer programmer, or group of programmers, who go by the alias Satoshi Nakamoto. (The actual identity of Nakamoto remains a mystery.) It was developed as an alternative to governmentally issued currency. Although a Bitcoin does not exist in tangible form, it is an actual measure of value. Bitcoins, like gold, are “mined.” Rather than digging up the earth, Bitcoin miners use powerful computers to solve complex mathematical problems by “digging” through possible solutions. The correct answer to each problem is a unique number. Finding this number yields the miner a block of Bitcoins. These are monitored from the beginning of their existence by a computer network that maintains the authenticity of each Bitcoin, thereby making it impossible to “counterfeit” Bitcoins. This is the simple explanation for a very complicated process, but it will serve the purpose of this discussion. Click here for an in-depth discussion of this “mining” process.
While Bitcoins can only be used to pay persons and merchants willing to accept Bitcoins as payment, the number of merchants willing to do so (especially in larger cities) is growing. An owner of a Bitcoin can transfer it to a party willing to accept it as payment through a computer or smartphone without an intermediate financial institution. Those merchants accepting Bitcoins (both e-commerce and brick and mortar businesses) use the Bitcoin symbol which is a dollar-like double-barred “B” (shown in the photo, above).
Most business will not set their prices in Bitcoins because of value fluctuations. Some creative companies are working to make Bitcoins more mainstream, especially in the e-commerce realm. One such company, BitPay, handles Bitcoin transactions for over 4,500 companies, most of which are e-commerce websites, but some of which are traditional brick and mortar retailers. BitPay takes payments in Bitcoins, converts them based on the then-current value, and forwards the cash equivalent to the merchant. This places the risk of such volatility on BitPay, not the merchant. The value of Bitcoins is highly volatile these days. It was recently reported that the total value of Bitcoins in “circulation” currently is over $2 billion. Just a year ago, that number was a small fraction of the current value. The value of a Bitcoin a year ago was approximately $10. However, a couple of weeks ago, the value of a Bitcoin had shot up to an all-time high (over $250). By the end of the same day, the value had dropped back to $100. A cottage industry has arisen with people speculating over the value of Bitcoins (as they would with other precious commodities like diamonds and gold).
For a currency that only exists in a virtual world, it is gaining traction nonetheless. In fact, there are reports of people who have traded in their real world savings in exchange for Bitcoins in the hope that the value of Bitcoins (like any item that is scarce) will increase in value. Others simply choose to use Bitcoins because of the unregulated nature of transactions involving them.
While Bitcoins certainly can be and are used for completely legitimate purposes, their unregulated nature also lends themselves to use in connection with illegal activities such as drug trafficking, illegal weapons deals and other criminal ventures. This is causing concern with law enforcement officials.
While this could be a passing Internet fad, I don’t think so. I think that we will all be hearing more about Bitcoins in the coming months and years.
