Bitcoin, the world’s newest and only digital currency is probably one of the most volatile and yet it’s quickly becoming very lucrative with current exchange rates valuing one bitcoin at more than $600. Since its creation in 2009, the currency has fluctuated unpredictability, often seeing extreme peaks and falls within hours. Bitcoin’s value recently rose to $900 only to fall 30 minutes later to $650. Based on current trends, analysts expect the currency to rise as high as $1,700 by the end of this week.
But it’s the currency’s roller coaster-like unpredictability which has made it a worthwhile investment for speculators, turning many early investors into millionaires. In 2009, a Norwegian man bought $27 worth of bitcoins only to discover that at today’s rates they’re now worth over $800,000. While stories like this have captivated the imagination of the ordinary consumer, many still remain skeptical about adopting the new currency. If you find yourself wondering whether now is the time to buy bitcoin, we’ve put together a comprehensive user guide to demystify this virtual currency.
What is bitcoin?
Bitcoin is a decentralized digital currency, also known as a cryptocurrency, which can be transferred between people and used to purchase things in a similar way to other currencies like the dollar; euro or yen. However, since it is a decentralized currency, it isn’t controlled by state bodies like the Federal Reserve. Instead, it relies on a peer-to-peer network with hundreds of computers around the world working to process the coins. For many, the appeal of the currency lies in its unregulated nature, which makes it one of the world’s first open financial networks. As government controlled financial systems prove to be increasingly unstable, the appeal of this currency soars.
When Cyprus’ banks were shut earlier this year as part of a $13 billion international bailout deal to prevent the complete collapse of the economy, many turned to bitcoin. In fact, this near economic collapse caused bitcoin prices to surge with the value of one coin increasing from $47 on March 16 to $88 on March 28. For those worried about the safety of the global banking system, bitcoin provides a reliable alternative.
Who created bitcoin?
No one knows for sure who created bitcoin but it’s believed that a person or group using the pseudonym Satoshi Nakamoto is behind the currency. While rumors abound about the real identity of this mathematical genius, the truth remains a mystery. In 2008, Nakamoto released a research paper in which the basis of the bitcoin currency system was outlined. Nakamoto remained an active contributor to the bitcoin community and the official forum until 2010 when he disappeared, but not before transferring responsibility to Gavin Anderson. Anderson is now bitcoin’s lead developer and works under the auspices of the Bitcoin Foundation, the only official body acting as the face of the currency.
Are there other virtual currencies?
Bitcoin may have received the most press coverage, but it isn’t the only cryptocurrency around. There are at least 80 other bitcoin-inspired currencies including peercoin, worldcoin, fireflycoin and zeuscoin. While these currencies work similarly to bitcoin, they rely on different algorithms and follow their own unique sets of rules. The main downside these currencies face is that they aren’t valued as highly as the bitcoin. Thus far, litecoin has emerged as the strongest alternative to bitcoin with its current value standing at just over $9 per coin. Even though litecoin is becoming a more commonly recognized virtual currency with vendors like Bees Brothers, which now accepts litecoin, it’s still no competition for bitcoin.
Where can I buy bitcoin?
Bitcoins can be purchased from exchanges; these are websites which convert currency into bitcoins. There are many different exchanges online but it’s important to choose a well-established one to minimize risk. Some of the more established exchanges include Coinbase, which makes it easy to instantly convert one’s local currency into and out of bitcoin. The company also offers bitcoin ‘wallets’, which enable users to store and make bitcoin transactions with ease. Currently, Coinbase supports over 400,000 wallets and has raised $5 million in funding.
The other option is to use a bitcoin ATM. Robocoin, the company which is producing these ATMs, currently has one machine operational in a Vancouver coffee shop called Waves Coffee. It’s estimated that within the first week, $100,000 worth of transactions were conducted using the machine, with an estimated 80 percent of those transactions being people buying bitcoins and 20 percent involving the sale of bitcoins for cash. The machine provides a convenient way for people to instantly access and convert their bitcoins into their local currency.
Who prints bitcoins?
As a digital currency, bitcoins are not printed. Instead, they are produced by a process known as ‘mining’. The bitcoin peer-to-peer network relies on complicated mathematical problems to prove and verify that money changed hands. During the mining process, the hundreds of computers making up the bitcoin network process the mathematical problems. Every time one is solved, the ‘miner’ (the computer doing the mining) is awarded a certain number of bitcoins, generally 25 coins which is worth over $12,000 at current exchange rates. This reward is a great incentive for more miners to join the network and ensure the currency remains decentralized.
The bitcoin system relies on a special algorithm which limits the number of bitcoins to 21 million coins in total. Since there is not an infinite number of bitcoins available, over time the mathematical problems become increasingly more difficult to solve. When the currency first launched, miners were using normal PCs to solve the problems. Now, special mining software and powerful processors are needed. It’s estimated that within the space of 24 hours, the average miner uses $147,000 worth of electricity to run machines powerful enough to mine bitcoins. Today, most miners use specialized, pricey devices known as Bitcoin Miners, which have enough processing power to mine effectively.
Some of the world’s most powerful computers are being used for bitcoin mining. E-Sports Entertainment Association (ESEA) was recently fined $1 million after it was discovered that it had added secret bitcoin mining software to its latest update. The software was designed to run in the background and take advantage of the gamers’ fast processors and graphic cards. Over the space of several months, the software mined bitcoins to the value of $3,700.
What can I buy with bitcoin?
For the average user, bitcoin’s real worth lies in its applicability and the fact that it’s more than just a virtual currency. Bitcoin has real-world value and is gaining increasing recognition by businesses as a valid means of payment.
The currency may not yet be universally accepted, but a San Francisco based Forbes journalist recently conducted an experiment in which she successfully lived off the virtual currency for one week. She admits that while challenging, it is doable and will become even easier as more merchants accept the currency. For those who aren’t quite as adventurous, there are many other ways to spend your bitcoin bounty without having to vacate your life.
Coupa Cafe, for example, is a Palo Alto coffee shop which is now accepting bitcoin. And if that doesn’t quite satisfy your taste buds, there are many other alternatives. Usebitcoins has mapped all the places from restaurants and coffee shops to jewelry stores and even health and wellness centers that accept bitcoins. Up until recently, it was even possible to use bitcoins to purchase any type of narcotic imaginable online though a site known as Silk Road.
While bitcoin likely won’t replace the dollar or the euro, it’s likely to provide tech-savvy consumers with a reliable and cost-effective alternative. It also proves that, to a large extent, the internet does provide a viable means of survival. Bitcoin exemplifies the role of tech in challenging and oftentimes vastly improving firmly established systems.