Almost everyone knows about Bitcoin or at least heard about it. As Bitcoin constantly hits its all-time high and dominate headlines, you might be wondering whether you should invest in Bitcoin. Here I outlined several reasons why it is worth investing in Bitcoin. Read on and find out if it is still a good time to buy Bitcoin.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. The opinions expressed in this article are the personal opinions of the author at the time of publication.
10 Reasons Why You Should Invest in Bitcoin
At the time of writing, Bitcoin is currently valued above $1,000. It has reached more than $20 billion in market value and the long-term gains in the last few years are dramatic as the currency has risen from $15 in 2013 to more than $1,000 at present. It is no doubt, huge!
No one expected that Bitcoins would reach $1,000 high when they first started in 2008. Look at where it is now.
So while $1,000 / BTC sound like a “magic mark”, we have question ourselves “is it really a magic mark?”. As it seems today Bitcoins will rise even more than $1,000 and it may reach $10,000 in the next five (5) years.
#1 Bitcoin Is Unstoppable
The notion of unstoppable computer systems should be familiar already. BitTorrent, the file-sharing protocol invented by Bram Cohen, has been around since 2001 and is still very much alive despite concerted, international, billion-dollar efforts to destroy it. The latest Star Wars movie can still, right now, be pulled through BitTorrent in minutes straight to your laptop.
BitTorrent was the very first Decentralized Application (DAP), or a community of actors generating value for each other across the internet. To truly stop BitTorrent, you’d have to shut down every single computer in every home in every country across the planet.
Bitcoin works in the same way as BitTorrent, it is unstoppable.
#2 Bitcoin Adoption
Bitcoin user adoption is starting to accelerate around the world. There will be more merchants using Bitcoin as a payment method, more users and more advocacy, more capital market investment coming from multiple places like India, China, South America, Africa. There also will be more digital tools empowering Bitcoin’s blockchain with added-value.
For the first three years of its life, Bitcoin was mainly used as a means of private exchange. Toward the end of 2012, WordPress, an online publishing platform, became the first major company to accept Bitcoin payments. Others, including OkCupid, Baidu, Expedia, and Overstock.com, followed in 2013 and 2014. Baidu later stopped accepting Bitcoin under pressure from the Chinese government, which clearly viewed Bitcoin as a threat to its own fiat currency.
The global economy is currently in a $152 trillion debt bubble, causing banks and governments to implement draconian monetary policies. Wealth preservation is becoming increasing difficult and it’s possible we’ll see more people looking for assets that are insulated from the traditional markets. Bitcoin’s decentralized nature makes it an appealing asset to hedge one’s portfolio. Bitcoin has proved out to be a very good portfolio asset owing to its high returns and acceptable volatility.
The statistic from Statista below depicts the number of Bitcoin ATMs worldwide from March 2015 to May 2017. There were 1,153 Bitcoin ATMs in May 2017 globally. If you look at the growth, it is increasing steadily over time.
#3 Bitcoin- Halving Protocol
Bitcoin follows a protocol by which almost every 210,000 blocks, the amount of new Bitcoin created is cut in half.
When Bitcoins was launched in 2009, the users were rewarded with 50 Bitcoins per block. This reward was halved in November 2012 to 25 Bitcoins per block. This will continue to happen and the number will be halved again. Thus, the amount of Bitcoins that can be created is strictly kept in check by the protocol it runs on.
The maximum number of Bitcoins is 21 million and not one coin more or less. Out of this 15 million has already been created. Bitcoin’s value will be difficult to drive down over time is that it’s not a resource that can be increased when demand is high. The scarcity of Bitcoins that may loom over us sooner or later is a very compelling reason to invest now as the price is simply going to hike over the coming years.
#4 Easy Trading
The trading of Bitcoin in very simple. Buying requires a credit or debit or Paypal or a bank account. It is that simple. These are facilitating platforms that allow for easily buying Bitcoins such as Bitquick, Blockchain etc. Transferring these Bitcoins to other users is also easy. But care has to be given during such transfer. This is because as highlighted in the succeeding reason the transfer is irreversible.
#5 Bitcoin Is Safe
Bitcoin cannot be hacked, manipulated or altered. Bitcoins are digital and cannot be counterfeited or reversed arbitrarily by the sender, as with credit card charge-backs. Once Bitcoins are sent, the transaction cannot be reversed. Since the ownership address of Bitcoins will be changed to the new owner, once it is changed, it is impossible to revert.
When you give your credit card to a merchant, you give him or her access to your full credit line, even if the transaction is for a small amount. Credit cards operate on a “pull” basis, where the store initiates the payment and pulls the designated amount from your account. Bitcoins use a “push” mechanism that allows the bitcoin holder to send exactly what he or she wants to the merchant or recipient with no further information. Furthermore, bitcoins do not require names – just digital wallet IDs.
Other than that, Bitcoin reduces the possibility of identity theft. When you give your credit card to a merchant, you give him or her access to your full credit line, even if the transaction is for a small amount. Credit cards operate on a “pull” basis, where the store initiates the payment and pulls the designated amount from your account. Bitcoins use a “push” mechanism that allows the bitcoin holder to send exactly what he or she wants to the merchant or recipient with no further information. Furthermore, Bitcoin does not require names – just digital wallet IDs.
However, it is worth nothing that exchanges or digital wallets are vulnerable.
With Bitcoin, it allows you to be able to send and get money anywhere in the world at any given time. You don’t have to worry about crossing borders, rescheduling for bank holidays or any other limitations one might think will occur when transferring money. You are in control of your money with Bitcoin because there is no central authority figure in the Bitcoin network.
With the blockchain, all finalized transactions are available for everyone to see. However, personal information is hidden. Your public address is what is visible. However, your personal information is not tied to this. Anyone at any time can verify transactions in the Bitcoin blockchain.
#7 Low Inflation Risk
One of the biggest problems with our current dollars and other currencies used around the world is inflation. Over time all currencies lose purchasing power at a rate of few percents per year mainly because governments keep printing more money. This process is basically a small tax on your accumulated wealth. As the central bank has nothing to do with cryptocurrency, it can’t influence it. Supply and demand are the only regulating mechanism defining its value.
With Bitcoin, you don’t have this problem because the system is designed to make Bitcoins to be finite. Only about 21 million Bitcoins will ever be released (mined). The release of new Bitcoins is slowing down and it will stop completely within a few decades. We have a slowing population growth which is projected to stop at around 10 billion by approximately 2050 which roughly coincides with the last Bitcoin to be mined. There will be roughly 1 Bitcoins for every 500 people.
#8 Appreciating Value
As you can see from the Bitcoin exchange graph that the value of Bitcoins was initially highly volatile during the first few years of it’s inception, however during the last 6 months the currency has stabilized and has been steadily increasing in value on a daily basis.
#9 Purchases Are Not Taxed
Since there is no way for third parties to identify, track or intercept transactions that are denominated in Bitcoins, one of the major advantages of Bitcoin is that sales taxes are not added onto any purchases.
#10 Ecosystem Simplification and Faster transactions
With all transactions being added to a single public ledger, it reduces the clutter and complications of multiple ledgers. Interbank transactions can potentially take days for clearing and final settlement, especially outside of working hours. Blockchain transactions can reduce transaction times to minutes and are processed 24/7.
Is It a Good Time to Buy Bitcoin?
If you are worried that you missed the Bitcoin Boat—and if you can take a long-term view—then stop worrying. The ‘right time’ to buy Bitcoin is whenever the cost is less than USD $10,000.
I think there’s always a mental barrier with people getting involved with bitcoin, hence many think about but a year down the line the same question pops into there mind.
Actually, Bitcoin appeared exactly at the time where it is needed the most. We are nearing the end of current financial world order. Countries engage in currency wars – and in this war, there are no winners, just losers. Central banks of most nations will probably print even more fiat currency and thus be transferring wealth from poor to the reach (the global elites). This is only possible because the poor are trapped – they use the fiat currency as store of value – and this will collapse.
But with Bitcoin – anyone can escape this trap! Buying Bitcoin is a lot easier than buying and holding physical gold. And it is certainly a lot more liquid.
With a small portion of your investment portfolio, a look towards the long view and open eyes that you could lose it as this is still an early adopter market, Bitcoin is now being used like gold as a hedge against devalued currencies. Its movement does not correlate with stock market movement and it has many positive properties over gold, for instance, the lack of storage fees being factored into the investment.
You may consider adding to in time. This will raise your average entry point into the market but allow you to monitor the risk as we move towards the mainstream, which I believe is where the market is heading.
If I invest $10,000 in Bitcoin today, how much money will I have by 2030?
However, what I can do is give you a simple chart on how the money scales as Bitcoin reaches new market caps. If you invested $10,000 today, here is what the value of your investment at:
Market cap of $50 Billion: $17,550
Market cap of $100 Billion: $35,103
If the market grows, so will your investment.
Where Can I Buy Bitcoin Safely and Invest?
Coinbase is one of the world’s largest Bitcoin broker, and also offers an exchange, a wallet, and developer API. In other words, it is a web-based digital wallet that allows you to send and receive Bitcoins. The company is backed by several large venture capital firms and claims to hold 617,000 consumer wallets, 16,000 merchants, as well as integration with U.S. banks.
Coinbase is often recommended to newcomers as one of the easiest ways to acquire their first bitcoins. Their extensive banking partnerships allow transactions to be made via EFT payment, ACH / SWIFT / SEPA transfer and, as a recent introduction, major credit cards and PayPal.
If you’re wary of leaving substantial sums of fiat or crypto on an exchange, Coinbase is probably one of the more secure options.
Bitcoin. the digital currency, has been all over the news for years. But because it’s entirely digital and doesn’t necessarily correspond to any existing fiat currency, it’s not easy to understand for the newcomer. Let’s break down the basis of exactly what Bitcoin is, how it works, and its possible future in the global economy.
Editor’s Note:we want to make it very clear right up front that we are not recommending that you invest in Bitcoins. Its value fluctuates quite a bit, and it’s very likely that you may lose money.
How Bitcoin Works
In layman’s terms: Bitcoin is a digital currency. That’s a concept that might be more complex than you realize: it isn’t simply an assigned value of money stored in a digital account, like your bank account or credit line. Bitcoin has no corresponding physical element, like coins or paper bills (despite the popular image of an actual coin, above, to illustrate it). The value and verification of individual Bitcoins are provided by a global peer-to-peer network.
Bitcoins are blocks of ultra-secure data that are treated like money. Moving this data from one person or place to another and verifying the transaction, i.e. spending the money, requires computing power. Users called “miners” allow their computers to be used by the system to safely verify the individual transactions. Those users are rewarded with new Bitcoins for their contributions. Those users can then spend their new Bitcoins on goods and services, and the process repeats.
The advanced explanation: Imagine it as BitTorrent, the peer-to-peer network that you definitely didn’t use to download thousands of songs in the early 2000s. Except instead of moving files from one place to another, the Bitcoin network generates and verifies blocks of information that are expressed in the form of a proprietary currency.
Bitcoin and its many derivatives are known as cryptocurrencies. The system uses cryptography—extremely advanced cryptography called a blockchain—to generate new “coins” and verify the ones that are transferred from one user to another. The cryptographic sequences serve several purposes: making the transactions virtually impossible to fake, making “banks” or “wallets” of coins easily transferable as data, and authenticating the transfer of Bitcoin value from one person to another.
Before a Bitcoin can be spent, it has to be generated by the system, or “mined.” While a conventional currency needs to be minted or printed by a government, the mining aspect of Bitcoin is designed to make the system self-sustaining: people “mine” Bitcoins by providing processing power from their computers to the distributed network, which generates new blocks of data that contain the distributed global record of all transactions. The encoding and decoding process for these blocks requires an enormous amount of processing power, and the user who successfully generates the new block (or more accurately, the user whose system generated the randomized number that the system accepts as the new block) is rewarded with a number of Bitcoins, or with a portion of transaction fees.
In this way, the very process of moving Bitcoins from one user to another creates the demand for more processing power donated to the peer-to-peer network, which generates new Bitcoins that can then be spent. It’s a self-scaling, self-replicating system that generates wealth…or at least, generates cryptographic representations of value that correspond to wealth.
How Are Bitcoins Spent?
In layman’s terms: Imagine you’re buying a Coke at the supermarket with a debit card. The transaction has three elements: your card, corresponding to your bank account and your money, the bank itself that verifies the transaction and the transfer of money, and the store that accepts the money from the bank and finalizes the sale. A Bitcoin transaction has, broadly speaking, the same three components.
Each Bitcoin user stores the data that represents his or her amount of coins in a program called a wallet, consisting of a custom password and a connection to the Bitcoin system. The user sends a transaction request to another user, buying or selling, and both users agree. The peer-to-peer Bitcoin system verifies the transaction via the global network, transferring the value from one user to the next and inserting cryptographic checks and verification at many levels. There is no centralized bank or credit system: the peer-to-peer network completes the encrypted transaction with the help of Bitcoin miners.
The advanced explanation: The technical side of things is a bit more complex. Each new Bitcoin transaction is recorded and verified onto a new block of data in the blockchain. (The two parties in the exchange are represented by randomized numbers that make each transaction essentially anonymous, even as they’re being verified.) Each block in the chain includes cryptological code linking it to and verifying it for the previous block.
In the conventional sense, Bitcoin transactions are incredibly secure. Thanks to complex cryptography at every step in the process, which can take quite a lot of time to verify (see below), it’s more or less impossible to fake a transaction from one person or organization to another. However, it is possible to “steal” bitcoins by discovering someone’s digital wallet and the password that they use to access it. If that information is found, via hacking or social engineering, a digital Bitcoin stash can dispensary without any way to trace the thief. Since Bitcoin isn’t regulated or secured in the same way your bank account or credit account is, that money is simply gone.
How Do You Turn Bitcoins Into “Real” Money, and Vice-Versa?
First of all, Bitcoin is real money, in the purely economic sense. It has value and can be traded for goods and services. It’s unlikely that you can pay your bills or buy groceries totally in Bitcoin (though those services do exist and they are growing), but you can buy a surprising amount of online goods with your Bitcoin wallet. At the moment, the biggest companies accepting Bitcoin include online computer hardware retailer Newegg, digital video game seller Steam, the social network Reddit, and even more general retailers like Overstock.com or Subway restaurants. Here’s a list of companies currently accepting Bitcoin payments directly or through gift cards.
But as interesting as it is and as fast as it’s growing, Bitcoin simply can’t replace conventional, government-issued currency right now: your landlord probably won’t take a Bitcoin payment over a rent check. Even if you happen to have dozens of Bitcoins available and you’d like to spend the profit you’ve made on them on a new car, the car dealership probably doesn’t have the infrastructure to accept them as payment (although a private seller might!). So, if you have Bitcoins and you want cash in your country’s currency, or you have currency and you want to convert it to Bitcoin for buying, selling, or investing, you’ll need a conversion service.
Broadly, converting Bitcoin into more standard currencies like US Dollars, British Pounds, Japanese Yen or Euro is very much like converting any of those currencies from one to the other when you’re traveling. You start with one currency, state your desired amount, give the value of the first currency plus a transaction fee, and receive the value in the converted currency in return. But since Bitcoin has no cash component and isn’t available to be accepted by conventional credit or debit transactions, you need to find a dedicated market exchange.
Coinbase is the most popular market and exchange in the United States. (Note: this is not an endorsement.) It offers buying and selling services for Bitcoin and other, similar cryptocurrencies, and will exchange US dollars and other standard fiat currencies for Bitcoins, as well as buying Bitcoins for USD and 31 other national fiat currencies. The company doesn’t charge for exchanges between cryptocurrencies, but exchanging Bitcoins for dollars deposited to a US bank account will cost the user a 1.49% transfer fee. So, to move $10,000 worth of Bitcoin from your own wallet to your bank account would cost 1.74 Bitcoins for the actual value, plus either $14.9 USD or .00259 Bitcoin for the transfer fee. This is a fairly standard transfer for most of the verified markets and exchanges.
There are other options for turning Bitcoin into conventional money. Coinbase and other markets can trade Bitcoin for USD and other currencies deposited directly to single-use debit cards or gift cards, or even into more flexible systems like PayPal, generally for a much higher fee. You can trade Bitcoins directly to another person for cash, though this is much more dangerous than going through an established system. (On the same note, be cautious of individuals wanting to trade Bitcoins directly for cash, goods, and services. The untraceable nature of the system makes it susceptible to fraud—see below.)
Bitcoin Mining Has Diminishing Returns
A few years ago when the Bitcoin system was new, individual users “mined” for new Bitcoins at a rapid pace. Bitcoin mining software used local processors, and even extra processors like a computer’s graphics card, to calculate hashes for the next block in the blockchain. While the number of people using and “mining” Bitcoin was low, each user doing the mining would randomly confirm the next block at a higher pace, generating new Bitcoins for his or her account quickly.
But this boom in generation couldn’t last. The Bitcoin system is designed to make each new block more difficult to find than the last one, reducing the amount of randomized Bitcoins that are generated and distributed. That means that as time goes on, each individual mining for them has to work harder and harder (in a figurative sense—it’s the computer that’s working harder and using more electricity, and thus, costing more conventional money). As the number of individual Bitcoins grows, the amount of Bitcoins rewarded for a successfully completed hash is diminished. In fact, “whole” Bitcoins are no longer generated by a single user all at once, they’re rewarded with fractions of Bitcoins (which are still quite valuable).
Initially, users created customized “mining rigs” that used relatively cheap clusters of off-the-shelf CPUs and GPUs to increase their chances of generating Bitcoin. Now the system is so popular and so distributed that an individual user can no longer simply buy a screamin’ fast GPU and expect to make back enough Bitcoin to cover its value in conventional money. Custom-designed “miners” are now sold for this purpose, with software and hardware designed for the sole purpose of supplying the maximum amount of computational power to the peer-to-peer system, and thus creating better odds of completing blocks. More processing power, more hardware, more chances of getting that payout…but at the same time, you’re spending more and more of your actual resources on hardware and electricity.
As a result, those hoping to earn conventional wealth via Bitcoin would be better off trading for it or selling goods and services rather than trying to make a mining system and run it constantly.
At the moment, there are between twelve and thirteen million Bitcoins in existence. They’ll become harder and harder to mine as more are generated. The system has an upper limit: after 21 million Bitcoins are generated, no more can be mined. Based on current trends, the last whole Bitcoin will be mined sometime in the 2040s, with the final portion of fractional coin rewards continuing for about 100 years. Once the upper limit is reached, the value of the currency will fluctuate almost entirely on supply and demand, though “miners” will still be able to earn Bitcoins by lending their processing power to the transaction system and receiving transaction fees.
Bitcoin’s Value Fluctuates More Than Standard Money
If you’re reading this guide, it’s probably because you’ve heard that Bitcoin is valuable. And it is. But that value changes rapidly, much more rapidly than any currency from a stable economy or even most stocks and bonds. The shifts in the value of Bitcoin can be huge, too: as a function of its total value, Bitcoin fluctuates more than ten times faster than the US dollar.
In 2010, each whole Bitcoin was worth less than a 25 cents in USD. In late November of 2017, each Bitcoin was valued at over $11,000 (before dramatically spiking downward to $9,000 almost immediately). Obviously that’s a huge rate of growth and a massive opportunity for anyone who got on board early—initial Bitcoin miners might be millionaires now if they’ve held on to their Bitcoins long enough. But those two points of data don’t tell the whole story: Bitcoin has gone through various dips and “crashes,” initially in a volatile period in late 2013 and early 2014. Each time the value recovered, but there’s no assurance that the current climb will continue, or that the entire cryptocurrency market won’t collapse.
This makes Bitcoin a questionable method for investment. While it’s true that many people have made huge amounts of conventional wealth by mining and trading in Bitcoin, that wealth is just as volatile as the market itself, unless it’s transferred to more stable currencies or investments. The ups and downs of the Bitcoin market appear to be coming much faster and more frequently than fluctuations in major stock markets and exchanges. The current high price of Bitcoin might be just the start before an even larger boom, or it might be a temporary “bubble” with an upcoming crash followed by a recovery…or the entire Bitcoin market could implode tomorrow, leaving millions of people with nothing but worthless cryptographic sequences. There’s no way to know.
That doesn’t mean Bitcoin won’t have its place in the future, however. Let’s talk about some advantages and disadvantages to Bitcoin over traditional currency.
Anonymity and Privacy
Bitcoin purchases between individual users are entirely private: it’s possible for two people to exchange Bitcoins or fractions of coins between wallets simply by exchanging hashes, with no names, email addresses, or any other information. And because the peer-to-peer network uses a new hash for each transaction, it’s more or less impossible to link concurrent purchases to a single user. The nature of the peer-to-peer encrypted network makes it secure from the outside, as well: no one else can see your personal purchases or receipts without first getting access to your wallet.
No Required Transaction Fees (For Now)
Conventional non-cash purchases include transaction fees: pay with a Visa credit card, and Visa will charge the merchant a few cents to verify the transaction. And of course, the cost of that charge is passed on to you in the form of higher prices for goods and services.
At the moment, there are no mandatory transaction fees for Bitcoin. Individual users and merchants can submit their purchases to the peer-to-peer network and simply wait for it to be verified on the next block. However, this process can take time (and it takes more time the more the network is used). So to speed up transactions, many merchants and users add a transaction fee to increase the priority of the transaction in the block, rewarding users on the peer-to-peer network for completing the verification process faster.
As the global supply of Bitcoins reaches its 21 million coin limit, transaction fees will become the primary method for miners to earn Bitcoins. At this point, presumably most transactions will include a small fee simply as a function of completing the purchase quickly.
No Central Governing Authority or Taxes
Because Bitcoin isn’t recognized as an official currency by any country, buying and selling Bitcoins themselves and using them to purchase goods and services isn’t regulated. So anything you buy with Bitcoins is not subject to a standard sales tax, or any other tax that’s normally applied to that item or service. This can be huge economic boon if you’re wealthy enough and interested enough to do a lot of business exclusively in Bitcoin.
Without being subject to most monetary laws, Bitcoin is effectively a barter system. Imagine your current supply of Bitcoins as a gigantic stack of potatoes: if you trade ten thousand potatoes for a new TV, the government won’t ask for a sales tax in the form of eight hundred potatoes. It simply isn’t equipped to handle any transactions not performed in its own currency.
However, you should be aware that any conventional earnings you receive from dealing in Bitcoin will be treated in the usual way. So if you transfer $10,000 worth of Bitcoins to your bank account via a Bitcoin market, you will need to report it as income on your taxes. Dealing in Bitcoin doesn’t nullify other standard requirements for taxation, either: even if you purchase a new car via Bitcoin from a private seller, you’ll still have to register that car with the government and pay taxes based on its market value.
So if Bitcoin is so great, why isn’t everyone using it? Well, obviously, it has some drawbacks too, especially at the current time.
Possible Government Interference
Any time something new comes around and challenges the status quo, the government is going to get involved to make sure that things remain the way they are supposed to be. The fact is that the US government, and other governments, are looking into Bitcoin for a variety of reasons. Just in the last few days, the US government has started seizing some accounts from the biggest Bitcoin exchange. More is likely to come in the future.
No Monetary Sovereignty
Perhaps the biggest weakness of bitcoin is that it is not a “recognized” sovereign currency—that is, it is not backed by the full faith of any governing body. While this could be seen as strength, the fact that Bitcoin is a fiat currency which is accepted only on the perceived value of other bitcoin users makes it highly vulnerable to destabilization. Simply put, if one day a large number of merchants who accept bitcoin as a form of payment stop doing so, then the value of bitcoin would fall drastically.
The current high value of Bitcoin is a function of both the relative scarcity of Bitcoins themselves and its popularity as a means of investment and wealth generation. If confidence in the Bitcoin market is suddenly and drastically reduced—for example, if a major government declared Bitcoin use illegal, or one of the largest Bitcoin exchanges was hacked and lost all of its stored value—the value of the currency will crash and investors will lose huge amounts of money.
The United States Treasury does not recognize bitcoin as a conventional currency, but does recognize its status as a commodity, like stocks and bonds. Similarly, the US Internal Revenue Service considers bitcoins property and taxes them as such if they are declared. No other country has declared bitcoin to be a recognized currency, but engagement with bitcoin and other cryptocurrencies varies from place to place. Some countries are investigating bitcoin as a growing commodity market, some take the same stance as the US declaring them assets, and some have explicitly banned their use for transfer of goods or services (though the means of enforcing those bans are limited).
Lack of Protections
The Bitcoin network has no built-in protection mechanisms when it comes to accidental loss or theft. For instance, if you lose the hard drive where your Bitcoin wallet file is stored (think corruption or drive failure with no backup), the Bitcoins held in that wallet are lost forever to the entire economy. Interestingly, this is an aspect which further exacerbates the limited supply of Bitcoins.
Additionally, if your wallet file is stolen or compromised and the Bitcoins contained within it are spent by the thief before the rightful owner, the double spending protection mechanism built into the network means the rightful owner has no recourse. Unlike if, for example, your credit card is stolen, you can call the bank and cancel the card, bitcoin has no such authority. The Bitcoin network only knows that the bitcoins in the compromised wallet file are valid and processes them accordingly. In fact, there is already malware out there which is designed specifically to steal Bitcoins.
Bitcoin markets are vulnerable to attack or fraud. Major exchanges like GBH and Cryptsy have been shut down with all the Bitcoin entrusted to their care presumably stolen by the operators. Japan-based Mt. Gox, formerly the handler of over half the Bitcoin transactions on the planet, was shuttered after a theft of hundreds of thousands of Bitcoins. The 2014 incident caused a huge (but temporary) drop in the value of Bitcoin worldwide.
Limited Concurrent Transactions
The Bitcoin block system requires connection and confirmation from the peer-to-peer network to be verified. Because each block contains a limited record of transactions and an upper limit to the amount of new transactions that can be written, there’s a limit to how many people can buy and sell with the system at any given time. As more and more vendors and individuals use Bitcoin to do business, the number of transactions per second increase, and the peer-to-peer network is becoming congested, with some operations without transaction fees taking hours to clear. Whereas conventional payment systems like credit cards can simply expand their connections and processing power to speed up processing, the isolated peer-to-peer nature of bitcoin doesn’t allow it to scale with the global financial system.
Black Market Appeal
A central principle to the design of the Bitcoin system is that there is no single transactional processing authority. As a result, no single user can be locked out of the system. Combine this with the inherent anonymity of transactions, and you have an ideal medium of exchange for nefarious purposes.
Bitcoin has become an ideal means for commerce in illicit goods and services. The quintessential case is the Silk Road, a dark web site that allowed users to anonymously trade items like drugs and fake identification, all bought with Bitcoin thanks to its untraceable nature. The story of Silk Road’s illegal trade didn’t even stop after the US Drug Enforcement Agency and Department of Justice shut down the site and seized its digital holdings in 2013. A Secret Service agent was charged with stealing over $800,000 of bitcoin from the investigators, who had held the seized digital currency to be auctioned off for the benefit of the law enforcement agencies.
While this is not exactly a weakness in Bitcoin (after all, drug dealers using cash doesn’t undermine the value of the currency itself), the unintended consequence of its usage for dubious purposes could be considered one. In fact, the US Treasury Department recently applied money laundering rules to bitcoin exchanges.
Subjects of Debate and Controversy
Lastly, let’s indulge a bit of controversy surrounding Bitcoin. While these topics of conversation are interesting, most everything in this section is conjecture and should be taken with a grain of salt—we just think they’re worth noting to get a full picture of the Bitcoin story.
The primary designer of the bitcoin specification is a “person” named Satoshi Nakamoto. Person is put in quotes here because Nakamoto has not connected “his” identity with a publicly known person. Satoshi Nakamoto could be an individual man or woman, an internet handle, or a group of people, but nobody actually knows. Once their work of designing the Bitcoin network was complete, this person or persons essentially disappeared.
Multiple individual people and teams of developers have been theorized to be the “real” Satoshi Nakamoto, with no conclusive proof for any one of them at the time of writing. Whoever he, she, or they are, Satoshi Nakamoto is estimated to be in possession of billions of US dollars worth of Bitcoin at current market rates.
Resistance From Conventional Investors
Many experts in standard money markets and investments consider Bitcoin a poor choice for investing money. The extreme volatility of Bitcoin versus investments like stocks, bonds, and standard commodities makes larger and older institutions wary. In addition, some investors and investigators consider Bitcoin and other cryptocurrencies to be either a passing fad (an economic bubble) and thus an extremely risky means of investment, or a fraud in and of itself, a “Ponzi scheme” for the benefit of Satoshi Nakamoto and other early investors.
On the other hand, it’s possible that some of these statements are made specifically to manipulate the value of Bitcoin: JP Morgan Chase has been accused of publicly calling the worth of Bitcoin into question via CEO statements while investing in it at the same time. As stated above, use caution when dealing in Bitcoin either as a means of purchasing goods or services or investing.
Bitcoin Cash Fork and Other Cryptocurrencies
On August 1st, 2017, long debates between bitcoin proponents and disagreements on how to solve its problems resulted in a currency split. The Bitcoin standard was broken in two, with the original system unaffected and the new Bitcoin Cash standard added. This was less like a stock market split and more like a software fork. Every person or organization who owned Bitcoin in any amount immediately owned an equal amount of Bitcoin Cash, with sales and transfers of both currencies occurring normally after the split. Like the original Bitcoin, Bitcoin Cash is entirely digital and has no real-world physical component (despite the name).
The split is a hard fork in software terms. The separate Bitcoin Cash peer-to-peer system allows for eight times more transactions per block, making it a better (but not necessarily equal) competitor to credit and debit cards for constant online and in-person sales. The operators of Bitcoin Cash hope that it will become a more widely-accepted currency for standard purchases, like coffee shops or supermarkets.
Because of the newer system, Bitcoin Cash has not benefited from the explosive growth of value that the original Bitcoin Cash has experienced. At the time of writing, Bitcoin Cash (BCH) is trading at approximately $325 per unit, less than 10% of the value of the original Bitcoin. That’s not necessarily a bad thing for the new standard: a currency with a smaller range of market fluctuation and a slower, more steady growth rate may be appealing to businesses. But at the moment, Bitcoin Cash transactions aren’t supported by any notable merchants, aside from existing cryptocurrency exchanges and wallets.
Without major support from large online or physical retailers, Bitcoin Cash seems unlikely to become as successful as the original Bitcoin. It’s more likely that the forked standard will join the ever-expanding list of competing cryptocurrencies without any notable application beyond the cryptocurrency market itself. These competing currencies use peer-to-peer systems similar to the original Bitcoin, but with significant changes in cryptographic methods and terms. Examples include Litecoin, Ethereum, and Zcash.
None of the competitors to Bitcoin has reached any notable fraction of its current value, and support from retailers outside of the growing and somewhat speculative niche of cryptocurrency exchanges is minimal.
Bitcoin and cryptocurrency are fascinating developments, a mark of the desire for participants in the information age to lessen their dependency on the economic and legal systems that prop up institutions from before the 21st century. It’s certainly made plenty of fortunes in its brief existence…and lost more than a few as well. The long-term viability of Bitcoin as a medium for wealth has yet to be determined.
If you’d like to get involved in Bitcoin or any of its competitors, make sure to do your research and use caution. Bitcoin can be a lucrative hobby and an exciting investment, but as with any other kind of investing, it’s always best to diversify for safety. If you’d like to read more about Bitcoin, we recommend checking out Bitcoin.org, the Bitcoin Wiki, and the Bitcoin Wikipedia page.
Bitcoin was invented as a peer-to-peer system for online payments that does not require a trusted central authority. Since its inception in 2008, Bitcoin has grown into a technology, a currency, an investment vehicle, and a community of users. In this guide we hope to explain what Bitcoin is and how it works as well as describe how you can use it to improve your life.
What is Bitcoin?
Since anything digital can be copied over and over again, the hard part about implementing a digital payment system is making sure that nobody spends the same money more than once. Traditionally, this is done by having a trusted central authority (like PayPal) that verifies all of the transactions. The core innovation that makes Bitcoin special is that it uses consensus in a massive peer-to-peer network to verify transactions. This results in a system where payments are non-reversible, accounts cannot be frozen, and transaction fees are much lower.
Where do bitcoins come from?
We go more in-depth about this on the page about mining, but here’s a very simple explanation: Some users put their computers to work verifying transactions in the peer-to-peer network mentioned above. These users are rewarded with new bitcoins proportional to the amount of computing power they donate to the network.
Who controls Bitcoin?
As we mentioned above, there is no central person or central authority in charge of Bitcoin. Various programmers donate their time developing the open source Bitcoin software and can make changes subject to the approval of lead developer Gavin Andresen. The individual miners then choose whether to install the new version of the software or stick to the old one, essentially “voting” with their processing power. It is in the miners’ best interest to only accept changes that are good for the Bitcoin currency in the long run. These checks and balances make it difficult for anyone to manipulate Bitcoin.
How to get started with Bitcoin
The best way to learn about Bitcoin is to get some and experiment. We have written articles about how to set up your own Bitcoin wallet, how to acquire bitcoins, and how to use bitcoins to help you get going.
Also, if you’d like to get a crash course in the basics of Bitcoin… What it is, why it’s so revolutionary, and most importantly, how to safely invest in it without making costly mistakes, we strongly recommend you check out this completely free, 90-Minute Training Seminar with Bitcoin Academy.