It can be very difficult to wrap your head around exactly what a Bitcoin is. The amazing digital currency is “mined” and actually has a maximum number of 21 million “coins”.
If that all sounds too far fetched and bizarre, understand this: $100 worth of Bitcoins bought seven years ago would now be worth $75 million. Try getting that return in property or shares!
Digital currency is already replacing green and crinkly bank notes. In just a few short years, PayPass has meant few now bother with ATMs. Indeed, many believe that the old whole in the word will disappear like the dinosaur.
Here’s a sobering statistic for the many cynics who wrote Bitcoin off the Bitcoin in 2009, when it became available to the general public (some even called it a scam!):
With an avalanche of news articles hitting the web this week about the skyrocketing value of Bitcoins, many are scrambling to catch up and figure out just what Bitcoins are and how they can be implemented into their financial strategies.
Here’s what you need to know.
Bitcoin is a ‘cryptocurrency’
A cryptocurrency is a digital asset the is designed to function as a medium of exchange. The ‘crypto’ part refers to the use of cryptography to keep the transactions secure.
The Bitcoins themselves are stored in digital ‘wallets’. You can store them yourself (using one of the available Bitcoin programs) or entrust them to a third party. Some people even opt for the ‘paper wallet’, where encryption keys are printed out and stored somewhere safe (such as a safe deposit box).
Bitcoin was designed to be the world’s first decentralised digital currency.
Instead of being controlled by a nation’s central bank, Bitcoin operations are distributed to masses of computers around the world called ‘miners’. These computers do the transactional work that would traditionally be done by banks, earning the computer operators Bitcoins in return.
There will only ever be about 21 million Bitcoins ever made.
There are currently over 11 million Bitcoins in circulation, with more being ‘mined’ every day. However, there is a hard limit in place – the reward for mining declines on a fixed schedule every 4 years. This means that we should hit the 21 million Bitcoin limit in 2140.
Bitcoins can be bought with traditional currency
Whilst it is still possible to ‘mine’ Bitcoins, it certainly isn’t as easy as it sounds and the reward for doing so will continue to decline over the coming years. For those starting out, it would be much easier to simply purchase some Bitcoins from a Bitcoin exchange (similar to buying shares or foreign currency).
Paying with Bitcoin is ‘anonymous’
By paying with Bitcoins, you move money without using an intermediary (like a bank or credit agency) so you can do away with formal identification details like account numbers and member names. In this way, it is like trading with digital cash. However, the transaction itself is handled by the network of ‘miners’, so the transaction is visible even if the identity of those performing the trade is not.
So should you run out today and spend your life savings on a bunch of Bitcoins? Probably not.
Whilst the plan is for an open-source, decentralised cryptocurrency to spread across the world, the reality is that it is virtually impossible to live purely on Bitcoins at this point in time. Additionally, governments around the world are still struggling to come to terms with regulating the use of the currency.
More and more businesses are signing up to accept Bitcoins as currency, but even in technologically-savvy areas like Berlin and San Francisco you would struggle to make it more than a few days without having to revert to traditional means of payment. For those of us living in Australia, it’s likely to take even longer for the cryptocurrency revolution to take hold (especially given our current technological challenges!)
So right now, it’s probably best to look at buying Bitcoins as an investment, rather than buying currency. It’s hard to tell what the future will be for Bitcoin (and cryptocurrencies in general) but it will certainly be fascinating to watch however it pans out. Who would have thought that one of the biggest financial shifts in history could be traced back to the purchase of a couple of pizzas!