Editor’s note: This article was first published in April 2013. The $142 price, Mt. Gox as “the most popular exchange” (it collapsed in 2014), merchants accepting Bitcoin and the statement that it is legal and governments are not concerned all reflect that moment; regulation now varies by country.
You’ve probably heard Bitcoin mentioned non-stop in recent days. Some even think it could be the currency that replaces the euro, while others believe it will end up as something more like gold. The most hard-line warn of the dangers of holding Bitcoin, as there is a real chance that many people will end up feeling they’ve been scammed.
This is something that sounds very good in theory, since it is a decentralised currency free from inflation, but in practice it could have the worst of both worlds. We explain it in depth below.
1. What is Bitcoin?
Bitcoin is a digital currency, decentralised and anonymous, born in 2008 and created by someone using the pseudonym “Satoshi Nakamoto”, but it is only now that it is gaining importance. After the disaster in Cyprus and some Europeans’ fear of losing their savings, trading in Bitcoin has increased.
The Bitcoin system is self-sufficient, coded to prevent inflation and encrypted to stop anyone from altering its code.
2. How much is a bitcoin worth and where can you follow its price?
When Bitcoin was first introduced, 1 dollar could buy about 1.30 bitcoins. At the time I’m writing this article, a single bitcoin is worth 142 dollars. You could follow the Bitcoin price in real time on Preev.com.
3. Can I get real money for my bitcoins?
Yes. You just need to sign up with a Bitcoin exchange service. The most popular in the world is MT.GOX. More and more sites are dedicated to exchanging bitcoins for money, charging a commission for it.
4. Why are they anonymous?
Bitcoins are anonymous because they are based on a decentralised system and can therefore exist on their own, since there is no central infrastructure. Anonymity can be an advantage for someone who wants to buy something without leaving a record. There is no sign of identity behind a Bitcoin holder and they can’t be traced, because you are just a string of random letters and numbers. That’s why one of the complaints about this currency is how easy it is making it for drug and arms traffickers to keep their businesses going.
5. What can you buy with bitcoins?
Besides what we’ve already mentioned — drugs, weapons and a range of other illicit items that are readily available — the anonymity of Bitcoin makes it possible for people to buy anything online without worrying about identifying themselves. There are many marketplaces (more and more of them) that accept Bitcoin as payment, ranging from restaurants to hotel chains, as in the case of the Howard Johnson chain.
6. Is Bitcoin legal?
Yes. Inexplicably, a currency that makes money laundering and hiding capital so easy is completely legal. Governments, for now, are not worried about this new “digital currency”.
Now let’s move on to the advantages, disadvantages and dangers of Bitcoin.
Advantages
As a currency without a nationality, you are free to exchange it with anyone in the world or transfer money anonymously, as well as to buy any kind of product online (legitimate or not) anonymously.
Ease of use: The easiest way to store bitcoins is to sign up for an online wallet service, through which we make all our transactions. This, of course, means trusting the provider of that service, because if the provider goes bust with its customers’ savings… we know what happens. More cautious users can install a personal digital wallet on their own computers. You then have to keep it safe from viruses and physical damage, though.
All transactions are protected by public-key cryptography. It works by generating two mathematically related keys in such a way that the encryption key can’t be used to decrypt a message, and vice versa. One of them, the private key, is kept by a single individual. The other key is public. In the case of Bitcoin transactions, the intended recipient’s public key is used to encode payments, which can then only be retrieved with the help of the associated private key. The payer, for their part, uses their own private key to approve any transfer to the recipient’s account. All of this would supposedly provide protection against theft.
Disadvantages
In recent days, Bitcoin has also taken some heavy blows that raise doubts. An alleged software bug caused Bitcoin’s value to drop, although the error was quickly fixed. Some financial media have branded Bitcoin a scam, although they’ve had to backtrack, since the word “scam” implies an intention to defraud. Even so, they’ve gone on to say that, intentional or not, time will tell, because most people will feel scammed when Bitcoin blows up, loses much of its supposed value or takes any other serious hit.
One user raised the alarm when he announced that he had lost almost half a million dollars to theft, which fuels the argument that this currency has the worst of both worlds: it could be easy to steal and impossible to trace.
For others, Bitcoin is just another virtual form of speculation, and they argue that the earliest Bitcoin holders are the ones who profit from the rise in its value. It isn’t exactly a Ponzi scheme, but it isn’t immune to forming a bubble either, as happened with tulip mania in the 17th century. Some are already saying that bitcoins are the new tulips, only for the digital age.
Featured image: Zach Copley, CC BY-SA 2.0, via Flickr.
