This article is for people who are new or haven’t heard of bitcoin. What is it? What can you do with it? Why would you use it? What do you need to watch out for when using it? The goal of this article is to start helping you to get informed so that you can distinguish the hype from the reality. It’s only a short introduction so use the links to deepen your investigation.
What is bitcoin? Some background information.
As stated in Wikipedia, “Bitcoin is an open source peer-to-peer electronic money and payment network invented in 2008-9 by pseudonymous developer “Satoshi Nakamoto”. On the 3rd of January, 2009 Satoshi sprouted from his computer keyboard 31 thousand lines of code along with an announcement on the internet. Thus Satoshi gave birth to Bitcoin and it was available for all whom where interested to look and review it. Unlike our current banking system, it is open to public scrutiny (i.e. open source) and is immune to banker manipulations from behind closed doors. That’s not to say it can’t be manipulated but those manipulations can and are scrutinized due to the software for Bitcoin being open sourced. Philosophically, I find this very appealing and it is one of the reasons I’m interested in promoting Bitcoin. It provides transparency which in turn establishes trust.
One unique aspect to Bitcoin is that roughly every ten minutes a block of Bitcoins is released. This is done through “mining” which is essentially achieved by number crunching algorithms using specific software and hardware designed to do this job. There is a whole Bitcoin mining community that focuses on this activity. Bitcoin can be mined for roughly the next 20 years until all the Bitcoin blocks are released. This means that there will be a maximum number of coins once mining has ended of just 21 million bitcoins.
Here’s a nice video summary of the above and more.
What can you do with it?
As more people developed an interest in bitcoin and started to appreciate its potential exchanges arose enabling fiat currencies (i.e., the US Dollar, British Pound, Euro, etc) to be exchanged for Bitcoins, and vice versa. Initially Bitcoins were only valued in cents or pennies and certainly less than a dollar. During 2010 the first merchants accepting Bitcoins entered the market resulting in the value of a Bitcoins appreciating rapidly. BitPay, a Bitcoin payment processor (akin to PayPal for fiat currencies), around the second half of last year took on its 1,000th merchant, some twelve months later they now have over 10,000 merchants (Read here for the original article)! The top three Alexa ranked sites as at the 29th of November accepting Bitcoin were WordPress (Ranked 16), followed by The Pirate Bay (Ranked 68) and Reddit (Ranked 78). It doesn’t look like Bitcoin is going away in a hurry.
As more people adopt bitcoin you will be able to readily exchange Bitcoin between individuals. Actually, you can now if you know someone who carries Bitcoin. You just need their Bitcoin wallet address and a Bitcoin wallet of your own. Also as Bitcoin is truly a global currency you can use it anywhere in the world where you find people accepting it. How do you get a Bitcoin wallet and manage it so you can do all this stuff? This will be the topic of my next post. However, before getting too carried away you also have to be aware of the potential risks involved with using cryptocurrencies and more specifically Bitcoin.
What do you need to watch out for when you use Bitcoin?
We’ll like anything that is relatively new there will be a lot of unknowns. What we do know in the short life of Bitcoin is:
- The price is very volatile and in its short history it has gone from less than a dollar to well over a 1,000 US Dollars. In the past it has gone from $29 back to $5. Currently, the trend is up but history has shown it can massively correct and drop to 20% of its value. The point is, only risk what you can afford to lose.
- You need to be sensible and take precautions with regards to how you store and back up your bitcoin wallet. You wouldn’t want what happened to James Howells to happen to you!. Security and backing up of Bitcoin wallets will be addressed in my next blog.
- Contrary to what many people say and what’s mentioned in the video below Bitcoin is not necessarily anonymous. You need to maintain good practices to protect your privacy. Again this will be covered in the section dealing with wallets.
- Bitcoin payments can’t be reversed. Of course they can be refunded but that means you need to know the person or business you had the transaction with and they need to be trustworthy. If you don’t know them at the very least you should be aware of some method to contact them. If you don’t have that then be prepared to lose your Bitcoins.
- Bitcoin is still in its early days even though it is growing quickly. This means that you should still consider it risky for the things that we don’t know are going to develop.
- Bitcoin does have value and for this reason there may be government taxes and regulations to consider. If your holdings are considerable and have increased substantially I would speak to an expert such as an accountant for advice.
Stay tuned for the next instalment where we get our hands dirty and set up a Bitcoin wallet. Fill in your details below if you want to receive updates to the blog or click follow if you’re a wordpress user.
Light, Love, Grace and Gratitude,
The Bitcoin Profit Prophet
PS Here’s a nice video worth a quick look that supports much of what I’ve said and provides some interesting insights into a potential digital future.
The Bitcoin Profit Prophet 