You must have heard a lot about bitcoin nowadays, let us explain what bitcoin exactly is?
What is bitcoin?
Bitcoin is the best-known digital currency. You can use it to pay for things without a third-party broker, like a bank or government. It is like a one big ledger shared by all the users: When you pay for something with bitcoin, or get paid, then your transaction is recorded on the ledger. Computers then compete to confirm the transaction by solving complex math equations, and the winner is rewarded with more bitcoins. The process is known as mining.
The idea of bitcoin came into existence in around 2009 when the financial crisis was still raging. Bitcoin were introduced to take the power from central bankers and governments who control the flow of currency usually.
Who made it?
Bitcoin was invented by Satoshi Nakamoto, who published the invention on 31 October 2008 in a research paper called “Bitcoin: A Peer-to-Peer Electronic Cash System“It was implemented as open source code and released in January 2009. Bitcoin is often called the first cryptocurrency although prior systems existed Bitcoin is more correctly described as the first decentralized digital currency.
How does it work?
It works through an app, install a bitcoin wallet app in your phone or computer and buy them from a bitcoin exchange.
What’s great about bitcoin?
Bitcoin is a great plus for small businesses, since stores have to pay processing fees every time a customer swipes debit or credit card – the fees would shrink down to the lowest possible when using bitcoin since the transaction will be processed by some competing computers and not by some big bank or financial institution.
Bitcoin can also be used in the third world developing countries where lesser number of people has bank outs so instead they can use bitcoin on their cellphones.
Barry Silbert, founder and CEO of SecondMarket and founder of Bitcoin Investment Trust, said at a MarketWatch Investing Insights panel event recently in New York, people in countries where the official currency is plunging might view bitcoin as a haven (though it’s not like bitcoin isn’t subject to plunging too).
Also, bitcoin payments can be anonymous to some extent, which could be a selling point to people who are concerned about privacy or taxation issues.
What are the odds?
The bitcoin exchanges are defenseless to hacking. Look at the recent collapse of Mt. Gox, when it lost some 650,000 bitcoins, or Vircurex, which halted withdrawals after a run on the bank, so to speak. If something like this happens, there is a huge amount of risk in reclaiming your money back and getting it. The Financial Industry Regulatory Authority, or Finra, issued a warning recently that digital currencies are “more than a bit risky.”
Bitcoin could also potentially be at the heart of illegal activities, including tax evasion or money laundering. In the U.S., two men were arrested in January 2014 on charges of money-laundering using bitcoins; one was Charlie Shrem, the head of now defunct bitcoin exchange BitInstant and a vice chairman of the Bitcoin Foundation. Shrem allegedly allowed the other arrested party to purchase large quantities of bitcoins for use on black-market websites.
Since it is not regulated by a bank, bitcoin is highly volatile. Recently bitcoin was trading around $448, according to the bitcoin price index by CoinDesk. A few months ago, it was more than $1,000. A year ago, it was barely pushing $100. Two years ago, it was about $5.
Where to use bitcoin?
In 2013 some mainstream websites began accepting bitcoins. WordPress had started in November 2012, followed by OKCupid in April 2013, TigerDirect and Overstock.com in January 2014, Expedia in June 2014, Newegg and Dell in July 2014, and Microsoft in December 2014. The Electronic Frontier Foundation, a non-profit group, started accepting bitcoins in January 2011, stopped accepting them in June 2011, and began again in May 2013.
In October 2013, Chinese internet giant Baidu had allowed clients of website security services to pay with bitcoins. During November 2013, the China-based bitcoin exchange BTC China overtook the Japan-based Mt. Gox and the Europe-based Bitstamp to become the largest bitcoin trading exchange by trade volume.
On 5 December 2013, the People’s Bank of China prohibited Chinese financial institutions from using bitcoins. After the announcement, the value of bitcoins dropped, and Baidu no longer accepted bitcoins for certain services.
Buying and selling of bitcoins
Bitcoins can be bought and sold both on- and offline. Participants in online exchanges offer bitcoin buy and sell bids. Using an online exchange to obtain bitcoins entails some risk, and, according to a study published in April 2013, 45% of exchanges fail and take client bitcoins with them. Exchanges have since implemented measures to provide proof of reserves in an effort to convey transparency to users. Offline, bitcoins may be purchased directly from an individual or at a bitcoin ATM.
The first bitcoins ATM was installed in October 2013 in Vancouver, British Columbia, Canada.
The bitcoin exchange service Coinbase launched the first regulated bitcoin exchange in 25 US states on 26 January 2015. Lawsky is responsible for the development of the so-called ‘BitLicense’, which companies need to acquire in order to legally operate in New York.
In August 2015 it was announced that Barclays would become the first UK high street bank to start accepting bitcoin, with the bank revealing that it plans to allow users to make charitable donations using the currency.
Some economists have responded positively to bitcoin while others have expressed skepticism. François R. Velde, Senior Economist at the Chicago Fed described it as “an elegant solution to the problem of creating a digital currency”.Paul Krugman and Brad DeLong have found fault with bitcoin questioning why it should act as a reasonably stable store of value or whether there is a floor on its value.
David Andolfatto, Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the establishment, which he argues is a good thing for the Federal Reserve System and other central banks because it prompts these institutions to operate sound policies.
Bill Gates, in relation to the cost of moving money from place to place in an interview stated: “Bitcoin is exciting because it shows how cheap it can be.”
Similarly, Peter Schiff, a bitcoin sceptic understands “the value of the technology as a payment platform” and his Euro Pacific Precious Metals fund partnered with BitPay in May 2014, because “a wire transfer of fiat funds can be slow and expensive for the customer”.
Officials in countries such as Brazil, the Isle of Man, Jersey, the United Kingdom, and the United States have recognized its ability to provide legitimate financial services.
Acceptance by merchants & nonprofits
In 2015, the number of merchants accepting bitcoin exceeded 100,000.
Organizations accepting donations in bitcoin include: The Electronic Frontier Foundation, Greenpeace, The Mozilla Foundation, and The Wikimedia Foundation. Some U.S. political candidates, including New York City Democratic Congressional candidate Jeff Kurzon have said they would accept campaign donations in bitcoin. In late 2013 the University of Nicosia became the first university in the world to accept bitcoins.
Use in retail transactions
Due to the design of bitcoin, all retail figures are only estimates. According to Tim Swanson, head of business development at a Hong Kong-based cryptocurrency technology company, in 2014, daily retail purchases made with bitcoin were worth about $2.3 million. He estimates that, as of February 2015, fewer than 5,000 bitcoins per day (worth roughly $1.2 million at the time) were being used for retail transactions, and concluded that in 2014 “it appears there has been very little if any increase in retail purchases using bitcoin.”
As an investment
Methods of investment include bitcoin funds. The first regulated bitcoin fund was established in Jersey in July 2014 and approved by the Jersey Financial Services Commission. On 4 May 2015, Bitcoin Investment Trust started trading on the OTCQX market as GBTC. Forbes started publishing arguments in favor of investing in December 2015.
In 2013 and 2014, the European Banking Authority and the Financial Industry Regulatory Authority (FINRA), a United States self-regulatory organization,warned that investing in bitcoins carries significant risks. Forbes named bitcoin the best investment of 2013. In 2014, Bloomberg named bitcoin one of its worst investments of the year. In 2015, bitcoin topped Bloomberg’s currency tables.
Venture capitalists, such as Peter Thiel’s Founders Fund, which invested US$3 million in BitPay, do not purchase bitcoins themselves, instead funding bitcoin infrastructure like companies that provide payment systems to merchants, exchanges, wallet services, etc. In 2012, an incubator for bitcoin-focused start-ups was founded by Adam Draper, with financing help from his father, venture capitalist Tim Draper, one of the largest bitcoin holders after winning an auction of 30,000 bitcoins, at the time called ‘mystery buyer’. The company’s goal is to fund 100 bitcoin businesses within 2–3 years with $10,000 to $20,000 for a 6% stake.Investors also invest in bitcoin mining. According to a 2015 study by Paolo Tasca, bitcoin startups raised almost $1 billion in three years (Q1 2012 – Q1 2015).
Legal status and regulation
The legal status of bitcoin varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed its use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.
The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law enforcement, and the media. The FBI prepared an intelligence assessment, the SEC has issued a pointed warning about investment schemes using virtual currencies, and the U.S. Senate held a hearing on virtual currencies in November 2013. CNN has referred to bitcoin as a “shady online currency starting to gain legitimacy in certain parts of the world”, and The Washington Post called it “the currency of choice for seedy online activities”.
There have been many cases of bitcoin theft. One way this is accomplished involves a third party accessing the private key to a victim’s bitcoin address, or of an online wallet.
Theft also occurs at sites where bitcoins are used to purchase illicit goods. In late November 2013, an estimated $100 million in bitcoins were allegedly stolen from the online illicit goods marketplace Sheep Marketplace, which immediately closed. Users tracked the coins as they were processed and converted to cash, but no funds were recovered and no culprits identified. A different black market, Silk Road 2, stated that during a February 2014 hack, bitcoins valued at $2.7 million were taken from escrow accounts.
A CMU researcher estimated that in 2012, 4.5% to 9% of all transactions on all exchanges in the world were for drug trades on a single deep web drugs market, Silk Road. Child pornography, murder-for-hire services, and weapons are also allegedly available on black market sites that sell in bitcoin. Due to the anonymous nature and the lack of central control on these markets, it is hard to know whether the services are real or just trying to take the bitcoins.
Several deep web black markets have been shut by authorities.
Some black market sites may seek to steal bitcoins from customers. The bitcoin community branded one site, Sheep Marketplace, as a scam when it prevented withdrawals and shut down after an alleged bitcoins theft. In a separate case, escrow accounts with bitcoins belonging to patrons of a different black market were hacked in early 2014.
Bitcoins may not be ideal for money laundering because all transactions are public. Authorities, including the European Banking Authority, the FBI, and the Financial Action Task Force of the G7 have expressed concerns that bitcoin may be used for money laundering. In early 2014, an operator of a U.S. bitcoin exchange was arrested for money laundering.