Bitcoin

Bitcoin is the world’s leading digital currency, or cryptocurrency. While Bitcoin and cryptocurrencies are still in their infancy, they have the potential to have a dramatic impact on how we exchange money. Bitcoin allows people to exchange money between one another outside the control of governments. Many find that idea very appealing as well as useful. Read on to learn more about this interesting form of currency.

Bitcoin Is The Original and Most Popular Cryptocurrency

Digital currency is a fairly new phenomenon, only having been around for less than 10 years now.  The idea behind it is that given the huge network of computers out there, they can be linked together in such a way as to create and manage new forms of currency, that exist only in cyberspace, but can be exchanged between users.

BitcoinThere are no physical Bitcoin coins, it is a pure digital currency, but this is the way most money changes hands these days with so called hard currencies, as we’ve moved well away from cash being the dominant form of currency.

With digital transactions involving cash, it is not the case that cash is transferred between the parties, as currency has become primarily an interchange between assets and liabilities. They are processed by financial institutions, who have accounts with one another, and when transactions clear, it’s just the balances between them that update, there’s no hard currency changing hands at all here.

So a digital currency like bitcoin isn’t really fundamentally different than the traditional currencies it seeks to replace, at least the way currency is primarily exchanged these days, as digital currencies transfer funds from one account to another just like the banking system does with digital transactions, only with bitcoin, there is no intermediary involved like a bank or a payment processor.

So someone came up with an idea to create a true user to user, peer to peer payment system, where funds flow directly from one account to another. This puts people in full control of the payment system, and although virtual wallets are needed to store the funds, the bitcoins in this case, the intermediary is passive rather than active like a bank or other financial processor is.

Prior to digital currency, you could already transfer money peer to peer, with internet wallets such as PayPal and others, and this remains the case, and you can even purchase things online with these internet wallets. However, the costs to do so are fairly high, especially compared to using Bitcoin.

Bitcoin’s Lower Transaction Fees

One of the biggest benefits of Bitcoin and other digital or cryptocurrencies is the low transaction costs relative to other means. So you can send bitcoins for less than it would cost to send money, although the gap seems to be narrowing here.

Transaction fees with Bitcoin are called mining fees, and they do seem to be going up as the digital currency matures. In theory at least, Bitcoin transactions should remain significantly cheaper, and without this benefit, this would bound to have a big impact upon its growth and even it’s maintaining its market share.

Bitcoin currently controls about three quarters of the worldwide market in cryptocurrency, although it may just be a matter of time before some of the newer competitors catch up. What’s important here though isn’t so much market share, or even market capitalization, it’s utility, and the goal is to see wider and wider acceptance of an alternative currency such as this in order to make it more useful.

Oddly enough, including a transaction fee when sending bitcoins is voluntary, and it used to be that if you included the fee your transaction would be given priority in the system, but if you weren’t in a hurry, your transaction would still be processed.

Nowadays though, including transaction fees is pretty much mandatory, and those with none included now risk being ignored. Bitcoin transactions do need to be digitally processed, in what is called a blockchain, so this isn’t exactly a peer to peer system, it’s more like a peer to peer by way of other peers.

Bitcoin Getting Both More Popular and Slower

The popularity of Bitcoin has also added to the backlog that is created in the system, and these days the backlog can be pretty significant, anywhere from tens to hundreds of thousands of transactions in queue. This has led to longer wait times for users to get transactions confirmed although it still isn’t too out of hand, and 10 minutes to a half an hour is still typical, but wait times are getting longer and longer.

Bitcoins are created by a process called mining, which uses raw computer power to solve mathematical problems and therefore prove their computational prowess, which creates blocks. Miners get awarded bitcoins through this process. As time passes, the potential supply of new bitcoins reduces, making it harder and harder to earn new ones through mining, although minors still can collect fees on the transactions they process, and this seems to be making fees more prominent in the system as we go along.

It’s expected that by 2140, all the bitcoins that will ever be created will already be in the system, but miners will still have an incentive to create new blocks, but at that point their entire compensation will be by way of collecting transaction fees.

Users need not be concerned about the technicalities involved here, any more than they need to worry about how financial institutions clear digital debits and credits, what they are after instead is a payment system that is both reasonably fast and very secure. Bitcoins are definitely very secure, and with the fast part, we’ll just have to wait and see how this all pans out as the currency evolves further.

Bitcoin Needs To Grow A Lot More In Popularity Though

In order for an alternative currency like Bitcoin to function somewhat efficiently, it needs to have a certain utility. If someone sends you bitcoins, and then you arrange for them to be sold and converted to hard currency, and the hard currency is sent to your bank, this at least somewhat defeats the purpose of digital currency.

That still can be useful though, if two parties do not have a good way to exchange currency, but ideally you would be able to keep a significant amount of it in the system, using the bitcoins you receive to exchange for something else directly.

The acceptance rate of bitcoin is still on the very thin side, the good news is that the popularity of Bitcoin has risen enough that at least a few retailers have started accepting it. Bitcoin is also really growing in popularity with online gambling sites, and it has the added benefit of allowing transactions with these sites outside the long arm of governments who may be looking to disrupt these payments, such as is the case with the United States for example.

So anytime it’s important or desirable to have your transactions occur off the grid so to speak, Bitcoin is perfect for this, as it is completely anonymous. All Bitcoin transactions are kept in a permanent ledger but it’s one that does not contain any personal information about the parties, nor can such information ever be obtained.

There are plenty of Bitcoin users that see this as a plus even when they have nothing they need to hide, and see this as a privacy thing, and value the ultimate privacy that digital currencies offer.

Still though, it will have to become much, much more widely accepted before it can be a true alternative to government issued currency.

Bitcoin Could Also Benefit From More Stability

Some people were drawn to Bitcoin by the fact that since it is completely unregulated by any government, and is purely regulated by the market, this truly makes it a currency of the people. While it’s true that it is not manipulated as a matter of fiscal policy, it is far less stable than hard currency.

Bitcoin fluctuates in value so much that there is significant risk in holding it, much more so than holding a foreign currency involves. This is like trading the forex market, where you would trade with a huge amount of leverage to make these trades tempting enough, because currencies just don’t move that much or that fast relative to one another.

There’s no leverage required for speculating in Bitcoin, as the its value relative to hard currency moves plenty. This can be seen as a good thing though, for those who do like to speculate, but something that can lose half it’s value or double in value in a short time may be too risky for a lot of people’s tastes.

Those who do like to speculate, or those who may even see bitcoins as a long term investment vehicle, will relish in the idea that the value of bitcoins should increase over time, provided that the demand for them does not decrease. This is because of the way it is set up, with a fixed, diminishing supply. As demand increases, this will only serve to drive up the value further in the long run.

However, merchants aren’t that fussy about dealing with a currency with so much volatility, for several reasons. It’s certainly possible to price in the additional risk into the cost of the goods or services they offer, but unless the demand is such that they will lose business if they forego this currency, there just isn’t much of an incentive to accept bitcoins.

Bitcoin is still in its infancy, and only time will tell just how successful this becomes, but the feeling is that this will continue to grow in popularity for the next while at least.

Bitcoin FAQs

  • Can you convert Bitcoin to cash?
    Bitcoin is held in an account called a Bitcoin wallet, where you can both deposit money to and withdraw money from as desired. When cashing in bitcoin, your bitcoin is converted to another currency such as U.S. dollars, where it then can be withdrawn to a pre-arranged approved transactional account.
  • What is a Bitcoin and how does it work?
    Bitcoin is a digital currency that is used as both a means of storing monetary value and to make payments and transactions to others in bitcoin form. Bitcoin is more a form of investment these days than a transactional currency, much like gold is, where people speculate on the future value of the asset.
  • Are Bitcoins legal?
    Bitcoin exists in the digital realm and is therefore mostly beyond the purview of regulators, and one of the main ideas behind Bitcoin is to have it off this grid. Bitcoin is legal in most countries though. Some countries seek to ban it but due to the nature of Bitcoin they are limited to enforcing the law against banks.
  • Is Bitcoin worth investing?
    Many people have earned fabulous returns by investing in Bitcoin, but there is also a higher risk of losing money by investing in it, due to its being subject to much wider price swings than normal. The potential returns are therefore much higher, but we must also pay much more attention to managing risk.
  • How do I invest in Bitcoins?
    Bitcoins are sold in exchanges, where interested parties open an account with and fund their Bitcoin wallet with an accepted payment method. The bitcoin then increases or decreases in value as its exchange price changes in the market. You can also trade Bitcoin futures as well as with certain forex brokers.
  • In which country Bitcoin is banned?
    Bitcoin is prohibited in Algeria, Egypt, Morocco, Bolivia, Columbia, Ecuador, Saudi Arabia, Iran, Bangladesh, Nepal, Pakistan, China, Taiwan and Cambodia. People from these countries still buy and sell Bitcoin but this must be done in a manner that circumvents the regulation that the country uses to enforce the laws.
  • Can Bitcoin be traced?
    Bitcoin transactions themselves cannot be traced, and thus is a favorite means of payment for criminals, as well as anyone else who is concerned about their privacy. The identity of holders of Bitcoin is another matter though, as regulators seek to have Bitcoin accounts associated with real names to be provided to them.
  • How do I trade in Bitcoin?
    Trading in Bitcoin may just involve speculating on their price while they are held in a Bitcoin wallet, and this is how the overwhelming majority of people speculate on them. They can also be traded on the futures market, as well as with some forex brokers who may offer BTC/USD as a currency pair.
  • How does Bitcoin trading work?
    Regardless of the method that we trade Bitcoin with, Bitcoin trading always involves a forex trade where Bitcoin is pegged against another currency, almost always USD. Your entry price will therefore be a certain amount of Bitcoin per USD, and the value of the position will change as their relative value fluctuates.
  • Do you have to pay taxes on Bitcoin?
    Governments require that we report all income earned from any source, and this includes money that we earn holding Bitcoin, as well as mining fees earned or any other income related to Bitcoin or anything else. The taxation rules surrounding Bitcoin is very much under debate and is also subject to change.
  • What happens if a Bitcoin transaction is not confirmed?
    The transaction will eventually disappear from the network, after which time there is no longer a claim on the amount that you sent with the unconfirmed transaction. It may be sent again, but usually with higher fees, if you have not specified a transaction fee with your transaction.
  • How long does a Bitcoin transfer take?
    The average time it takes to complete a Bitcoin transaction ranges from a half an hour to several hours during times of high network activity. An hour to an hour and a half of waiting is fairly typical. Offering to pay higher transaction fees tends to speed up the time it takes to have your transaction confirmed by the blockchain.
Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.