Bitcoin and the Bitcoin Network >>>
What is bitcoin?
Just like email was created to send messages from person to person around the world for free, bitcoin was created to send money from person to person around the world for free.
And just like the email system works with email addresses and emails, the bitcoin system works with bitcoin addresses and bitcoins.
While on the email system the format of an address is email@example.com and you have to type this on the “To:” space to be able to send an email, on the bitcoin system the format of an address is a 30 character code like 1JqjAHgjCmNCRUHWKHrtUcvCofhWt9FTSW and you have to copy this on the “To:” space to be able to send a bitcoin.
To start using email you need to go to an email service like Gmail, open an email account, and start sending and receiving emails. On the bitcoin system you need to go to a bitcoin service like Coinbase, open a bitcoin wallet, and start buying, selling, sending, and receiving bitcoins.
Email is something you can create and store in your “Sent emails” box infinitely, and the receiver can also store, copy, and resend endlessly. Bitcoins are something there is a limited amount of and when you send one it goes away from your wallet just like a dollar bill would from your physical wallet. The receiver can store it in his wallet or send it away, but when he does send it away it will be deleted from his computer. Thus, unlike emails, bitcoins are finite and unique. In this way they are more like gold than email; there is a limited amount and they cannot be copied or replicated.
These last two characteristics, finite and unique, are what make bitcoin ideal to be used as a currency. The fact that it is electronic and used only on the internet is what makes it a digital currency.
This is a video that explains bitcoin produced by some of the original bitcoin developers and engineers:
Is it time to start using bitcoins?
As adoption of bitcoin accelerates, its use case and functionality may become more compelling for a growing number of merchants, consumers, traders, and investors. Although it’s not yet suitable for everyone, the following are some features that make bitcoin attractive:
It is a valid currency: While many are still analyzing if bitcoin will be a valid currency or not, I say it is a store of value, an exchange mechanism, and a unit of account, therefore it is already a currency.
A store of value: Although the price of bitcoin has been volatile, since inception it has been gaining value and already has a market capitalization of more than $1 billion. As bitcoin users grow globally its function as a store of value will be reinforced.
A unit of account: Since bitcoins can be used to store value, this value can be compared with the value of any other currency or merchandise. This makes it a valid unit of account to price products and services and to measure cash flows, among other things.
An exchange mechanism: Since it is easy to transfer, bitcoin can be exchanged for products and services or used to payoff debts if the parties agree. Therefore, it can be used as an exchange mechanism.
It is a global network: Just like email, anybody in the world with a computer or a mobile device with internet access can have a bitcoin address. With a bitcoin address and a bitcoin wallet it is possible to send and receive bitcoins to and from anybody and anywhere in the world.
It is decentralized: The bitcoin network is the sum of people transacting in bitcoins with one another directly on the internet. There is no central server or entity, like a government, central bank, corporation, or foundation that controls the network. Therefore it cannot be manipulated like normal currencies issued by decree and controlled by governments.
It is free: Because it is an open source protocol and it is decentralized its use is free. To store, send, and receive bitcoins has no cost. This must not be confused with the purchase and sale of bitcoins. Bitcoins have value so to buy bitcoins you need to pay for them!
Wallet services: To be able to use bitcoins there are wallet services that are easy to subscribe to and provide the functionality to transact with bitcoins.
Send and receive: The basic functionality of a bitcoin wallet is to manage a bitcoin address so you can send and receive bitcoins. You can see your bitcoin balance and the transaction history so you can track your bitcoin activity.
Buy and sell: Since bitcoins can be stored and transferred they can also be bought and sold. You can do this by transacting with someone directly and then sending or receiving the bitcoins or you can use a bitcoin exchange.
Connected to the dollar system: Some bitcoin wallet services may be linked with your regular dollar based bank account. This makes it easier to convert bitcoins to dollars and vice versa and to move money between your wallet and your account.
Global exchanges: To facilitate the exchange of bitcoins with other currencies there are many global exchanges like Mt. Gox or Bitstamp where bitcoin users can trade them for different currencies like dollars, pounds, yens, or euros.
Sell and get paid: Once you have a bitcoin address it is easy to post it on your website or send by email so other bitcoin users can send you bitcoins in exchange for your products and services. You can also use a bitcoin wallet provider that offers merchant services so you can install a “buy” or “pay” button on your site so you can get paid to your wallet directly.
What are the risks of using bitcoin?
Because it is a new technology in its early stages, bitcoin has certain risks associated with it:
Volatility: Since inception bitcoin prices have been very volatile. Recently the bitcoin price went up from $70 to $260 and then down to $50 again to be traded now at around $100. This happened in a matter of weeks so it is still very volatile to use it as a savings or stable investment mechanism. For now it seems to be suited for very small investments and short term trading. Bitcoin is not suitable for the risk averse because there is a great risk of permanent loss of capital.
Theft: Although the majority of bitcoin services like wallets and exchanges have established bank level security in their systems, some are still not very sophisticated and may be subject to hacker attacks and theft. This is a serious risk in the bitcoin network because once bitcoins are transferred they cannot be recovered.
Trust: Related to the above and because bitcoin has been around for only a few years, all bitcoin services are mainly start-ups or companies with no significant capitalization. This poses an additional institutional risk as the majority of these services wouldn’t be able to respond to customer claims like theft, fraud, or errors.
Accessibility: Many bitcoin exchanges and wallet services have been affected by hackers with denial-of-service attacks (also known as distributed-denial-of-service attacks – DDoS). These are not internal thefts of bitcoins or information, but massive attacks that overload their servers. These attacks make these services unavailable for long periods of time so there can be little or no access to your wallet and thus the ability to withdraw money or transfer bitcoins out of your account.
Bitcoin is still a new concept, but it’s in the process of being understood and adopted by a growing number of consumers, merchants, and investors around the world. As this process continues the reasons to start using bitcoins are becoming more compelling.
There is also increased investment in the sector and many new finance companies are offering more professional and consumer friendly solutions for everyday use.
Bitcoin is not for everyone at this point because it still poses significant technological and financial risks, namely the permanent loss of capital. However as these risks are mitigated, more consumers, merchants, and sophisticated investors should start learning about and using bitcoin.