What Is A Bitcoin?

What Is A Bitcoin?

Right now there’s a lot of buzz about the virtual money called Bitcoin.  It’s the first decentralized digital currency that can be transferred from person-to-person via the Internet without the need for a bank, financial institution or government body. The theory is that by cutting out the middleman – the banks – you make it cheaper to do business anywhere in the world.

Confused? So was I. Here’s a breakdown of what  Bitcoin is, and why it’s picking up popularity.

Born Out Of Crisis

The financial meltdown has created growing skepticism of how good banks are for the economy. In 2009, the idea of Bitcoin was born out of this fear. It assumed if currency is exchanged person to person then there is never a need to hold your money in a bank and be vulnerable to the actions of the financial institution. This peer-to-peer process, in theory, keeps costs down and transactions much clearer. Up until now there was little interest but with the drop in gold prices investors are starting to look more closely at a currency that is not tied to any government body or commodity like gold and that does not need a central clearing house.

How Does It Work?

This is the tricky part. Digital “miners” create Bitcoins in a similar manner as physical miners, who find gold to back a traditional currency. The “miners” in this case solve complicated mathematical problems – these create the coins, which are then made available for others to use in digital business transactions.  Each transaction has a digital signature that makes it impossible to forge or re-use the Bitcoins. This virtual money is then stored in your virtual wallet, and used to do business where Bitcoins are accepted.

Bitcoins Earn Rewards

Similar to PC Points or Airmiles, Bitcoins also feature a rewards program, where you can earn virtual points that can be used to buy things or services from a particular catalog or the money used in specific stores. Bitcoins’ reward scope may actually be one of the largest out there – anyone can decide to accept them as payment, creating endless potential for retailer partnerships.

Who Is Using Bitcoins?

About 100,000 people are currently signed up to use Bitcoins and participate in this virtual economy. In March there were more than $5.2 million in documented Bitcoin transactions. The Bitcoin website shows anyone can receive Bitcoins as a method of payment.

Should Bitcoins substantially increase in popularity and usage, these early adopters have the potential to become very wealthy – just like those who were among the first to invest in gold, or any other precious commodity. For now, though,  their future remains unclear and the value of the virtual currency continues to  fluctuate. For example at the beginning of 2013 a Bitcoin was worth $13.51. Then, in early April, as the Cyprus government announced it was selling off gold to raise funds, Bitcoin got a boost and was trading as a high as $266, before plummeting to less than $100 last week.

How Can You Get Them?

You can become a miner and mine for Bitcoins, but unless you’re an advanced math whiz, it’s a very difficult process. A more common approach is to exchange your traditional dollars or currency for the Bitcoins. To use them, one must create a digital Bitcoin wallet, and receive their first Bitcoin address. Bitcoins can then be purchased through suppliers like Coinbase.com.

Remember – It’s Not Yet A Real Currency

Bitcoins are a very interesting concept – and there’s no doubt that the world is moving toward virtual transactions. In fact, many of us already use a virtual form of money, whether it’s the number in your bank or the value on your statement. How many of us get our salary, pay our bills, put money away in our RRSP and shop for groceries without every touching a real dollar? Bitcoin is building on this, but its important to point out that to make sense we still need to covert Bitcoins to dollars to help highlight the value.

Who Shouldn’t Use Them?

My dad still stands in line at the bank to cash a check or withdraw money. He does not trust the online world to complete his financial transactions and prefers to get cash in hand with a receipt. Bitcoins are not for him. This may be an extreme example, but Bitcoins are in their infancy still and if you are nervous to be first to participate in a new economy my advice would be to wait before you go on a Bitcoin shopping spree.

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