What is Bitcoin?

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Much controversy swirls around bitcoin, the digital money that hit the market in January 2009. From its inception, there have been questions surrounding the online currency; observers query its strength, popularity and, of course, its viability. How could bitcoin compete with the monetary system we already have? Will it one day supersede the current system? These questions have been asked from day one and continue six years later.

The creator of bitcoin, an anonymous person or group of people using the alias Satoshi Nakamoto, knew this new money system would raise eyebrows, but it was thought to be a great breakthrough for various reasons; among them, it was a system that could be used worldwide and would have no regulations. And with bitcoin, there’s no middle man–no banks are necessary! There’s also no governmental or central authority overseeing it. The system is peer-to-peer, meaning the user deals directly with another party and can do so without even using a real name. Bitcoin is accurately described as the first decentralized digital currency.

The first bitcoin transaction was made the first day it was made available. Programmer Hal Finney downloaded the bitcoin software on release day and received ten bitcoins from Nakamoto in the world’s first bitcoin transaction. It has been making its way gradually ever since. Some people even see bitcoin as an investment, hoping it will increase in value. For a select market, bitcoin has some appeal, but experts say it’s still too early to tell if it ultimately will have staying power.

But, as expected, not everyone is thrilled about bitcoin. Its use is attracting the attention of law enforcement, regulators, legislative bodies and the media. Because it’s not regulated and somewhat anonymous, these entities cite money laundering, the financing of illicit activity, theft, fraud, tax evasion and use in black markets as possible scenarios associated with it. A 2012 internal FBI report that was leaked to the internet states, “If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful tool for various illegal activities beyond the cyber realm…Bitcoin might logically attract money launderers, human traffickers, terrorists and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers.” This is a red flag swirling around bitcoin.

But bitcoin users relish the new monetary system and find it refreshing that they can make monetary transactions, remain anonymous and avoid a financial regulatory system. Businesses are also finding bitcoin more appealing; it has grown over the years as a form of payment for products and services, and its fees are typically lower than the fees imposed by credit card processors. With bitcoin, the fees are paid by the purchaser, not the vendor. That’s a huge draw for businesses. Since there are no chargebacks, retailers usually offer in-store credit as the only option when someone makes a purchase using bitcoins. In 2013, some major corporations’ websites began accepting bitcoins; among these are WordPress, TigerDirect, Time, Inc., Dish Network, Expedia, Dell, Microsoft and the Sacramento Kings. Certain charities and nonprofit groups also have started accepting bitcoin donations.

How does bitcoin actually work? How do you get it and how do you actually use it? Bitcoins can be bought or sold both online and offline. Participants in online exchanges offer bitcoin buy and sell bids. Obtaining bitcoins online is said to entail some risk because of the possibility that the online exchange might fail, in which case clients can lose their bitcoins. Offline, bitcoins may be purchased directly from an individual or at a bitcoin ATM. Bitcoins are stored in a “digital wallet,” a virtual bank account that allows you to send or receive bitcoins, pay for goods and services, or to save. People can send bitcoins to each other using mobile apps or their computers. But there are drawbacks. Bitcoin wallets, unlike bank accounts, are not insured by the FDIC. Wired online magazine reports the risk of hackers using malware to steal bitcoins from unprotected digital wallets, and users are advised to maximize their digital security to prevent intrusion.

What is the long-term value or risk of bitcoin? Financial analysts, economists and investors have tried to predict the possible future value of bitcoin; some say bitcoin will be valued at zero in just a matter of time. In November 2014, David Yermack, professor of finance at NYU Stern School of Business, forecasted that in November 2015 bitcoin may be all but worthless. The death of bitcoin has been proclaimed numerous times.

But don’t use haste in counting out bitcoin. In June 2014, Boston-based Circle Internet Financial launched a mainstream payment platform that converts deposits in currencies instantly to bitcoin without transaction fees. Interestingly, its user agreement notes that an account is insured if bitcoins are lost due to breaches of Circle’s digital storage facilities but not insured if the accountholder’s security protocols are inadequate.

Sources: circle.com, coindesk.com, ft.com, money.cnn.com, reddit.com, wikipedia.org and wired.com.