All You Need to Know About the Bitcoin

All You Need to Know About the Bitcoin

Bitcoin, one of the most popular forms of cryptocurrency, and enjoys many advantages when compared with traditional global currencies. It operates outside of the global financial system and is not controlled by any agency. It cannot be tracked by global authorities and cannot be taxed too. Consequently, bitcoin has found particular use in the so-called “Dark Web,” home to clandestine marketplaces such as the Silk Road.

In theory, the bitcoin system is also extremely hard to hack on account of its security features. Still, several bitcoin exchanges have faced attacks, leading to losses for many investors. Even if you were an investor with an appetite for risk, you would do well to understand more about cryptocurrencies, or specifically bitcoin before venturing. Here’s a primer on bitcoins you will benefit from reading before doing anything.

Who issues bitcoins?

Unlike traditional currencies, there is no central issuer like, say, the Fed, that hands out the bitcoin. Consequently, there is no guarantee of its value either. The cryptocurrency, or peer-to-peer electronic cash, originated in 2009 but its exact origin remains a mystery. Nobody knows for sure who its creator might be but it is widely believed to be a programmer called Satoshi Nakomoto. Little else is known about Nakomoto.

How do I get bitcoins?

In theory, anyone can “mine” it from a personal computer. Using special software, you would need to run complicated arithmetical calculations. But in reality it is next to impossible for several reasons, among them the statistical odds. Just like it gets progressively harder to identify prime numbers, it gets increasingly difficult to mine bitcoins. Today, it could take an estimated three years before a user can successfully mine some bitcoins. This is why syndicates have been formed to pool resources and mine bitcoins. Such syndicates bring on far higher computer processing power and speed, helping the computters identify special sequences of data called “blocks.”

Currently, there are an estimated 11 million bitcoins in circulation, and only 10 million more can be mined because of a cap set in the blockchain system.

Can I simply buy bitcoins?

Yes, you can buy bitcoins using regular currencies such as dollars, pounds and many others. Bitcoin exchanges such as Mt. Gox trade in the cryptocurrency. But trade with care because main exchanges have been hacked in the past, and some have even closed. Even Mt. Gox, which accounts for nearly 80% of the bitcoin trade, has faced hacks. Bitcoin’s purported security – every transaction can actually be traced – is little comfort for people who have lost money.

Bitcoin vs traditional currencies

Traditional currencies serve three major functions. They serve as a store of value, medium of exchange and a unit of account. Bitcoin’s volatility affects the first. The cyrptocurrency can be used on the “Dark Web” and on sites such as Silk Road, Reddit, WordPress and Mega but its low acceptance in real world limits the second function. It serves best as a unit of account because of its secure blockchain technology.

What is bitcoin’s legal standing and economic basis?

Most countries do not officially recognise or ban bitcoins. Most simply ignore it. Given its small size, it has worked so far.

Many economists have difficulty getting their heads around the bitcoin. Nobel Prize winner Paul Krugman, for example, considers it similar to the failed gold standard because its supply is limited, blunting monetary policy. Consequently, he argues, it poses the same challenges that led the world to end the gold-based monetary system.

Many other economists hold limited or low opinions of the bitcoin system. Some even consider it a Ponzi scheme.

Bottom line

Now you know how to mine bitcoins, and understand the process of successfully doing so. What you still need to examine is your risk appetite and your goals. Do you want to mine bitcoins for use in the Dark Web? Or would you rather invest in the expectation of high returns? How much money can you afford to invest in bitcoins? What returns might satisfy you? Make up your mind before jumping in.

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