It’s currency without a bank, transaction fees or accounts required.
The bitcoin, created in 2009, remains an online currency in the shadows. It’s an encrypted unit stored in virtual wallets. It can be used to buy anything from food to services online. It’s globally exchangeable. Businesses that accept it aren’t subject to transaction fees.
As currency or investment, bitcoin toils under a cloak of mystery. Users transfer bitcoin through computers or mobile apps. You cannot hold a physical bitcoin, which just adds to the mystique.
Bitcoin averages $223.05 USD in exchange rate, according to bitcoinaverage.com, which tracks the bitcoin market. How can money you can’t run through the wash hold purchasing power?
Let’s examine a bit of the fact and fiction of bitcoin.
Fiction: Bitcoin users are anonymous
Consider bitcoin users “pseudo-anonymous.” Names are undisclosed in the blockchain – the public ledger into which all bitcoin transactions are recorded. It contains payment amount and bitcoin address, making it possible to trace history on any bitcoin. Bitcoin users commonly include their name with their bitcoin address online. There are ways to make bitcoin use “anonymous enough,” though.
NEW ADDRESS | Users can generate new addresses for each transaction. Bitcoin transaction history is stored by bitcoin address. This also keeps your bitcoin account total private.
ANONYMIZING LAYERS | Transactions aren’t encrypted, and go to the entire bitcoin network. Masking agents such as Tor or access through a VPN will hide your IP address.
Fact: A Math Whiz Can Earn Bitcoins
It’s known as mining – a process of awarding bitcoins to those who verify blocks of bitcoin transactions. In order to verify them, they must figure out complicated math problems. All transactions are stored on a decentralized public ledger.
Those who contribute to making bitcoin transactions a success are rewarded with bitcoins of their own.
GET HARDWARE | Bitcoin mining requires hardware built specifically for it. Transaction and security validation moves at speeds of hashes per second. The typical office or home computer lacks the processing power to mine.
DOWNLOAD SOFTWARE | There are many special programs used for mining. Two of the most popular are BFGminer and CGminer, which are command-line programs. There are also user-friendly, click-and-go programs such as EasyMiner for Windows/Linux/Android platforms.
JOIN A MINING POOL | Miners gather virtually to share hashing power and split the bitcoin reward in a mining pool. Pool miners have a greater chance to reap a reward than solo miners because of the shared computing potential.
SET UP WALLET | Bitcoin wallets can be established on a mobile device or computer. They are trading accounts that store bitcoins much like a conventional wallet stores cash. Security becomes paramount with unaffiliated currency, which should be treated like cash.
Here are the main security risks for online wallets:
THEFT: Without encryption technology and password protection, an unauthorized user could compromise your bitcoin account.
FRAUD: Currency under bank or government regulation can be insured; bitcoin isn’t regulated, so fraudulent transactions aren’t easy to rectify.
Fiction: Bitcoin Is a Ponzi Scheme
Unlike Ponzi schemes, bitcoin pays no returns to investors and money flow isn’t necessary to sustain the bitcoin market.
However, it does fluctuate wildly in value. Just before hackers attacked a bitcoin exchange in 2014, the value of one bitcoin reached $1,200 U.S. It had fallen to less than $300 by early 2015.
There’s no central bank in charge to balance bitcoin’s value and limit its extreme market volatility. For this reason, bitcoin could be classified as a speculative investment at worst.
Fact: Bitcoin Exchange Will Alter the Federal Reserve’s Monetary Policy
The Federal Reserve regulates the American market. Its goal: Maximum employment, stable prices and financial market stability. Bitcoin proponents claim its market doesn’t need the Federal Reserve.
The Fed might need bitcoin, though. It has seemingly embraced a currency like bitcoin’s potential to provide a safer, faster payment method for certain types of transactions.
In a report released in January 2015, The Fed proposed strategies to improve the U.S. payment system in the areas of speed, security, efficiency, collaboration and international payments.
The strategies were strikingly similar to how bitcoin exchanges operate. How can the Fed implement these changes without a middle man or taxing exchanges? Time will tell.