Only a few weeks ago, we wrote an expose on Bitcoin, the digital currency that is captivating the imaginations of early adapters, tech gurus, and international wheelers and dealers…not to mention making venture capitalists salivate. In that article, we covered the basics of Bitcoin - what it is, how it was founded, how much it's worth, how it works, and other nuts and bolts.
Even since that article came out, there have been huge changes in the digital currency landscape. More and more big vendors are accepting it, users have more ways to access it, and Cryptolina, a recent exposition in Raleigh, North Carolina, brought together the Bitcoin community to explore and advance the movement. At the same time, genius third-party innovators like RibbitCoin and Ribbit.me have taken the concept of digital currency and leapfrogged it (pun intended) to the next level of economic and social utility, truly democratizing how we will engage in commerce for the next century.
The following is part 2 of our expose on Bitcoin, covering everything you need to know about the movement that may become bigger than the Internet!
How are Bitcoins created?
Since it has no central
bank, there is no one governing body “creating” Bitcoins like the Federal
Reserve prints money. Instead, Bitcoins
are generated by a genius method called “mining.” When individuals or companies do payment
processing work on behalf of the Bitcoin system – verifying and reconciling
payments through digital data records – they are awarded with around 25
Bitcoins, usually valued at $12,500.
Through this system of public auditing, a new Bitcoin is brought into
existence on average of one every ten minutes.
For the average person or
Bitcoin novice, mining probably isn’t an option when you want to obtain
Bitcoins. But you can obtain them from
another user in exchange for goods or services, or there are third-party web services
that allow you to trade dollars or other money for Bitcoins. Bitcoin ATM machines are even popping up!
How can you hold Bitcoins?
Bitcoins are basically
encrypted files that hold data signifying value. Bitcoin “wallets” aren’t physical wallets but
special software used to hold and protect these encrypted files. That can be on your computer, with a
third-party site for safekeeping, or on your smart phone. For those who want something tangible to show
for the value they hold, you can actually print out these encryption codes on
special receipts. These receipts can be
stored in a safety deposit box (or anywhere you’d like,) just like paper money,
but usually aren’t traded in physical form because of the digital nature of
Bitcoin transactions.
I see images of gold coins with the Bitcoin logo –
are there physical Bitcoins, too?
There are physical Bitcoins,
but the value is not that they’re made out of gold, silver, or some precious
metal (though some are - just for show.)
Instead, these physical Bitcoins are embedded with the encrypted files
and key codes. They’re protected with
tamper-evident holograms, so once you use access and use the code, the “coin”
is worthless. Some third-party vendors
created coin Bitcoins, but their popularity ebbs and flows and there is no real
practical benefit to keeping them in that form.
You can buy things online,
in brick-and-mortar locations that except Bitcoins (through a QR code scanner,)
or transfer them easily to anyone you wish.
Basically, think of them as a digital gift card not tied to any store or
even any country’s currency. Merchants
like them because Bitcoin fees are 2-3% lower than expensive credit card
processing.
Can they be lost or stolen?
Although the Bitcoin
Foundation maintains that its currency is theft-proof, that’s not the
case. Since BC is stored digitally, the
files can be lost if a hard drive is erased or discarded (which happened to one
investor, instantly costing him tens of millions of dollars.) There is malware that can steal encrypted
files from your computer or crash your system, and third-party websites are
subject to hacking, bankruptcy, or fraud.
Some will argue that those conditions exist in the traditional monetary
system, but since it’s unregulated, there’s no way to get your money back or
usually even apprehend the culprits.
Safety is one area that will probably needs to see vast improvements
before Bitcoins are a household occurrence.
So is it like Paypal?
Yes and no. PayPal seems like a digital exchange of
currency to the end user, but remember that PayPal facilitates transactions in
US dollars. PayPal is also a for-profit
company with a responsibility to shareholders – just like Visa. But Bitcoin is decentralized, which means no
one person or group of people own or control it. Bitcoin is the world’s first completely open
financial network, meaning you don’t need the authority or channel of an
established bank to create your own financial services.
How are Bitcoins gaining legitimacy?
The Bitcoin movement took a
huge step forward just the last few weeks after a tumultuous 2013 and a promising
start to 2014. Google, the world’s most
popular search engine, just added a Bitcoin tracking tool to its main
website. You can now easily check the
daily price or convert to other currencies.
This follows on the tail of Yahoo! Finance and Bing.com embracing
Bitcoin back in February, and the financial periodical Bloomberg adding it to
its financial terminals in April. But
Google is the big one.
What do governments and banks think about it?
It’s making them nervous –
they don’t know whether to embrace it, use it, ignore it, or try to control
it. Of course, their lack of influence
and control is why it’s so scary to these entrenched financial
institutions. The European Banking
Authority warned that Bitcoin lacks consumer protections (and they’re right, as
we’ll cover later.) Recently, the United
States Senate Committee on Homeland Security and Governmental Affairs held the
first-ever Congressional hearing on Bitcoin.
In June of this year, California Assemblyman Roger Dickinson, drafted
legislation (Assembly Bill 129) to legalize Bitcoin as currency. The US Commodity Futures Trading Commission
went on record in March, saying it was considering regulation of digital
currencies like Bitcoin.
Of course the Internal
Revenue Services hates it because it allows so many international transactions anonymously
(and without tax consequences,) so the US Government Accountability Office
reviewed virtual currencies upon the request of the Senate Finance Committee
and recommended that the IRS formulate tax guidance for Bitcoin
businesses.
Then again, a US political
candidate Jeff Kurzon, a congressional candidate from New York, accepted
Bitcoins for campaign donations.
How are criminals using Bitcoin?
New technology is often
first used by criminals, who exploit the gray area before governments or
institutions step in to regulate and fix the problems. Bitcoin has been used extensively to launder
money, exchange drugs, and even fund terrorist organizations. The largest known case of this was the Silk
Road, an online black market that sprang into existence parallel to the Bitcoin
phenomenon. In 2012, it’s estimated that
4.5-9% of Bitcoin transactions were drug trades on Silk Road and other black
markets. Transactions were anonymous,
unregulated, fast and easy, and impossible for police to trace. But finally the United States government
stepped in and the FBI shut down Silk Road, seizing 144,000 Bitcoins representing $28.5 million spread out over 45
registered users. In total, it’s
estimated that Silk Road encompassed $1.2 billion in value traded over 1.2
million transactions. Other third-party
sites, like online gambling, have rose to prominence based on Bitcoin
exchanges.
What’s the future of Bitcoin?
The frontiers are wide open
for this new technology – that represents not just a platform of how to do
something different, but a grand idea, redefining the individuals rights and
role in society from a monetary standpoint.
No one really knows what the future with Bitcoin will look like, but
there are a lot of incredibly smart people scrambling to figure out the best
applications. A recent film documentary,
The Rise and Rise of Bitcoin, made its debut at the Tribeca Film Festival in
New York this spring, chronicling Bitcoin's birth and meteoric growth.
Will it be a boon for
international non-profits and help solve some of the Developing World’s biggest
problems? Will it make a dinosaur out of
the notion of traditional banks? Or will
it just become another convenient service so you can buy a cup of coffee
without carrying cash? No one knows for
sure, but Bitcoin certainly has our attention.