They say change is a good thing, but I’m still on the fence when it comes to Bitcoin. It’s the cryptocurrency that’s been blowing up my newsfeed for the past year, leading me to finally give in and research exactly what it is. At first, I thought I’d buy one and hop on the bandwagon… that is until I learned that one freaking Bitcoin is worth approximately $13,000 dollars. Needless to say, no Bitcoins for me.
For Those of Us Still Struggling to Understand Bitcoin
Although I won’t be investing anytime soon, I couldn’t help but wonder what the hype was all about and decided to give myself a crash course in the latest currency to create an investment frenzy. I won’t share with you how long it took me to grasp how this form of currency works (hint: several hours), but rather hope to break down how the transfer of this currency works, key terminology and why everyone remains skeptical about its success so far.
Alright, here goes nothing.
Bitcoin is a virtual currency with no central authority – meaning, no physical money, banks, bankers or government involvement. It’s controlled solely by its users in an open source network where users can write and edit code to protect payment exchanges. When payments are exchanged between users or businesses they’re recorded behind the scenes in a public ledger called the Block Chain that records and validates every transaction. The way we actually make these transactions is similar to online banking apps like Bank of America or Wells Fargo. Users send and receive Bitcoin through a mobile wallet or through a computer program that can only be accessed through your own personal key or pin. You can use the currency as a form of payment at a growing list of businesses such as Subway, Expedia and Overstock.com.
Now, since you can’t exactly walk into a bank and ask for Bitcoin, there are three main ways to acquire the currency. 1. As payment for goods or services. 2. Purchasing through a Bitcoin exchange (online) 3. Earn them through mining – which brings us to what I think is one of the most interesting concepts of this currency. The term mining is an analogy for gold mining which creates new Bitcoin. It’s the process of spending computer power to process transactions, secure the network and keep everyone in the system synchronized together.
Users that mine for the network are issued Bitcoin as a reward, but there’s a catch. Once 21 million Bitcoin are mined the supply will be maxed out. The details on what will happen when we hit the limit are still unknown, as the cap won’t likely be reached until sometime in 2140. The currency won’t “die” but the way miners are incentivized will need to change, most likely through transaction fees for processing and recording Bitcoin transactions based on the size of the exchange.
As dynamic and cutting edge as this all sounds, there are several reasons to remain skeptical and cautious before boarding the Bitcoin express. Bubble trouble, security and scaling are the top three threats to the success of this currency. Financial experts have tossed around the term ‘bubble’ to reflect Bitcoin’s success and perhaps its eventual demise. Bubbles refer to a situation where the price of an asset exceeds its value by a wide margin. In addition to worrying about whether this is a bubble that will burst, online Bitcoin exchanges have also been targeted by cyber-attacks. Although few have been successful, users question the security of the exchange platform with an open source foundation.
Lastly, scaling has raised many concerns for the future of the currency knowing that the cap is set at 21 million and how the network will handle the increase in activity. With more Bitcoin in circulation, this means more transactions to be processed, validated and recorded which may slow down the processing times users are already accustomed to. Approximately 15 million Bitcoin have already been mined and the currency so far remains stable, but still unpredictable. I am by no means a financial expert, but I believe that cryptocurrencies like Bitcoin will continue to grow and evolve in this Gold Rush 2.0 era, so get mining.