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Wednesday, January 8, 2014

Is Bitcoin the Real Deal?

Bitcoin has received more hype and attention than almost anything else in 2013. Just to make sure we are all on the same page, bitcoin is a virtual currency that you can use to buy and sell goods or services. It can also be used to seamlessly transfer money between people by bypassing the banking system. Bitcoin is not backed by anything, but the value of it is based on supply/demand and the popularity of the currency. Additionally, there are only supposed to be 21 million bitcoins that will ever be put into existence. Right now there are said to be about 11 million bitcoins in circulation.


"bitcoin" photo taken by Steve Garfield
is licensed under CC BY-SA 2.0
The question many of you may have is: How are bitcoins created? Bitcoins are "mined" by people who have computer hardware mining devices. These devices have to solve extremely complicated mathematical equations in order to generate a bitcoin. Miners typically "pool" together, meaning team up with other miners, because the process takes too long by yourself.

What are some of the advantages of a bitcoin?:
  1. Lower transaction fees for merchants who accept credit cards. Typically, merchants get charged fees of around 3-4% of the total sale price, with bitcoin it is between 0-1%.
  2. Bitcoin is not backed by any government, so technically more coins should not be carelessly created to devalue the currency. Additionally, one particular government's instability won't hurt the value.
  3. It is easy to transfer money between people and you can bypass the banking system. You can just log into your bitcoin wallet on the internet or on your phone, and send a payment to another person's wallet.
  4. Strong international appeal of the currency. Bitcoin currency is slowly starting to be used in multiple countries throughout the world.
  5. Bitcoin payments are secure, irreversible and said to reduce fraudulent transactions.
What are some of the disadvantages of bitcoin?
  1. Payments can be made somewhat anonymously, which can bring about shady business. There recently was a big FBI bust on an internet company called Silk Road that was using bitcoins to sell drugs.
  2. Volatile and erratic currency pricing since it is a new currency.
  3. Fear of your bitcoin being hacked or stolen since they are all virtual.
  4. It costs you money to purchase a bitcoin. It looks like the average rate for buying a bitcoin is about 1% of the purchase price.
One of the most intriguing factor's about bitcoin is it's increase in value over the past year. Bitcoin was valued at just $14 per coin in January 2013 and is now valued at around $930 per coin as of January 6, 2014. Wish I would've bought a few coins back then!!! To give you some perspective, at the end of August 2013 there were $1.5 billion worth of bitcoins in circulation. Everyone wants to know will this run keep going or is this a bubble waiting to burst.

Another positive note is that bitcoin has some large companies that are now accepting them. The two largest companies are Overstock.com and the app game maker Zynga. Additionally, bitcoin has some strong backing and venture capital funding within the tech community.

With that being said, I think this virtual currency is a very interesting idea. I like the fact that the amount of bitcoins outstanding is limited and that they may become a worldwide type of currency. If this sounds a little weird to you, remember what it was like when you first heard about the internet (I was totally lost!). Only time will tell what is going to happen with bitcoin. Will it be more valuable than gold or just another fools gold?

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