Bitcoin - a decentralized currency
Bitcoin is generated by peer-to-peer technology. In other words, no central authority controls its use or monitors transactions. We refer to bitcoin as a cryptocurrency since it is based on digital cryptographic concepts.
Bitcoins are created by “miners”. It simply refers to computers running special programs that solve complex math problems at a predictable rate. Once a problem is solved, a bitcoin is rewarded. The number of bitcoins generated is halved every 5 years. Ultimately, they will reach their limit at 21 million in 2140. Since it is not backed by any government, its value lies in the fact that various individuals and businesses accept it as a form of payment. The currency was created by Sakoshi Nakamoto, but this name is believed to be a pseudonym.
Bitcoin gives an alternative over other traditional currencies and offers many benefits. It is not regulated. There is no exchange or regulatory body involved with it. Anyone can engage in transactions with no intermediaries. The counterparties are anonymous even though transactions are public. Since it is a relatively new concept, its use has not been specifically addressed by tax regulators like the IRS (tax benefits). Obviously, tax regulations like the capital gains taxes are applicable; but currency tax regulations are not because it has not been firmly established that bitcoins are currencies. Lastly, it offers an Alternative form of payment to other currencies with no control from a government or a central bank.
Due to its limited supply, bitcoin is a deflationary currency which tends to rise. Up to 73% of bitcoins are held in passive accounts.
What do they look like? 145A2geTXWhty9jyshsTHYh7STnbnkilxX. A bitcoin contains 34 characters starting with the letter 1 or 3.
Just this week, the total value of outstanding bitcoins has surpassed $2 billion. 2 weeks ago it was worth $1 billion.
The demand for bitcoins is going up, and with limited supply its value is skyrocketing.
Historically, bitcoin has increased 3800% in value. It started trading 0.3 cents in 2009 when it was first launched. Bitcoins absolutely exploded in value earlier this month following the announcement of capital regulations in Cyprus. Cypriot investors poured their money into an alternative currency. Today, buying a bitcoin on the major U.S. exchange, Mt. Gox, costs more than $200.
Bitcoin is a highly volatile financial instrument compared to other commodities in the financial market. As stated earlier, in just the past few days, its market value has increased more than 50%. This is an amazing volatility for a commodity, much less a currency.
bitcoin may or may not be a bubble, but it certainly offers a financial opportunity for savvy investors. There is a strong belief among speculators that bitcoin is just a bubble. However, it could potentially become the money of the future. In fact, the disbelief in a new technology is not something new itself. To their discredit, many people were skeptical about the use of plastic cards in the 60’s. Today, credit card transactions have surpassed cash and/or checks.
Even if bitcoin does not last, the four-year-old currency may be pointing to a future where digital money will be the norm. It has certainly changed the way we deal with currency, since it is a decentralized system. Even if bitcoins go under, the era of a pure digital currency which doesn’t have its antecedents in the physical world, is here to stay. We might see more of these.
As such, litecoin, a new cryptocurrency that is based on bitcoin is already being issued.
As the Bitcoin network approaches maximum supply, the expectations of bitcoin prices would change; vendors may be no longer willing to accept bitcoins.
Like any investments, there are a few risks associated with the use of bitcoin.
Due to hacking, it poses a serious threat for investors. On April 1st, Instawallet, a site that offered a service to allow people to store bitcoins, its site had been hacked. Instawallet posted a notice on its site on April 1, saying it was down for maintenance, raising suspicions among investors. The stock fell from $147 to $125 in a couple hours.
Similarly, a bitcoin investor lost 25,000 bitcoins, worth about half a million Dollars back in June 2011. Though it is difficult to mine a bitcoin, and many people can spend quite a long time and a significant amount of computing power to get, they aren’t exactly difficult to steal, as opposed to real-life, tangible money. All one needs in order to steal them is access to the owner’s computer. Because bitcoins are traded through a decentralized network without any sort of authorities, and the addresses used to send and receive bitcoins are not linked to any identity, once bitcoins are stolen, it is pretty much impossible to get them back. This presents a major flaw for the currency and potential investors.
Lastly, there is a risk of a government crackdown. Because of illegal activities, money laundering and the fact that governments don’t like competition very much, they might attempt to bring down bitcoin. Since it is a decentralized currency, governments cannot just close it down directly; however it can undermine confidence by accepting anti-bitcoin law, closing exchanges, or restrict businesses from accepting it as a form a payment (by enacting law).
http://www.businessinsider.com/presentation-what-is-bitcoin-2013-3#and-start-with-basics-2
http://www.spiegel.de/international/business/boom-of-digital-currency-bitcoin-raises-questions-of-stability-a-893342.html
http://www.geekosystem.com/first-major-bitcoin-theft/
http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article21942.htm
http://bitcoin.stackexchange.com/questions/366/what-methods-could-a-government-use-to-shutdown-bitcoin
http://venturebeat.com/2011/06/08/government-crackdown-on-bitcoin/
http://seekingalpha.com/article/1070891-do-bitcoins-pose-a-threat-to-paypal-visa-and-mastercard
http://qz.com/72118/yes-people-are-hoarding-bitcoins/
http://eprint.iacr.org/2012/584.pdf
https://medium.com/money-banking/2b5ef79482cb
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