I have become obsessed recently with the technology of Bitcoin. I see it as the next "big thing" in technology and a truly revolutionary payment system.
For those of you that are new to Bitcoin, this article is a basic overview of what Bitcoin is, and how it is going to affect your life in the future. Bitcoin is quickly gaining momentum, and it seems more and more likely every day that bitcoin will succeed and become the digital currency of the future.
What is bitcoin?
Bitcoin is a digital currency system designed in such a way that no single party can control it. It is managed by a huge network of computers that work together to process and confirm bitcoin transactions. Every bitcoin transaction that has ever occurred is recorded in a digital ledger. This ledger ensures that duplicate transactions cannot occur. In exchange for processing these transactions, the owners of these computers get a small reward in the form of bitcoins.
The advantage of bitcoin is that it makes it easy to send "money" to anyone in the world for zero to very little cost. Bitcoins are stored in a digital wallet. If you have bitcoins in your wallet, then you simply need the address of the wallet you want to send money to in order to process that transaction. You don't even need to know who that wallet belongs to in order to send money. Once the bitcoins are sent it takes about 10 minutes for the transaction to be confirmed. After they are confirmed, there is no way to ever reverse that transaction. Its a done deal.
You can own as many wallets as you like. Currently, a paper wallet is the safest way to store your bitcoins off-line. There are a number of services including Coinbase and blockchain.info that provide online wallets. These are great companies, however, there is no guarantee on your money. If the company is hacked or goes out of business, you may lose your coins for good. Another option is to use software such as multi-bit or bitcoin-qt to store bitcoins on your computer. Bitcoin-qt is also available as a software wallet for android.
You currently get bitcoins by buying them from a service like coinbase, accepting them as a means of payment, mining for them by processing bitcoin transactions, or having someone give them to you. Mining is not practical for the average person because the hardware costs are enormous. Buying bitcoins is getting easier, but it usually requires you to connect a bank account and transfer money to a 3rd party for bitcoins. An alternative option are local markets where you can do face-to-face bitcoin exchanges. Localbitcoins.com is a website that helps you find local bitcoins to buy or sell. These options are currently limited, but I expect them to grow in the future.
One bitcoin is currently worth around $800. However, this value is very volatile right now and could swing quickly in either direction. Some have suggested that 1 bitcoin could eventually be worth $100,000 if the technology is successful. However, there are too many unknowns to accurately predict where the value of bitcoin will eventually settle....if it ever does settle. Furthermore, bitcoin can be broken down into very small quantities. Its possible to send .0001 bitcoin or even smaller.
Currently, there are relatively few merchants that accept bitcoins for payment. However, Overstock.com recently began accepting bitcoins, the largest retailer so far to do so. It appears likely that many more retailers will sign up to accept bitcoin in the near future.
Risks?
I believe the biggest risk to bitcoin is government intervention. Many governments have yet to step in and force regulations on the bitcoin community. This uncertainty is currently the biggest unresolved issue for the future of bitcoin. However, if bitcoin achieves enough momentum, I believe that most governments would have a difficult time stopping it.
Volatility is another big risk. The value of 1 bitcoin is unstable and unpredictable. Bitcoin is in its infancy and no one currently knows what a bitcoin will be worth in 1 year, let alone in 1 week.
Hacking and theft have also caused early growing pains for bitcoins. Bitcoin wallets contain private keys that protect your wallet from being used without your permission. However, if those keys are compromised, then your bitcoins could be easily stolen with no way of ever retrieving them. Paper wallets are the best way to "hide" your private key from hackers, however, paper wallets are not practical to use on a daily basis to make payments.
Rewards?
The biggest reward to using bitcoin is fast and inexpensive payment transactions. A credit card charges a merchant 3-4% for each transaction. Bitcoin has to potential to dramatically lower that transaction fee. Bitcoin also avoids the issue of merchant chargebacks. Unlike a credit card transaction, a bitcoin transaction cannot be reversed. This protects merchants from the huge costs involved in stolen credit card transactions.
Currency speculators see bitcoins as a potential investment with huge returns. The value of a bitcoin has risen dramatically over the past year, and many see that value continuing to rise. There is a limit to the number of bitcoins that can be issued, although that cap won't be hit for decades. Therefore, bitcoin is a limited resource. If demand for bitcoins continues to rise, then the value of the currency should also rise along with it.
The Future?
I have heard bitcoin described as the Internet without the browser. The technology is still in its early stages, and currently it is not ready for mass adoption. It is simply to difficult to use right now for the average person. Bitcoin needs to get to a point where people have no idea what their wallet code is or whether their private keys are protected. Bitcoin transactions will need to be as seamless as swiping your credit card.
Bitcoin is a huge potential threat to credit card companies. If bitcoin is adopted, there is no way that credit card companies will be able to maintain their current margins. If they are unable to adapt to bitcoin, the future of these businesses are at risk.
Bitcoin also has the potential to circumvent the banking system and provide a modern payment system for third world countries. There are millions of people in the world that don't have access to the banking system and are shut out of the modern economy. Bitcoin offers a solution to this problem and in this way it could serve as a huge boost to the overall economy by providing access to markets that currently have no way of making payments.
I also see a huge market in the future for bitcoin insurance. People need to have the same level of confidence with a bitcoin wallet as they do with a savings account. They need to know that their money is protected and not at risk of loss.
I am very excited about bitcoins potential and I expect it to be a dominant technology within 10 years. There are many risks and uncertainties still, but in the end, I believe this disruptive technology will be impossible to stop.
For those of you that are new to Bitcoin, this article is a basic overview of what Bitcoin is, and how it is going to affect your life in the future. Bitcoin is quickly gaining momentum, and it seems more and more likely every day that bitcoin will succeed and become the digital currency of the future.
What is bitcoin?
Bitcoin is a digital currency system designed in such a way that no single party can control it. It is managed by a huge network of computers that work together to process and confirm bitcoin transactions. Every bitcoin transaction that has ever occurred is recorded in a digital ledger. This ledger ensures that duplicate transactions cannot occur. In exchange for processing these transactions, the owners of these computers get a small reward in the form of bitcoins.
The advantage of bitcoin is that it makes it easy to send "money" to anyone in the world for zero to very little cost. Bitcoins are stored in a digital wallet. If you have bitcoins in your wallet, then you simply need the address of the wallet you want to send money to in order to process that transaction. You don't even need to know who that wallet belongs to in order to send money. Once the bitcoins are sent it takes about 10 minutes for the transaction to be confirmed. After they are confirmed, there is no way to ever reverse that transaction. Its a done deal.
You can own as many wallets as you like. Currently, a paper wallet is the safest way to store your bitcoins off-line. There are a number of services including Coinbase and blockchain.info that provide online wallets. These are great companies, however, there is no guarantee on your money. If the company is hacked or goes out of business, you may lose your coins for good. Another option is to use software such as multi-bit or bitcoin-qt to store bitcoins on your computer. Bitcoin-qt is also available as a software wallet for android.
You currently get bitcoins by buying them from a service like coinbase, accepting them as a means of payment, mining for them by processing bitcoin transactions, or having someone give them to you. Mining is not practical for the average person because the hardware costs are enormous. Buying bitcoins is getting easier, but it usually requires you to connect a bank account and transfer money to a 3rd party for bitcoins. An alternative option are local markets where you can do face-to-face bitcoin exchanges. Localbitcoins.com is a website that helps you find local bitcoins to buy or sell. These options are currently limited, but I expect them to grow in the future.
One bitcoin is currently worth around $800. However, this value is very volatile right now and could swing quickly in either direction. Some have suggested that 1 bitcoin could eventually be worth $100,000 if the technology is successful. However, there are too many unknowns to accurately predict where the value of bitcoin will eventually settle....if it ever does settle. Furthermore, bitcoin can be broken down into very small quantities. Its possible to send .0001 bitcoin or even smaller.
Currently, there are relatively few merchants that accept bitcoins for payment. However, Overstock.com recently began accepting bitcoins, the largest retailer so far to do so. It appears likely that many more retailers will sign up to accept bitcoin in the near future.
Risks?
I believe the biggest risk to bitcoin is government intervention. Many governments have yet to step in and force regulations on the bitcoin community. This uncertainty is currently the biggest unresolved issue for the future of bitcoin. However, if bitcoin achieves enough momentum, I believe that most governments would have a difficult time stopping it.
Volatility is another big risk. The value of 1 bitcoin is unstable and unpredictable. Bitcoin is in its infancy and no one currently knows what a bitcoin will be worth in 1 year, let alone in 1 week.
Hacking and theft have also caused early growing pains for bitcoins. Bitcoin wallets contain private keys that protect your wallet from being used without your permission. However, if those keys are compromised, then your bitcoins could be easily stolen with no way of ever retrieving them. Paper wallets are the best way to "hide" your private key from hackers, however, paper wallets are not practical to use on a daily basis to make payments.
Rewards?
The biggest reward to using bitcoin is fast and inexpensive payment transactions. A credit card charges a merchant 3-4% for each transaction. Bitcoin has to potential to dramatically lower that transaction fee. Bitcoin also avoids the issue of merchant chargebacks. Unlike a credit card transaction, a bitcoin transaction cannot be reversed. This protects merchants from the huge costs involved in stolen credit card transactions.
Currency speculators see bitcoins as a potential investment with huge returns. The value of a bitcoin has risen dramatically over the past year, and many see that value continuing to rise. There is a limit to the number of bitcoins that can be issued, although that cap won't be hit for decades. Therefore, bitcoin is a limited resource. If demand for bitcoins continues to rise, then the value of the currency should also rise along with it.
The Future?
I have heard bitcoin described as the Internet without the browser. The technology is still in its early stages, and currently it is not ready for mass adoption. It is simply to difficult to use right now for the average person. Bitcoin needs to get to a point where people have no idea what their wallet code is or whether their private keys are protected. Bitcoin transactions will need to be as seamless as swiping your credit card.
Bitcoin is a huge potential threat to credit card companies. If bitcoin is adopted, there is no way that credit card companies will be able to maintain their current margins. If they are unable to adapt to bitcoin, the future of these businesses are at risk.
Bitcoin also has the potential to circumvent the banking system and provide a modern payment system for third world countries. There are millions of people in the world that don't have access to the banking system and are shut out of the modern economy. Bitcoin offers a solution to this problem and in this way it could serve as a huge boost to the overall economy by providing access to markets that currently have no way of making payments.
I also see a huge market in the future for bitcoin insurance. People need to have the same level of confidence with a bitcoin wallet as they do with a savings account. They need to know that their money is protected and not at risk of loss.
I am very excited about bitcoins potential and I expect it to be a dominant technology within 10 years. There are many risks and uncertainties still, but in the end, I believe this disruptive technology will be impossible to stop.
