Bitcoin is a form of online payment which was created by Satoshi Nakamoto in 2008. Since the system is a peer to peer system, an intermediary is not required during a transaction. Network nodes then verify the transactions before recording them in a public distributed ledger known as the block chain. The unit of account used by the ledger is known as a bitcoin.
Due to the fact that this system does not require a single administrator or a central repository, the US treasury has called bitcoin decentralized virtual currency. In fact, bitcoin is often called the first cryptocurrency in the world.
Bitcoins are generated in order to reward payment processing work. In this process, users tend to offer the power of their computers in order to verify as well as record the payments into the aforementioned ledger. This process is popularly known as mining and can be rewarded by new bitcoins as well as transaction fees. In addition to mining, bitcoins are also used in exchange for services, products and different currencies.
The popularity of bitcoins has seen a staggering growth in recent years mainly due to the fact the fees for using bitcoins as a form of payment results in fees which are generally lower than those imposed by credit card processors.
However, despite this surge in popularity, bitcoins have still not gained much traction in Â Â Â Â Â Â Â Â Â Â Â Â Â Â retail transactions and various authorities, such as the European Banking Authority have issued warnings stating that users who engage in transactions with bitcoins do not have the rights to refunds and/or chargebacks.
History of bitcoins
As mentioned earlier, Satoshi Nakamoto created the bitcoin system back in 2008, in a research paper. However, it wasnâ€™t until 2009 that Nakamoto implemented the system as open source code. Hal Finney was one of the first contributors to bitcoin, downloading the software the day it was released. He received 10 bitcoins from Nakamoto in the first ever bitcoin transaction.
Later, in 2010, an exploit allowed users to create a massive number of bitcoins, which were eventually erased when the bad chain was overtaken by another chain. The popularity of bitcoins saw many other developers use the open source code published by Nakamoto in order to create various other cryptocurrencies.
The end of 2012/ start of 2013 saw the bitcoin system gaining steadily in popularity, which in turn lead to mainstream websites such as WordPress (November 2012), OKCupid (April 2013), AtomicMall (November 2013) and TigerDirect in January 2014 agreeing to accept bitcoins. Perhaps the greatest achievement of bitcoins came when Microsoft started accepting bitcoins as well towards the end of 2014.
Furthermore, several popular advocacy or non-profit organization such as the Electronic Frontier Foundation have also decided to accept donations made in the form of bitcoins.
In October 2013, a major Chinese internet company, Baidu, started accepting bitcoins as an acceptable form of payment while in November 2013, a Chinese based bitcoin exchange became the largest bitcoin trading exchange in the world if compared by trade volume.
On 19th November 2013, the price of a bitcoin reached $900 after a Senate meeting where the FBI told the committee that bitcoins were a legal, legitimate financial service. On the very same day, a bitcoin traded for $1100 in China. However, later, on 5th December 2013, the Chinese government issued a declaration which outlawed transactions via bitcoins. This led to Baidu ceasing to accept bitcoins as well.
Meanwhile, in October 2013, the first ever bitcoin ATM machine was installed in Vancouver, Canada. In November 2013, the market capitalization of bitcoin exceeded $10 billion.
In January 2015, a bitcoin exchange service known as Coinbase initiated the first ever regulated bitcoin exchange in 25 US states, while intending to expand this service to over 30 countries by the end of the year.
Advantages of bitcoins
You might be wondering about the pros and cons associated with bitcoins. This in turn will help you to decide whether you should consider investing in bitcoins or not. There are various reasons and advantages that have been attributed to bitcoin, which in turn have led to the massive surge in popularity of the system. Some of the advantages that people attach to bitcoin include:
Freedom in the process of payment
If you use bitcoins for your payments, you can easily send as well as receive money anywhere in the entire world. Furthermore, you will also not be bound by time constraints which are often applicable on wire transfers.
Furthermore, you do not have to worry about having to reschedule around bank holidays, having to cross borders and or other limitations that tend to exist when you have to transfer money. In addition, due to the lack of a central authority associated with bitcoins, you are completely in control of your own money and are not answerable to anyone else.
Security and control
Due to the fact that you remain in control over your own money, you can also control the transactions which in turn helps to ensure that transactions are carried out smoothly and maybe even more importantly, safely. Another security feature offered by bitcoin is the fact that merchants are no longer able to add on any hidden price or extra fees without being discovered. In fact, now the merchant will require your permission before being able to charge you extra fees.
Also, bitcoin offers great anonymity to its own users. You can engage in any transaction you want and make payments as well as accept payments without the transaction being linked to your identity and other personal information, which you may not want to be made public. Since nobody can access your personal information if you engage in transactions through bitcoins, this provides you with excellent protection from identity theft.
Another excellent security feature offered by bitcoin is the ability to not only back up your bitcoins, but to also encrypt your money in order to ensure its safety. This is a feature few, if any, digital currencies offer.
No seizures by third parties
Since there are several redundant copies lying around of the transaction database, there is no party with the power to seize the bitcoins. At most, such a party can force a user to send their bitcoins to another person. Hence, there is no way that the government or any such organization can freeze the bitcoins of a user.
Due to the block chain format which is the modus operandi of bitcoins, everyone can notice and access all final transactions. However, as mentioned earlier, they can only see the transactions and none of the personal details of the people engaging in the transactions. They can only find out the address which is set at public; any other personal information is for your eyes only.
Due to the block chain format, anyone can verify bitcoin transactions at any point in time they choose. Since bitcoin has been deemed to be secure cryptographically, there is absolutely no danger of any individual, government or even organization interfering with bitcoins and hence, your transactions.
Most bitcoins transaction charge little, if any, fees for the processing of transactions and payments. The fees charged is generally paid by the user if he wants to speed up the processing of the transaction. The higher the fees paid, the faster will the transaction be processed since it will get higher priority within the network.
Meanwhile, digital currency is also aiding merchants in converting bitcoins into other currency. The fees charged for such services are significantly lower than those charged by competitors such as PayPal or credit cards.
Reduced risk for merchants
Since bitcoin transactions cannot be reversed at all, are completely secure and do not attach any personal information, merchants are generally well protected against the risk of being exposed to fraud and the resulting loss of earnings as well.
Using bitcoins, merchants can carry out transactions safely and securely even in places where fraud or crime rates are extremely high. This is due to the fact that it is more or less impossible to defraud bitcoin because of the public ledger, which was described earlier.
Disadvantages associated with bitcoins
Lack of awareness as well as understanding
Unfortunately, too many people are still not aware of the potential and application of bitcoins in their lives. Since people are not educated about bitcoins, it has still not reached the heights that it can possibly reach. This is one of the main reasons why bitcoins are not accepted by many businesses even though some have started to accept bitcoins as payment.
Even the companies which have begun accepting bitcoins do not possess staff with sufficient experience to enable them to help customers understand and accept bitcoins in their lives.
One of the main criticisms attributed to bitcoins is the volatility with which the rate of bitcoins changes. Due to the fact that there are a limited number of bitcoins present and there demand is increasing significantly, the prices are changing at an alarming rate, which has led many economists to believe that the whole system may collapse. However, it is expected that such volatility will reduce as time goes on and the system increases in stability.
Currently, the main reason behind the sudden changes in the prices of bitcoins has to do with current events which are linked to digital currencies.
It is still developing
Bitcoin is by no means an established currency. It still has features which are in dire need of redevelopment if it wants to be able to challenge other currencies in the near future. To this end, tools and services are being developed which in turn will help the growth of bitcoins.
Reception of bitcoins
The reception to the popularity and even the concept of bitcoins has been greatly polarized. While many economists consider bitcoins to be an excelled advent to digital currency, others have failed to react so positively.
Many economists believe that bitcoin is a fundamentally flawed idea brought into existence and popularized by people who do not have a complete grasp of how money operates. Some people, such as the Vice President of the Federal Reserve Bank of St. Louis, David Andolfatto, has stated that bitcoins could be considered to be a threat to the establishment, which should be considered as a positive due to the fact that this will force other banks to operate more efficiently while enacting sound policies in order to be able to retain their hold.
Meanwhile, the president of PayPal, David Marcus, has stated that while bitcoin is a great system where you can place your assets, it will not be considered to be a reliable currency until the major price volatility is decreased. The richest man in the world, Bill Gates, believes that bitcoins show how cheap it can be to move money from place to another.
On a similar note, Peter Schiff has accepted bitcoins as a valid form of payments and consider bitcoin to be better than wire transfers which can often be slow as well as expensive for the customer.
Bitcoin may have proven to be a controversial system, with its fair share of admirers and critics. It has often been written off by various magazines who deem it to be a fad which will soon wear off. However, one thing that it has certainly proven is the fact that it is here to stay.