Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Transactions are made with no middle men – meaning, no banks! Bitcoin can be used to book hotels on Expedia, shop for furniture on Overstock and buy Xbox games. But much of the hype is about getting rich by trading it. The price of bitcoin skyrocketed into the thousands in 2017.
Bitcoins can be used to buy merchandise anonymously. In addition, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation. Small businesses may like them because there are no credit card fees. Some people just buy bitcoins as an investment, hoping that they’ll go up in value.
Facts About Bitcoin
Yet investors have poured money into the digital currency. Here are some of the basic questions and answers you need to know to decide whether to put your money into Bitcoin or other cryptocurrencies.
- What determines Bitcoin’s worth? “Bitcoin is a digital currency with no intrinsic value, (which is) worth as much as people think it’s worth — and there might be a bit of herd mentality going on in that regard right now,” according to digg.com, an internet news aggregator.
- Is Bitcoin unique? No. There are many cryptocurrencies. David Drake, chairman of LDJ Capital, a New York City-based family office that invests in Bitcoin for clients, estimates there are more than 7,000 cryptocurrencies — which he calls digital assets. But only 200 are traded on exchanges. And only about 10 of those are widely used, he says.
- Can you buy, say, just $1,000 worth? Generally, you can buy any amount that the exchange permits. If you buy an amount of Bitcoin that does not coincide with the price per coin, your ownership would be indicated in fractions of a Bitcoin or as one or more whole Bitcoins plus a fraction, Drake says.
- Where can you buy Bitcoin? Cryptocurrency exchanges. Coinbase.com is the most popular. Other exchanges include Bithumb, Coinmama, BitQuick, CEX.io and Bitstamp.
- How high are exchange fees? They vary. Buybitcoinworldwide.com lists these fees: Coinbase charges 3.99% for using a credit card or debit card and 1.49% for transactions involving a connected bank account. Coinbase’s GDX service assesses a 0% fee, Coinmama 6%, CEX.io 0.2%, BitQuick 2%. Bitstamp charges a 0.25% fee, which falls to 0.1% with sufficient trading volume.
- Are there security issues? Yes. Coinbase has gone offline several times due to surges in traffic. Also, cryptocurrency exchanges often don’t agree about the value of Bitcoin at any given time. And several exchanges have reported hacker breaches resulting in the theft of millions of dollars worth of Bitcoin. NiceHash reported such a breach on Thursday. Those thefts stole money from individual wallet owners, not from the exchange, Drake says. The Japanese Bitcoin exchange called Mt. Gox reportedly filed for bankruptcy protection in 2014 after $450 million of Bitcoin disappeared or were stolen by hackers.
- How/where can you spend Bitcoin? An increasing number of retailers accept Bitcoin as payment, including Overstock.com, Expedia, Microsoft, Subway, Zynga, eGifter and Dish Network. But generally an exchange converts your Bitcoin into traditional currency that you transfer to a bank account, credit card or debit card.
- How does Bitcoin work? Bitcoin users are assigned accounts called “wallets.” The status and balance of each wallet is tracked by a network known as blockchain. Blockchain is a public ledger, which shows transactions (without wallet owners’ identifications) to all users, which in theory is what keeps transactions honest. Each transaction is “signed” by a secret piece of data called a private key, which proves that a transaction comes from a wallet’s owner. Basically, the public ledger shows that the same Bitcoin is being spent only by its current owner.
- Does Bitcoin have a shady background? The vast majority of Bitcoin users are honest people motivated by privacy concerns, curiosity or speculative investment goals, Drake says. But because Bitcoin makes transactions anonymous, it was used by Silk Road, a market facilitating the sale of illegal drugs. Also, Bitcoin has reportedly been the way that some hackers demand ransom payments to release computer systems or data. And skeptics says digital currencies facilitate money laundering.
- Can you short Bitcoin? The start of Bitcoin-based derivatives trading on the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) will allow investors to short or bet on price declines in Bitcoin. The availability of futures contracts could draw more investors to Bitcoin, possibly boosting its price, though those using futures to hedge or bet on a Bitcoin price decline could put downward pressure on the cryptocurrency.
- Should newcomers proceed with caution? “Absolutely,” Drake said. “You should just put in a few hundred dollars for the purpose of getting used to the technology and the interface.” He adds that some exchange interfaces are not mass-market user friendly.
- Can retail individual investors compete with professional trades who use sophisticated tools? “If I bought shares of Apple (AAPL), I’d be competing with the likes of Goldman Sachs,” said Jay Blaskey, digital currency specialist for BitIRA. “There are always people who have more knowledge than I do. But most trading tools are pretty widely available. As far as I know, few people have a totally unique edge.” Any investor can see bid-ask spread and volume information about Bitcoin on exchanges, Blaskey adds.
- Is there a way for individual investors to protect themselves from hackers? Remember those private keys that contain investors’ information? Blaskey says that the wallet provider his firm works with copies and encrypts account data including investors’ keys, takes the devices offline and stores investors’ keys offline. Hackers then do not have access to the keys or other information. “It’s like putting money into a bank vault,” Blaskey said. One caveat: on a recent episode of the popular TV show “Big Bang Theory,” science genius Sheldon Cooper protected his key by moving it to a thumb drive, which he disconnected from his computer. The comedic element? He lost the thumb drive. Don’t repeat Sheldon’s error.
In the early state of society, the value of a good or service was determined by the amount of labor required to produce it, and then the need for exchange of goods and services bred currency.
Why do Bitcoin have value?
The value of Bitcoin comes from the same reason the US dollar does – it’s a useful form of money that’s used by people to buy and sell things.
While the US dollar’s value is supported by the government, which gives it a legal status and uses it to collects taxes, Bitcoin’s value comes from its code.
Although it’s not tangible, Bitcoin’s code gives it features of a traditional fiat currency like scarcity, divisibility, portability, fungibility, and recognizability. In addition, Bitcoin is decentralized, can be used without a middleman, provides some level of anonymity, is impossible to counterfeit, and has other features such as programmability.
But the most important reason for current Bitcoin value is that people want to use it to pay for goods and services, store their money, or simply speculate. The more the network of Bitcoin users and merchants grows and the more secure and advanced the system becomes, the bigger Bitcoin’s value in USD and other currencies can get.
Bitcoin’s future in question
No one knows what will become of bitcoin. It is mostly unregulated, but some countries like Japan, China and Australia have begun weighing regulations. Governments are concerned about taxation and their lack of control over the currency.