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what is bitcoinYou’ve probably heard of BitCoin, the Internet’s recent attempt at independent currency. It’s been all over the news for reasons both positive and negative – it’s a useful way of transferring funds anonymously, but the currency itself remains volatile and prone to abuse.

Many finance experts, geeks, and fans of Internet security have been watching BitCoin developments enthusiastically, trying to see whether the system really will work. As for actually making use of BitCoin, most people who want to give it a go have found the process confusing and just given up. So, what’s the deal? Will BitCoin ever find a place amongst respected currencies?

The Difficulty With BitCoin

Despite many useful guides written on how to use BitCoin BitCoin – Buy, Sell & Trade Using Anonymous Peer-To-Peer Currency BitCoin – Buy, Sell & Trade Using Anonymous Peer-To-Peer Currency Earlier this month two prominent US politicians wrote to US Attorney General Eric Holder to express concerns about the rise of a new online currency – BitCoin. The anonymous, peer-to-peer currency has become very popular... Read More , there seems to be an element of confusion and difficulty present. Even if potential users do understand the complex system they’re often thwarted when they attempt to purchase or mine BitCoins. People who don’t get hold of any currency straight away tend to lose interest.

what is bitcoin

BitCoin Limits: Buy, Mine & Trade BitCoins

Once you’re set up to use BitCoin, you can buy, mine guiminer - An Extensive Tool For Bitcoin Mining guiminer - An Extensive Tool For Bitcoin Mining As of late there's been a been a great buzz going around about Bitcoin, the latest P2P digital currency. One of the main activities of getting Bitcoins is through a process called mining. No need... Read More and trade BitCoins with other people in the system. But you’ll have to use specialist BitCoin markets and software so that the transactions are verified in the BitCoin system. This isn’t a currency that can be converted at your local Bureau de Change.

For instance, a tourism operator in Asia might consider accepting Pounds Sterling or US dollars for their wares as they know they can exchange the currency to their own local currency later and it means that they make the sale on the spot. This is just not possible with BitCoins as users need to be in the system before they can accept payment. Once a person owns BitCoins they can exchange to their local currency, but only via specialised markets and only if there’s a BitCoin buyer willing to exchange. This severely limits BitCoin’s usefulness outside of its own ecosystem.

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BitCoin May Face Government Opposition

Due to BitCoin’s anonymity, BitCoin has become the currency of choice for illegal trade, including at least one brazen site dealing in pharmaceuticals. The same anonymity could also cover the tracks of people moving funds internationally. Governments worldwide are likely to consider the currency itself as a threat because of this power, and will therefore look at ways to shut it down or make trade using anonymous currency illegal.

Who would put their trust into a currency that could be easily made inaccessible to them with the stroke of a pen?

The BitCoin Exchange Rate

In recent days, the BitCoin exchange rate has suffered a huge drop in value. This happened once before due to a scam which devalued the currency. As of yet, it’s not clear what’s causing this current devaluation.

what is bitcoin

However, it is clear to many observers that this new BitCoin currency just doesn’t have the gold backing of most currencies, nor does it have the public trust required for the value to remain constant.

The BitCoin setup has been carefully managed to avoid hyperinflation, but this will never stop the currency being devalued the instant the public loses confidence in the BitCoin’s worth. Some say it’s a form of fiat money – and in many respects it’s exactly that. BitCoin enthusiasts and pedants would claim this is untrue, but the similarities are clearly there to be seen.

Should We Use BitCoin?

There are a number of great reasons to support an anonymous, peer-to-peer traded currency rather than our regular banking, but the questions still linger: Is it safe? Is it a scam? Will it suddenly devalue out of existence? Is BitCoin mining worth it when you factor in power costs? Given that risks have been identified, is it worth investing in this currency?

Let’s pass this debate over to the readers. Do you use BitCoin? What do you see as the biggest risks of the system? What could BitCoin do to make the system easier for first-time users? Do you think governments will try to stop BitCoin use? What do you think will happen to BitCoins over the next 5 years? Do you have confidence in the value of the BitCoin? Why or why not?

And look out soon for MakeUseOf’s official manual on BitCoin, including how to set up an account, getting free Bitcoins, mining, and more.

  1. Christian
    September 27, 2011 at 12:58 am

    >How is a currency with less than $1 available to each US citizen--never mind the rest of >the world--supposed to work?

    this to answer is easy, bitcoin is highly devidable if bitcoin ever will reach the status of a common accepted online currency its worth will not level at 4 to 5 USD. If this scenario will come to reality the worth might be about 1000 USD for a bitcoin. At the moment this is "utopia" but if bitcoin will be used as the no.1 online currency it will be unavoidable just to manage the worth of anyday onlinebusiness...
    Nevertheless even if this will happen it will take some years to happen.
    And now here's my personal opinion: I think Bitcoin or another quite similar thing will be the furture of online payment at all, the Idea is born, it is working, and any following system has to be convertible to bitcoin or back if it will take over the bitcoin system. The whole system of bitcoin is ready to be the revolution of online-payment; local, national or even worldwide; at all. I don't think ist possible to  let the word forget about it's benefits and advantages against any process of online payment before...

    christan (Bremen, Germany)

    • Angela Alcorn
      September 27, 2011 at 9:20 am

      Nice answer, Christian. Thanks!

  2. Mike2
    September 21, 2011 at 4:15 am

    If I understand the manual correctly, BitCoin is designed to top out at around 21 million BCs in circulation in maybe 100 years' time. Taking Dustin's exchange rate estimate above, that's maybe $100M worth.

    How is a currency with less than $1 available to each US citizen--never mind the rest of the world--supposed to work?

    • Angela Alcorn
      September 21, 2011 at 7:06 am

      The reasoning behind that is so that it's not overinflated, but I see what you mean. I guess they're working on the theory that not everyone will be interested in owning BitCoins and therefore there'll be more for those who do.

    • justin
      September 21, 2011 at 1:18 pm

      Simple put: 1 bitcoin will be worth a lot.  That's why the currency is already distributed with so many decimal points. 

    • Mmmerlin
      September 30, 2011 at 10:16 pm

      You are correct in thinking that would be the case if Dustin's exchange rate was to hold, but if huge worldwide adoption were to happen then this would not be the case.

      If the currency sees wide adoption, it would, as you observe, become very rare. However, as the currency will be very rare this will force the value of the BitCoin to go much higher. (After all, the only property that gives the BitCoin any real value is its rarity!)

      Because the BitCoin is so divisible it means that it can, unlike other currencies, still work with a very high price per unit of currency (with contrast to the dollar with its smallest unit of division being the cent).

      The BitCoin would still function perfectly as a currency were it's value to hit $1,000,000 per BitCoin as the smallest unit into which it can be divided is 10 billionths of a BitCoin, making the value of its smallest division at a price of $1M per BitCoin equalt to $0.01.

      So in short, the more people that use it the more valuable it becomes, at which point people simply use smaller and smaller divisions to make transactions of reasonable amounts of money. Whether this is actually divisble enough to service the ENTIRE world's economy is another matter, but it could certainly replace most people's currency of use without too much of a problem (though if this did happen there would be many other MAJOR problems that would need to be addressed but that's another story...)

    • Angela Alcorn
      October 1, 2011 at 3:46 pm

      Nice explanation - thanks for sharing!

  3. Angela Alcorn
    September 18, 2011 at 10:37 am

    Wow - Lots of info. Thanks for sharing that.

  4. Mike
    September 16, 2011 at 8:59 am

    I'm not sure where BitCoin is going and for how long...

    My personal advice? If you are up to something new download a client and start mining. Worst case you wasted some processing time - if you are lucky, you might have made some money...

    • Angela Alcorn
      September 16, 2011 at 9:56 am

      Yep. Keep it casual and you can't lose too much. :D

  5. Dustin
    September 16, 2011 at 8:47 am

    Q: Do you use BitCoin? A: Yes, i use it to sell services online such as computer repair, and have sold a few outdated electronics with it. I also like to trade bitcoin as a hobby.

    Q: What do you see as the biggest risks of the system?
    A: technical risks include the theroetical 51% network hijacking that as far as i understand is not currently possible due high mining difficulty, i could be wrong. Currently the wallet.dat (the thing that holds your bitcoins) is not encrypted, although that is being worked on in a future bitcoin client update.

    Q: What could BitCoin do to make the system easier for first-time users?
    A: Native integration with exchanger api's to make trading from USD to bitcoin/visa versa would be pretty cool, i think. An option (once encrypted wallets are working) to back up the wallet.dat somewhere safe, an option to switch wallet.dat files. You can currently do both, but its not really intuitive for the average joe. Maybe a naming system for bitcoin addresses (so i could send bitcoins to DaveW1984 instead of the raw address)
    Q: Do you think governments will try to stop BitCoin use?
    A: This has been deeply discussed, and i think for the most part the community concludes that because of its p2p functionality and very very small network footprint, even with deep packet inspection it would be fairly difficult to detect, therefor even if a law bans it, it wouldn't be effective and there is no real way to detect bitcoin traffic. Worst case scenario is you use a vpn or an offshore server. Not every country in the world is going to ban bitcoin, and because of its psudo anonymous nature, you would not be able to connect the bitcoin traffic from some vpn in sweden to Bob in los angles.

    Q: What do you think will happen to BitCoins over the next 5 years?
    A: The bitcoin community is pretty strong, If things are done right i think bitcoin could be a real possibility of being a currency used outside of the internet (and this is already happening) I do not think its going to be the thing that kills any non-internet based currency, but i could see smaller countries adopting bitcoin. Its honestly hard to tell, but if the community stays with it and keeps improving bitcoin, it will be around for a very long time.

    Q: Do you have confidence in the value of the BitCoin? Why or why not?
    A: Currently, its very unstable. I see another bubble happening, I think it will be a few years before the value is stable, but i think when it does go stable it will stick to 4-5 dollars a coin. Even with its volatile value, there are online stores that have automated systems for adjusting the amount of bitcoin a certian product costs. As bitcoin grows and more people adopt it as a way to sell services or goods, you'll find people will care much less about the value of bitcoin. How many people are concerned about the value of the us dollar? unless your trading it for another currency, you wont find many people who care. They can go to the store and pay for what they want. its so convient the value is irrelevant to them. Once bitcoin is at this status of convience, value of it in us dollar will not be a concern for the average joe.

    • Angela Alcorn
      September 16, 2011 at 10:00 am

      Wow. Thanks for the incredibly detailed, intelligent responses to the questions. I hope people who design BitCoin clients and any dubious consumers read this.

  6. neophonic
    September 16, 2011 at 12:31 am

    Can we trust in Euro? Can we trust in Dollar? eh..

    • Angela Alcorn
      September 16, 2011 at 9:54 am

      All good questions right now!!

    • jhpot
      September 16, 2011 at 5:03 pm

      You mention gold backing: the dollar hasn't been backed since Nixon. 

  7. oldtimer
    September 16, 2011 at 12:12 am

    One simple reminder-E-Gold, seen what happen there, lost money.. Never again will I trust a e-currency.

    • Dustin
      September 16, 2011 at 8:24 am

      E-gold is not the same as bitcoin. the only thing similar is its a digital currency. With that said, bitcoin certianly has its ups and down, but i have been comparing past bitcoin buy/sell patterns pre 20-30 dollar per coin value up to the months leading up to the 20-30 dollar per coin value and they are pretty similar with whats happening now. bitcoin is unpredictable, but i can take an educated guess and say we'll see another bubble. I think currently its at about what it should be, however.

      Bitcoin is most definatly not stable, and i dont think anyone in the bitcoin community will tell you to put more into bitcoin than what you can afford. With that said it certainly is fun, and if you want to learn how exchange markets in general work bitcoin actually provides a great platform for doing that before you move into playing with forex. Because of bitcoin, i have learned to read candle stick charts, learned several charting algorithms, its taught me things about forex that i found difficult to learn otherwise.

      Unlike e-gold, bitcoin is also p2p. even at its worst, it will be nearly impossible to kill off completely. E-gold was centeralized, bitcoin is not.

    • Angela Alcorn
      September 16, 2011 at 9:56 am

      If you're using Bitcoin for education and fun then you're keeping a healthy attitude, I say.

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