Categorized | Alternative Investments

What Is Bitcoin? An Intro to Digital Currency

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There is an exciting new market emerging in the form of digital currency, and many asking what is bitcoin? Digital currencies have existed for years in the form of centralized digital gold currency. In the past few years though a new kind of digital currency based on cryptography has risen.  The most well known of these crypto-currencies is Bitcoin.

what is bitcoin

What Is Bitcoin?

Bitcoin is a decentralized, peer-to-peer, deflationary currency first emerged in 2008. This form of currency relies on massive amounts of computer power to create new coin through a process called “mining.”  In many ways its comparable to gold. Both have a maximum amount that can be acquired through mining. As more bitcoin is mined the more difficult it is to mine, causing less to be found.  Eventually, bitcoin will reach a maximum of 21 million coins after which no new coin can be mined.  Because of the limited amount like gold, bitcoin is deflationary.  For investors, this makes bitcoin a very interesting hedge for inflationary fiat currency (physical currency, like the US dollar).

Since 2009, the value of bitcoin has increased over 30,000%.  From the beginning of this year up to June 1st bitcoin has increased over 900% alone.  It has outperformed every other market in long-term growth and the size of the market is now worth nearly $1.25 billion. What’s even more intriguing is it’s consistent growth each month.

Explore the Bitcoin Market

what is bitcoinThere are many attractions to a digital currency like bitcoin.  The most obvious attraction is that bitcoin is digital, not taking up any physical space unlike paper currency or gold. It can be stored on a flash drive, a computer, a mobile phone, a QR code (seriously!), on a physical coin with tamper-proof holographs, or even in a “brain wallet” which is actually a phrase that you would memorize.

Another huge attraction is it’s independence and freedom from government and bank control.  Funds in a bitcoin wallet cannot be frozen or confiscated!  There are no central banks controlling the supply of bitcoin and it isn’t influenced by the status of any country’s economy.  Recently many investors have flocked to bitcoin, especially those in the Euro-zone debt crisis involving Cyprus.

Another attraction to bitcoin is it’s very low and often times non-existent transaction fee to send a transaction to anyone, anywhere in the world.  For those of you looking to avoid high merchant fees charged by credit cards or money transfer services like Western Union, bitcoin is a great alternative. Transactions across the bitcoin network appear in seconds and confirm in minutes! It’s also not possible to chargeback a bitcoin transaction which eliminates a lot of the common scams performed using services like PayPal.  Unlike traditional currency, every bitcoin transaction record is public, so it’s trivial to prove that someone was paid.

In the past year alone the value for one bitcoin has increased over 1000%.  How many other types of currency have you seen increase at a similar rate? What is really appealing to curious traders is how each bitcoin can be divided down into 100 million smaller pieces called satoshis. By doing so it’s still possible to buy very small amounts of a bitcoin even as the value continues to climb.  There have also been proposals for alternative ways to count small amounts of bitcoin more efficiently, like the tonal bitcoin.

How Do I Buy Bitcoin? What Are Bitcoin Exchanges?

You can buy and sell bitcoin in a number of different ways. The highest volume method has been using bitcoin exchanges.  These function much like a forex exchange in which a fiat or other digital currency is exchanged for bitcoin.  The drawbacks in using these exchanges have been the fees they charge and the security risk of letting a third party hold the bitcoin.  Another way to trade have been through the over-the-counter (OTC) community.  OTC uses a web-of-trust system between individual traders to negotiate payment.  With OTC you may avoid the fees and security risk, but it’s much more difficult to trade and a lot easier to get scammed.  Lastly, some people use mobile apps to carry their bitcoin with them and do face-to-face transactions with fiat cash for bitcoin.

Digital currency and bitcoin are lucrative, but are not without their faults.  Historically, bitcoin has been exceedingly volatile and the exchanges have experienced some pressure from federal regulators. During the largest exchange involving MtGox, their US accounts were seized for not properly registering their accounts as a Money Services Business (MSB). Additionally other domestic exchanges have closed due to the costs of acquiring a proper licence to operate in the country.   In April the value of bitcoin went from $266 to approximately $50 before rebounding to over $120.  This has made bitcoin incredibly exciting to trade but also difficult to keep as an investment.

Are digital currencies and bitcoin the future? Will we all be buying bitcoin? What do you think?

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(photo credits to: En.Bitcoin.It/Wiki)

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