What is Bitcoin?

Bitcoin is the first decentralized cryptocurrency – a digital or virtual currency that uses cryptography for security – which was created in 2009 by an anonymous person under the alias “Satoshi Nakamoto”. Since it’s inception, Bitcoin has gained quite a lot of traction across the globe. At this very moment, there are several independent markets where bitcoin is being bought and sold in exchange for most centralized forms of currency.

How is it made?

Bitcoins are generated through a process called “mining”, wherein a person or group of people use a designated software to solve complex math problems and verify other bitcoin transactions. The result of this process provides each “miner” with a designated amount of bitcoins.

Since those “mining” for bitcoin are providing a service to the market by approving other bitcoin users’ transactions, it helps to create a self-sustaining ecosystem where bitcoin can not only survive, but thrive.

If you’re thinking about quitting your job, figuring out how to mine, and generating an endless amount of bitcoins on your brand new yacht, you may want to hold off. According to the bitcoin protocol, i.e. the rules that make bitcoin function, only 21 million bitcoins can ever be created by miners.

The process of mining bitcoins is extremely complicated and would take at least an entire article to explain, so if you’re interested in learning more about mining and the blockchain ecosystem, consult this online mining resource.

Where can you use it?

You can currently use bitcoin to buy pretty much anything you can think of over the internet. Electronics, flights, culture, craft beer, and everything in between can all be purchased using the digital currency. Perhaps one of the largest adopters of the cryptocurrency to date is Microsoft, who adopted the use of bitcoin on their website back in 2014.

Bitcoin is also starting to leak out from the internet and bleed into our daily lives, although in very limited quantities. Only a handful of retailers are willing to take the chance with the somewhat experimental currency, so finding exactly what you want in a brick and mortar location can often prove a bit difficult. Regardless, if you want to try your luck, you can check out this useful map of every physical business which accepts bitcoin around the globe (8,880 as of publishing).

The Good

As we will get into shortly, the question of whether or not bitcoin is “good” or “bad” is very subjective. However, there are some surface-level positives of this up-and-coming cryptocurrency which can’t be ignored.

For instance, bitcoin makes international business transactions cheap and easy since it is decentralized and requires no conversion of any kind. Also, there are no fees associated with bitcoin transactions so this option may be attractive to savvy small business owners looking to avoid credit card fees.

Another big plus is the fact that with digital currency, you don’t have payment information which can be somewhat easily lifted from merchant websites. When you enter your credit card information into an online form, you are making yourself vulnerable to hackers looking to steal credit card numbers. It seems like we all have either been a victim of credit card fraud or at least have known someone who has, so it is apparent that this lack of security is an ongoing problem with the digital marketplace.

Bitcoin fixes this issue by eliminating the use of excess secret information. To complete a bitcoin transaction, you simply need two keys; one key is public, the other is private. When you send a bitcoin, you combine both your public and private key and apply a mathematical function to them, creating a certificate which proves the transaction was initiated by you.

Since bitcoin is decentralized, it has the advantage of not only being completely anonymous but also being immune to any kind of inflation. By creating a ceiling on the number of bitcoins which can exist at one time (21 million), there can never be too many bitcoins in the market. In fact, deflation in bitcoin market is far more likely than inflation.

The Bad

When you flip to the other side of the bitcoin, you find the instability and vulnerability of this still budding technology. This seemingly stems from the tendency of people who are given a certain amount of freedom (especially anonymous people on the internet), it’s inevitable that certain people are going to take advantage and potentially ruin it for everyone else.

First of all, the downside of anonymous, decentralized, global transactions is that they’ll inevitably be used to fund criminal activities. Money laundering, tax evasion, gambling and any number of other criminal pursuits can successfully operate within the bitcoin market. Although there have been steps to combat the stream of illegal activities taking place using bitcoin, such as the takedown of the Silk Road last year, criminals are constantly coming up with new types of tech to stay out of the line of fire. For instance, bitcoin “tumblers” or “mixers” are programs which randomize IP numbers of people making bitcoin transactions, making them impossible to trace. Such programs are illegal to use but are of course still being used to transfer dirty money.

Another major kink to work out of the decentralized currency model is the security issues it has. Although personal security is better because you don’t have to input your banking information, the security of the network is always at risk of attack. For instance, back in 2013 $1.2M in bitcoin was stolen from inputs.io, a company that stored hundreds of people’s bitcoin wallets across the globe. In 2014, bitcoin exchange service Mt. Gox lost $468M worth of bitcoin in a series of Distributed Denial of Service (DDoS) attacks. Even as recently as August 2016, roughly $65M worth of bitcoins were stolen off of Bitfinex, another popular bitcoin exchange site.

This, of course, leads to yet another glaring risk that bitcoin users face every time they mine or invest: bitcoin is not insured by FDIC. Without any governing body manufacturing and distributing the currency, there’s no way to reproduce the money you lost in the seemingly frequent event of a breach. Certain bitcoin exchanges, like Coinbase, have managed to insure their transactions so there is hope for the future, but without an entity like FDIC backing the currency, there’s no guarantee every bitcoin could be returned if there was a large enough breach.

It’s for all of these reasons why the SEC shot down the proposal, put forth by the social-network-famous Winklevoss twins, for bitcoin to be publicly listed as an exchange traded good, which would have essentially let people buy and sell digital currency the in the same space as traditionally traded stock.

Bitcoin has grown more than anyone would have predicted when it made its way into the public eye eight years ago, but its future remains uncertain. Opinions of the controversial currency vary widely from certain doom to imminent success, but despite your point of view, one thing is indisputable: as of publishing, a single bitcoin is worth $1,037.53, a figure that’s grown in 8 years from its initial price of $0.0054.

Is Bitcoin overvalued? Will it survive the next 5 years or be replaced by a competitor? Let us know on Twitter! (US) (UK)