Bitcoin

What is Bitcoin?

Bitcoin is a form of digital currency – a new form of money, essentially – that is tradable throughout the world. It is not an official currency, however, which means that it operates without the involvement of banks or clearinghouses.

Bitcoins can be transferred between individuals or between businesses to pay for goods and services, all without the use of a bank, so the fees for that exchange are lower. Bitcoins do have value and, as such, are subject to taxation just as with cash in your local currency.

How does Bitcoin work?

Bitcoin was built with a distributed digital record in mind called a blockchain. Blockchain is a type of public ledger -- a digital system for recording transactions and related data in multiple places at one time. Blocks in a blockchain are units that contain data about every transaction, including the date, time, value, buyer and seller, and an identifying code for each exchange.

Blockchain is designed to make it extremely difficult to hack the system or forge the data stored on it, thereby making it secure and immutable. Each computer in a blockchain network has a copy of the ledger to prevent single points of failure. If one block is changed, then all the other blocks in the distributed ledger must be changed. Blockchain is a decentralized technology, meaning it is not controlled by any one organization. In addition, identifying codes makes it difficult to fraudulently produce blocks.

Bitcoin is stored in a digital wallet application on a computer or smartphone. Cryptocurrency wallets are among one the best ways to keep bitcoin secure. There are also multiple types of wallets. Software wallets enable users to keep only a small amount of bitcoin on a computer or mobile phone for everyday use, with the balance kept in a separate offline wallet. This safeguards the majority of a user's bitcoin from malware trying to intercept the password used to access a wallet.

Offline wallets are wallet software that is installed on a USB rather than on the internet, so they can be kept physically secure. Hardware wallets, another form of offline wallet, are physical devices such as flash drives that store a user's private keys. Even when connected to another device, the private keys are never exposed, and signed transactions are completed on the device. Multisignature wallets require two or more private keys to authorize transactions. This greatly decreases the chances of a wallet being accessed if lost or stolen. One key is stored in a secure location as a backup, another is stored on the user's mobile device and a third key can be stored with a multi-signature provider.

People can send bitcoin to others via bitcoin wallet-to-wallet transfer. Bitcoin can be sent by initiating a transfer request from a bitcoin address in the customer's wallet to a bitcoin address, or alphanumeric string, in the vendor's wallet. Senders can select the amount to transfer either as bitcoin or in their local currency.

Advantages of Using Bitcoin

Some of the advantages of using Bitcoin over another online payment network, such as PayPal, or even your bank, are:

· It can be used in any country without the need for currency conversion

· Sending money to a business or individual costs less per transaction

· There are no limits to the number of transactions you can initiate each month

· Your account cannot be frozen or suspended

· Transactions are irreversible, unlike PayPal payments

· You can keep Bitcoins in a digital wallet that is accessible from your phone, tablet, or computer.

Several of these advantages exist because there is no central governing authority, as there is with a bank. Of course, that may also be a disadvantage. Bitcoin is still considered “experimental,” even by the organization itself, so be aware that there are also risks involved in accepting Bitcoins in place of cash. Bitcoin began trading in 2009.

Another potential advantage is that the fee to transfer Bitcoins from one person or business to another is unrelated to the amount being transferred. Unlike other payment networks that charge a percentage of the transaction value, Bitcoin charges based on the ability to reverse the transaction – the easier to cancel, the lower the fee.

That is, a Bitcoin transaction takes an average of 10 minutes to be resolved – 90 minutes at the most. During that process, some confirmations occur that the transfer of Bitcoins is occurring. The fewer the number of confirmations requested – you can request zero – the lower the fee to send coins; there is never a fee to receive Bitcoins. But you can also request as many as 36 confirmations to be sure that once the Bitcoins are in your account, they cannot leave without your permission.

This can be especially useful when selling expensive goods. On some payment networks, a buyer can claim to have an issue with an order and almost immediately receive a refund, even without your input. This would not happen with Bitcoins – once the payment is in your account, it is yours to keep.

Where to Get Bitcoins?

There are only a few ways to obtain Bitcoins:

· You can purchase Bitcoins at an online exchange

· You can obtain them from an individual who has them

· You can accept Bitcoins as payment

· You can earn them by supporting the process of verifying transactions in the Bitcoin system, called mining.

You cannot make purchases through other platforms, such as PayPal or Dwolla, using Bitcoins because of the potential for fraud. Only Bitcoin-approved exchanges are authorized to sell them.

What are the risks of Bitcoin?

The risks involved with bitcoin include the following:

Volatility in investments. Bitcoin does not have a long-term track record or history of credibility behind it, Prices rise and fall quickly.

No insurance. Bitcoin exchanges and wallets are not insured by federal or government programs. Unlike bank accounts, if something happens, it is unlikely that individuals will get their bitcoin back.

Suspected ransomware. Because transactions are made digitally and anonymously, bitcoin is the currency of choice when hackers hold an unsuspecting victim's data ransom.

Regulatory restrictions. Bitcoin has also been used for black market transactions, which may invite government regulation to restrict it.