5 Questions About Bitcoin
I received many questions about Bitcoin from friends and these most frequent questions are emblematic of the questions most people ask.
1. What is bitcoin? How long has it been around? How extensively is it used?
Bitcoin is two things which share a name: 1) a payment system and 2) a currency. You use the Bitcoin payment system to send bitcoins as currency from one account holder to another. The transfer is instant, works anywhere in the world, carries no necessary fee and is private.
- The payment system itself is revolutionary – nothing like it has ever been done. The system is decentralized, so there is no “server farm” to controls payments. Transactions are made “peer to peer” just like any file-sharing. To use the system, you can either download the client software (which runs on your computer and stores money locally) or you can use an “ewallet” which is a website run by a 3rd party which holds the funds for you (it’s simpler, but also introduces a counter-party risk if the third party is not trustworthy).
- The currency units used on this payment system have a market price, based purely on supply and demand. Currently one bitcoin is worth about $1000 USD, and there are many exchanges around the world. The Bitcoin unit can also be divided up to eight decimal places (you can even send a payment as low as 0.00000001 bitcoins). A little over 15 million bitcoins are currently in existence (as of February 2016) and there is a limit of maximum of 21 million in existence. Bitcoins are released on every 10 minutes in blocks of 50 coins and the amount it’s cut in half every four years (so the maximum of Bitcoins created will be no more than 21 million coins).
How extensively is Bitcoin used? Well, around the world there are somewhere between 100,000 and 1,000,000 users, some of whom use it frequently and some who are using it only occasionally. Every day there are several million dollars per day, but it is not possible to know for what purpose.
2. What are the most important advantages of Bitcoin? How isdoes Bitcoin different from other online payment systems such as PayPal?
- Zero fee to transfer money
- Transfers are instant. No holiday or weekend delays.
- Works globally, no territory restrictions
- Enables the transfer and storage of wealth with no counter-party risk (you don’t have to trust anyone)
- Excellent hedging against inflation
- Any amount can be transacted (useful for micropayments under a penny)
- Zero chargeback risk (meaning that once a merchant receives Bitcoins, there will be no risk of a fraud or payment reversal. The funds are immediately “good”)
- Ability to move around capital controls (for example, to get money out of China or Argentina)
- Anyone can accept and use Bitcoin.
- 1Open-source, continually upgradable. Anyone can adapt and improve the software and build with it.
How is Bitcoin different from PayPal? It’s important to know that PayPal is a payment method using the traditional banking infrastructure, while Bitcoin it’s a payment method with its own currency: bitcoins, and is entirely separate from the traditional banking infrastructure.
3. What are the major liabilities of bitcoin? Is it associated with any major security problems?
- Steep learning curve
- Requires personal responsibility (if you’ll delete your wallet by mistake without making backups, thenyour money is gone).
- Value is relatively volatile and fluctuates (there is no guarantee the tomorrow’s price will be the same as todays).
Regarding security problems – this is an important point. All of the security breaches to date and so called “bitcoin hacks” have not been against Bitcoin as a payment method, but rather against the different individuals and companies who did not secure wallets properly. Think a traditional bank leaving its vault and doors unlocked at night… a theft will occur. This doesn’t mean the US dollar was hacked, or that banking as an institution is necessarily at fault, it just means that one bank made a mistake. The same is true with Bitcoin.
Frankly, it is very easy to lose your bitcoins if you are foolish, and it is very easy to never lose them if you are smart. This payment system requires some due diligence and personal responsibility. Because there is no Bank behind Bitcoin you can call tech support (it’s the same with bars of gold or cash – if you lose them, they are gone, and nobody can get them back for you).
4. Is bitcoin used to facilitate illegal transactions? Is it, as it has been characterized, a currency of crime?
Bitcoin, like any money, can be used for illegal transactions. Because of its private, secure nature, it is impossible to know the extent to which it is used for such purposes (just like we don’t know how much cash is used for illicit activity, but we all know that it happens).
We know that media characterized Bitcoin as a so called “currency of crime”, because A) crime makes a good news story and B) they don’t understand it. Bitcoin itself is high-tech and so it carries some danger and risk. People can use it for both for good or evil – Bitcoin is morally agnostic, it’s just a tool. Now, to be honest, it’s an useful tool so criminals would like to use it, just as many good people like to use it too.
But we can be sure that in the next years the US dollar cash will continue to remain the preferred currency in crime industry.
5. Can you predict what the future may hold for digital currencies generally and bitcoin specifically?
First we must understand that the so called “digital currencies” are not in fact real digital currencies. Credits into your Paypal account for example are really just USD-backed; it’s not an unique currency. Other so called “digital currencies” like Facebook Credits, can be created without limit and out of nothing, so it’s not serious money (some say the USD is similar to Facebook Credits and not like Bitcoin, because both Facebook Credits and USD can be created out of thin air).
So Bitcoin is the first, what should be called “true” digital currency. It is a scarce, digital commodity with properties that make it perfect for use as money, and so it is used for this purpose.
As the world starts to realize the benefits of a real digital currency, it will become more and more popular. It will become as ubiquitous as email. Really, there is no reason it should cost $45 to send a “wire transfer” of money between two people. The bank is just changing digital numbers in a digital database – why does it cost $45 and take 3 days? It’s absurd, and Bitcoin finally offers a real alternative.
Bitcoin is an invention which people will look back upon and say, “wow, that was obviously needed,” just as we look back on the internet today. And, like the internet, Bitcoin will change the way people interact and do business around the world. But, it’s a process that takes years, and it’s only just getting started.