The idea of cryptocurrency, virtual money with no concrete basis of value, may seem strange to some. But the most popular cryptocurrency, Bitcoin, is causing quite an economic stir all around the world. With its system of exchange that moves from one user to the other and fluctuating value, people have a lot of questions about Bitcoin as a valid form of currency.
What Is Bitcoin?
Bitcoin, simply put, is virtual currency. It runs on a peer-to-peer network, meaning that there are no regulations or middlemen, just an exchange between people. Bitcoins are available only online, and their value isn't based on a concrete object. Instead, demand and economics determines how much each bitcoin is worth. No person or company controls or changes the software or how Bitcoin works. Instead, everyone using the technology has to comply with the same set of rules to keep the system running.
Where Does the Bitcoin Originate?
According to CNN, in 2009 someone under the alias of Satoshi Nakamoto created the Bitcoin. Nakamoto never revealed his or her true identity, and has since dropped off the radar. Bitcoins come out of a process called mining which involves computers solving complicated math problems. Miners also approve Bitcoin transactions, a process which enhances the system's security. In the early days, a person could mine bitcoins from a home computer, but now you need special hardware and software to do it.
Where Can You Get Bitcoins?
In order to receive bitcoins, you have to set up a virtual wallet. After that, if you aren't going to mine for them, you can accept them as payment for goods or services online, you can purchase them directly from people who have them, or you can enter an exchange which allows you to use the money in your bank account to purchase a bitcoin. As of early 2014, people in Canada and the US can use special Bitcoin ATMs.
How Does it Work As Currency?
Mining bitcoins happens at a fixed rate which will decrease each year until a certain number of bitcoins exists, so acquiring bitcoins through mining is competitive and increasingly difficult the more people who try to do it. Bitcoin isn't regulated or insured, and the virtual wallets that hold them are subject to hacking or accidental deletion. If this happens, a way to retrieve the lost bitcoins doesn't exist. Bitcoin is a very volatile currency. Wolfram Alpha reports that in the past year, the value of a bitcoin has swung between just under $30 to $1237, with an average of about $270. Though one of the draws of bitcoin is its lack of government and big business regulation, it may not be able to develop on a larger scale as a currency without more regulation.
Where Can You Spend Bitcoins?
More and more places accept Bitcoin as a form of payment, opening up options of purchasing anything from clothing to books to games. Even large businesses like T-Mobile may begin to accept bitcoin in the future, as evidenced by a Reddit user's story of e-mailing the T-Mobile CEO and receiving a positive response. Even some univirsites are accepting bitcoin as a form to pay for tuition. Always check over a financial fitness checklist when it comes to investing your money into something important like your education, or your future. More schools are adding their name to the list of universities that are accepting bitcoin in exchange for classes, which is just another factor in the rising state of cryptocurrency.
Are There Any Legal Issues?
Using Bitcoin as currency doesn't yet come attached with any legal issues. But the fact that it isn't yet taxed can get bitcoin users into trouble. If you earn money by trading bitcoins, that money is considered by most governments as taxable income. Since bitcoin isn't regulated, however, you're the one who has to report the earnings. People who fail to report earnings could end up in trouble with the IRS. The illusion that bitcoin comes without taxes is just that, an illusion. Not to mention the ramifications of a currency this unregulated and this anonymous, which the world has already seen in the underground black market dealings of websites like Silk Road.
Regardless of whether or not banks and the government start officially accepting Bitcoin as a currency, it has already changed the world economy and impacted internet commerce. The fluctuating dollar value might make some people uneasy, but as more and more vendors accept payment in Bitcoin, it seems like it's here to stay.