Bitcoin is a digital currency invented by Satoshi Nakamoto in 2008. It is one of a handful of a new class of currency called cryptocurrencies. Decentralization is one of Bitcoin’s notable traits. No government or single entity has influence on it, dictates its use or regulates it; people who have Bitcoins own them exclusively. Internet users can earn Bitcoin by mining it. They do this by allowing Bitcoin peer-to-peer access on their computer. The peer-to-peer network then accesses the users’ processing power to confirm Bitcoin transactions. The Bitcoin network credits its members according to how many transactions their hardware has confirmed. Some early mining operators became millionaires. In order to create value, the Bitcoin currency requires more processing power to complete transactions as time goes on. Now, Bitcoin is so expensive to mine that only commercial operators can afford the equipment and expenses to mine the currency profitably.
Where Did Bitcoin Come From?
There is great mystery surrounding the creator of Bitcoin. The inventor of the digital currency never came forward after launching the product. After Bitcoin’s release, its inventor took a large amount of Bitcoins and transferred ownership and responsibility of the Bitcoin company to another party. Some doubt Nakamoto’s identity, because the paper that he published introducing the concept of Bitcoin contained perfect English. Other people theorize one person could not have written a currency application of this complexity, and that Satoshi Nakamoto is actually a moniker that represents a group.
Why Was It Invented?
In the paper published by Nakamoto, he expressed his concerns that internet commerce is completely reliant on third-party banking processors. In his opinion, the problem with this was that the entire system hinges on trust. A major weakness in this trust-based system is that all transactions are reversible. When a dispute arises, a bank steps in to resolve the problem. This is where the weakness in the system lies. The lack of real-time accounting and verification creates a window where the traditional money transfer system is vulnerable. Nakamoto also felt that his invention would help consumers save money on the fees that banks charge consumers, and protect business owners from losses due to fraud.
Other reasons that Nakamoto cited for creating Bitcoin was that small casual transactions are not possible because the cost will match or outweigh the payment. Additionally, he felt that merchants lose significant revenue because they must use labor to extract excessive amounts of information to protect their business’s interests, and because they sometimes fall victim to fraud despite their best efforts. By creating Bitcoin, Nakamoto sought to eradicate these problems. He decided that an un-exploitable digital currency system, that validated transactions in real-time and made all sales final, was the solution to these dilemmas.
What is the Status of Bitcoin Today?
Currently Bitcoin is still in a stage of infancy. Consumers are adopting its use in increasing percentages, but their numbers and percentage of growth is so small that Bitcoin enabled retailers are decreasing in number. The United States is the most active Bitcoin market in the world. Although Bitcoin’s value has shrunk considerably, technology insiders insist that Bitcoin’s value against the dollar does not matter at this stage. They liken this phase of Bitcoin’s growth to the early internet when it was a technological marvel, but it was still waiting for inventors to create utilities to make the platform more practical on a mass scale.
What Are the Pitfalls of Bitcoin?
The number one drawback to Bitcoin is that the public is generally unaware of the digital currency. Next, consumers who use Bitcoin have no one to call if a merchant does not render a product or service as promised. Once a transaction is complete, a shopper can only receive a refund if the merchant decides to send it to them. If someone finds a way to steal a consumer’s Bitcoins, there is no way to track and retrieve the funds from the thief. Another Bitcoin risk is volatility. Bitcoin value can fluctuate by hundreds of dollars in a matter of months. When a business does offer refunds, Bitcoin’s volatility exposes the business owner to monetary losses if they do not factor price fluctuations into the refund amount. If a user loses their wallet, which they store on their smartphone or computer, it’s just like losing a wallet full of cash. A virus or hardware theft can make all of a Bitcoin user’s digital currency disappear instantly.
What’s so Great about Bitcoin?
Bitcoins are the digital equivalent of cash. Users do not have to give any personal information to complete transactions with the currency, and they can send money anywhere in the world in real-time. The information used to complete a transaction is also anonymous. If a transaction does involve a fee it is minimal. Because of Bitcoin’s decentralized design, international exchange fees do not apply. For business owners, the first million dollars in transactions are free. After that, Bitcoin charges merchants one percent of each transaction. This is a significant savings compared to standard merchant processing fees that fall in the one to three percent range. Many merchant exchanges automatically convert Bitcoins to dollars once the transaction is complete to skirt the volatility issue. Also, merchants never have to worry about chargebacks. Once a transaction clears, it is irreversible. Merchants are free to deal with refund issues according to their own policies. Finally, merchants who accept Bitcoin do not incur the cost and time expenditure of protecting credit information or renting or buying expensive card readers. Small businesses can even use a smartphone or tablet to process payments.