GT Explains: What is Bitcoin And How Should You Be Using It

Khamosh Pathak

Bitcoin

Bitcoin is a digital cryptographic currency used as a software based payment system.

Did that go over your head? That’s because explaining Bitcoin easily in one sentence is impossible (which is also why Twitter will never kill blogs, so yay). But I’ve got a lot more characters than 140 at my disposal so here it goes.

A lot of people on the internet have tried to explain Bitcoin and while the general public has some idea of what it’s, they’re still not sure if/why they should be using it. Across the internet you’ll find superbly animated videos, dumbed-down articles and in-depth analyses about Bitcoin and its purpose in this world. This gentleman even uses apples to explain Bitcoins like we’re 5 years old.

So, What is Bitcoin?

Bitcoin Is A Digital Currency That Holds Real Value

Bitcoin
Bitcoin paper wallet – A physical representation of the digital currency.

Bitcoins have monetary value. You can buy Bitcoins using real american dollars and then trade your Bitcoins back for physical money. The exchange rate of Bitcoin fluctuates fairly quickly. Sometimes gaining/losing a couple hundred dollars in a matter of days (which creates a whole other problem we’ll get to shortly).

Bitcoins Can Be Mined

Bitcoin

Bitcoins are generated based on a algorithm created by Satoshi Nakamoto. So it is literally possible to create Bitcoins (and by extension money) out of thin air but it’s not as easy as it used to be. The way it works is you install a mining software on your PC/server and as it computes, it unearths or hashes Bitcoins. But the algorithm is designed to get tougher to compute every time a Bitcoin is generated, which means you’d need more powerful computers every passing day.

A couple of years ago you could generate a sizeable amount of Bitcoins just by keeping your PC turned on at night, now the generated value of the Bitcoins won’t even be enough to cover the electricity used by your PC. Which is why people are building supercomputers or hiring large servers to do their mining, but even that isn’t as lucrative as it used to be.

So your dream of printing digital money has been squelched.

Digital Comes With Its Own Problems

Bitcoin

Granted, Bitcoin is highly sophisticated and secure. There’s even a public ledger of all the transactions taking place and as you need a unique Bitcoin ID to access your wallet and exchange coins, this does make tracking easy. But that doesn’t mean Bitcoins are totally secure, just as your money in a bank isn’t totally secure. There have been hacks, break-ins and downright fraud cases recently. The biggest by far being the disappearance of Bitcoins worth $350 million from MtGox Bitcoin Exchange.

Digital usually means something that’s easily pirated or copied. The same concern applies to Bitcoins. How do you know if the Bitcoins the person just sent you in exchange of the product you shipped (digital or physical) are real? You can take precautionary measures – only use official wallets and known services for transactions but something can always go wrong. But hey, that’s the cost of doing business.

Open, Easy, Anonymous

Bitcoin

The reason Bitcoin is so popular is because it makes transactions easier where they aren’t. If you want to make a transaction between borders you usually have to use Paypal, and we all know just how bad the service is (not to mention the high 7% transaction fee). For countries with strict rules like India, you can’t even send/receive more than a limited amount and even then the transaction must qualify for pre-approved use cases.

Now, if you want to do the same thing with Bitcoins it takes three steps. Buy Bitcons and add them to your secure wallet. Send them over to the other party and then receive your confirmation/product. That’s how easy this is. And it works no matter which country you’re from.

But as cryptocurrencies are new, some governments have banned/restricted their use till they come up with a fair and taxable policy. So don’t forget to check your local policy before dealing in coins.

What Should You Use It For?

Investment?

Haha. No. Bitcoin’s valuation fluctuates way too quickly for it to be a viable investment opportunity. The risk involved is too high and unfortunately it’s the kind of risk you don’t have any control over. Tomorrow Bitcoin can either trade at $100 a coin or $2000 a coin.

Transactions?

Now you’re getting it. To make this fair, what you do is buy Bitcoins just before making the payment. Which means that to you, the money paid was the same. And the other party will usually do the same, converting the Bitcoins to dollars as soon as they get them.

Bitcoin
Bitcoin’s use in troubled and rural areas in Africa is growing thanks to the ease of use and anonymity.

These transactions take place online all the time and they are done in under a minute. From you converting dollars to Bitcoins to the receiving party converting them back to dollars. And this, is by far the best use of Bitcoin right now.

I’m sure this article gave you an overview of Bitcoin and how you can use it. But to learn more about Bitcoin check out the linked articles in the second paragraph.

Cool Tip: You can acquire a high-quality dedicated Bitcoin mining rig for a few thousand dollars from places like Butterfly Labs. Don’t get into Bitcoins unless you know what you’re doing though.

Images via: Zach CopleyJonathan WallerFrancis StorrZach CopleyJonathan WallerHannu Makarainen.

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