Bitcoin is a digital virtual currency that is designed to give online users the capacity to process transactions without restrictions from outside third parties like governments and banks. It is also referred to as a type of electronic currency or crypto-currency that is autonomous from conventional banking. The technology was designed in 2009 by an undisclosed individual hiding under an identity named Satoshi Nakamoto. To this day, the programmer of Bitcoin has never been known. However, since 2009, Bitcoin has garnered enormous attention and also controversy as a substitute to Euros, US dollar and other commodity currencies such as gold and silver. A network of computers connected to a private program is used to carryout transactions and also process the payments in term of Bitcoin. The introduction of this currency was to help solve complex mathematical algorithms, so that the details of each transaction can be verified and recorded.
How Does Bitcoin Work?
As a user, you need to create a Bitcoin wallet in order to access your Bitcoins and be able to send them to other people. Unlike traditional currency, Bitcoin is not under central control. It works in such a way that each and every transaction has to get collective approval from a users’ network. The price depends on the users’ confidence level and the more companies accept it as a payment method, the more successful Bitcoin will be.
Bitcoin is not found in coins or notes and is not held in vault. Please note that, its supply is capped at 21 million. With every 10 minutes, about 25 Bitcoins are mined and so after a period of 4 years the amount released will continue increasing.
How to Setup a Bitcoin account
As a user you get a Bitcoin wallet from a Bitcoin broker. You are then supplied with a Bitcoin address composed of letters and numbers. You also acquire a private key which serves as a password.
Characteristics of Bitcoin
Bitcoin has purchasing power and uses online trading instruments to carry out investment applications. These characteristics are similar to the ones of traditional currencies but the difference is in the fact that Bitcoin can only work online or in the digital world.
One of its unique characteristics is that it is decentralized. This means that users can take total ownership of their digital currencies since they are not run under any financial institution or governing body so it is not under any control.
Any transaction made using Bitcoin feature Bitcoin addresses which are not linked to any personal information such as names. With conventional payment systems, personal information is asked for. This may put conventional payment users in jeopardy because of schemes and frauds surrounding these systems.
Transactions are kept in a publicly accessible ledger referred to as blockchain. Other users can see the address but not any personal information.
Bitcoin accounts are easy to create since only little information is asked for during the process. Bitcoin transaction fees are lower and the processing speed is higher compared to the one for traditional payment systems.
Uses of Bitcoin
This virtual currency has three popular uses. It can be used to buy goods and services, send money anonymously or it can also be used as an investment. It is used as an application feature for several investment vehicles. These vehicles include binary options platforms, trading Bitcoin and forex among others. Moreover, some brands provide Bitcoin currency revolving services.
Advantages of Bitcoin
Bitcoin presents many benefits and advantages when reflected on the applications of fiat currencies within the existing financial ecosystems.
There are significant merits that accompany the adoption of this cryptocurrency.
- Guaranteed Safety
All crypto wallet transactions are signed by authentic signatures before being transferred to the blockchain. The competition of such a process operates within safe limits that rule the storage and exchange of the virtual currencies.
With Bitcoin, there is a lack of, for example, credit card numbers that may end up in the hands of malicious actors—who may attempt to impersonate identities in their favor. In fact, Bitcoin payments are usually made anonymously even though users ought to be critical in protecting their privacy.
Otherwise, the guarantee of “control over your money” that Bitcoin guarantees is unmatched. Bitcoin transactions are highly secured.
- International Transactions Made Easy
In a majority of corporate environments, small and medium scale enterprises suffer high costs in executing online payments. This aspect is specific to high international transaction fees that affect the economic advantage of selling goods and services across markets.
Being global, Bitcoin provides a cheaper, safer and faster alternative to small businesses that are out to expand their borders. Sending Bitcoin across continental destinations has become as simple as making financial transactions across the street. There are no banking institutions along the value chain that contribute to unnecessary long waiting periods and no extra charges that would affect your company’s eventual profit.
Also, importantly, there is a lack of limitation concerning the minimum and maximum amounts to be sent using Bitcoin.
- User Friendliness
As far as user friendliness goes, transacting in Bitcoin is relatively easy when compared to other forms of money. All it takes is a simple memory card and you are good to go. Such a memory card can be used in moving Bitcoin from one place to another—just as you would transport audio and video files via memory stick.
Notably, as a user, you may apply the same currency in different locations across the world without the requirement of currency conversions. This is an important benefit that cannot be provided by conventional fiat systems.
- A Payment System That Saves Time
In the context of fiat currencies, credit card monies may stay locked up for long periods of time in the context of customer requests for chargeback. This, therefore, presents an unprecedented inconvenience to payment transactions for no justifiable reason.
For Bitcoin, transactions take place quickly and without the common mishaps witnessed in conventional credit card dealings.
In the context of mobile phone payments, Bitcoin payments can be made with two easy-to-follow steps. A user simply makes a scan before paying up for goods or services. There would be no need for the person to sign up, swipe cards, enter passwords or provide signatures. All a merchant needs to do is use a QR code embedded in their Bitcoin wallet app to receive payments from users that would scan the code using their smartphones. This process is simple and saves a great deal of time.
- Zero Risks for Inflation
Bitcoin is not affected by inflation—which happens to be commonplace among conventional fiat currencies.
Ideally, inflation is a phenomenon that occurs whenever a government issues excess money over a fiscal year, thus decreasing the purchasing power of a country’s populace in general.
With Bitcoin, the virtual currency is finite in nature, whose number, as per 2018 statistics, stood at only 21 million. This factor reflects on the aspect of Bitcoin’s insulation against the “threat of inflation” which is of great benefit to both buyers and sellers.
- Favorable Transaction Fees
The fees attracted by Bitcoin transactions are relatively lower in value compared to their fiat counterparts—both credit and debit card purchases tend to be pricey.
This Bitcoin feature, in itself, is enough justification for market players to employ Bitcoin as their preferred medium of exchange for vended goods and services.
Actually, receiving Bitcoin is a free-of-charge process. Otherwise, most wallets have very minimal default charges whilst greater margins may be considered in the encouragement of faster transactional confirmations.
The amount of fees charges per transaction is independent of the amount of Bitcoin transferred—a user may send 20 Bitcoins for the same fee it costs to send only 2 Bitcoins.
- No taxation
When an individual make purchases with any government currency such as US dollars or Euros, he or she has to pay an additional amount of money to the government as tax. Each purchasable product has its own designated tax rate. But when you make purchases through Bitcoin, taxes are not included. This is one legal form of tax evasion and a major benefit of using crypto-currency. With no taxation, Bitcoin is convenient especially when purchasing items that are exclusive to overseas. Such items are heavily taxed by the government.
- Flexible online payments
Since Bitcoin is an online payment system just like any other online system; the users have the benefit of paying for their coins from any part of the world that has internet connection. So a person can be lying on his or her bed and purchasing coins instead of going to the bank or to a store to get the job done. Again, when using this means of payment, you are not required to fill your personal details to make a transaction. This means that the transactions are a lot simpler than any transaction carried out through credit cards or bank accounts.
- No outside interventions
One major benefit of Bitcoin is that it removes third party disruptions. This means that government and financial institutions such as banks have no powers to interfere with any Bitcoin transaction or freeze an account. Hence, as a user, you enjoy the freedom when making purchases with Bitcoin than when making purchases with national currencies.
- Concealed user identity
All Bitcoin transactions are concealed. This means it gives you the option of user anonymity. The transactions can never be tracked to you and no any purchase is connected with your personal identity.
Disadvantages of Bitcoin
Bitcoin is not short of disadvantages. The fact that this cryptocurrency is still fairly new to international financial systems means that it still has a long way to go. The perfection of Bitcoin’s system can only be guaranteed by its maturity but, for now we have to remember that it has been around for only a decade.
At this point, this cryptocurrency suffers few spending options. There are not many traders that are willing to incorporate Bitcoin in their payment systems. Still, you may find a number of online stores that provide the Bitcoin payment option even though, as we are about to see, Bitcoin’s demerits have impeded its full incorporation into the everyday spending of modern consumers and merchants.
- Limited Acceptance
As mentioned above, Bitcoin’s media attention has not been advantageous to the cryptocurrency’s acceptance by the public. Many people are still ignorant of the application of crypto coins and in their existence altogether.
A small number of businesses have welcomed the Bitcoin movement into their system while many people stand to be uneducated about it.
Truth is, for Bitcoin to spread sufficiently, the corporate world needs to ramp up educational efforts. Although some ecommerce sites accept Bitcoin as payment, the corporate scene still has a long way to go as far as staff sensitization, about Bitcoin, is concerned.
- Potential for Catastrophic Losses
Despite the guaranteed safety that Bitcoin provides, you may lose all your Bitcoin if your storage device crashes. Additionally, any other form of data loss may result in significant Bitcoin losses that would not follow a recovery.
This is a reality because Bitcoin happens to be just but another software program—with its risks. Nonetheless, it is no secret that Bitcoin’s coding is a job well done since users continue to derive financial benefits from it. This is not to rule out the possibility of a future flaw that cyber criminals would exploit to their advantage.
- Lack of Payment Protection Frameworks
Another key disadvantage lies within Bitcoin’s decentralized currency system. With fiat currencies, central banks provide critical protections that are embedded in banking processes—which engage tasks on the customers’ behalf.
Transacting with Bitcoin does not provide the surety of protection in instances where a user faces rogue merchants. This would be a classic event when traders accept Bitcoin without meeting their end of the bargain. However, sometimes, such an issue may be resolved by the application of a third party escrow services which, technically speaking, would rip your Bitcoin of their uniqueness against traditional currencies.
In the context of conventional currencies, refunds are used as corrective mechanisms to rule out possible conflict between merchants and their customers. In the case of Bitcoin, transactions are irreversible.
Additionally, in another instance, a user’s loss of their Bitcoin wallet or the accidental deletion of unique Bitcoin codes will result in significant economic loss.
- High Volatility
Bitcoin prices are highly volatile, thanks to a host of determinants ranging from market supply and demand to government regulations and other external elements. The factors affecting price volatility cannot be separated from the risks associated with adoption of Bitcoin.
Importantly, the lack of a central governing entity managing Bitcoin’s value reflects on the highly unpredictable event of the coin’s price fluctuations overtime. Such events are usually controlled by the owners of Bitcoin who may make steep decisions regarding the availability of the cryptocurrency in the market. It is for this reason that some commentators have come out to describe Bitcoin as a pump-and-dump scheme, the biggest scam in history.
- Popularity Among Criminals
The inception of Bitcoin turned out to be an important catalyst in the running of dark web marketplaces. The relative promise of anonymity by Bitcoin has turned out to be a desirable feature among underground drugs and weapon markets. At this point, it is no secret that Bitcoin is being used as an agent of money laundering, cybercrime and the trade of narcotics.
Unfortunately, there is not an easy way to regulate Bitcoin’s involvement in illegal darknet activity.
- High Mining Costs
The function of verifying Bitcoin transactions is a complex and costly task.
Bitcoin mining entails the operation and maintenance of many high-powered computer hardware that would organize lines of code familiar with the blockchain technology. These machines consume a great deal of power although Bitcoin miners find this to be an economic risk worth taking.
Nonetheless, there has been an increasing number of Bitcoin miners venturing into the industry. The existence of a large number of miners has translated into the flooding of subjects into global mining groups that work together in gathering pools of Bitcoin. This means that new entrants are unable to derive as much economic benefit as their former counterparts.