Bitcoins - the New Global Currency
Credit: JavrsmithBitcoin made the news in April 2013 due to the fact that they were extremely volatile. But what are Bitcoins? How do you get them? Why would you want to? Obviously more information is required in order for these to become more familiar to normal people.
What are Bitcoins?
Bitcoins are an electronic currency that was created to facilitate international trade without reliance on any central governing body. They were set up as a peer-to-peer system which is designed to be self regulating and self governing. The currency is known by the acronym "BTC".
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What Can You Do With Bitcoins?
Bitcoins are like cash. They can be traded, or spent, like cash. You can have a balance of them. You can price your goods or services in them. You can buy goods or services using them. While they are actually a form of money, they are entirely electronic. Conversely, regular currency, like the United States dollar, exists as physical units, (bills and coins), and as electronic totals.
How Do You Earn Bitcoins?
You can earn Bitcoins through various avenues, much like you would earn ordinary currency. You can perform a service and receive BTC. Even viewing a web page can earn bitcoins for free. You can sell goods for BTC. Since it is entirely electronic, you must send or receive a message that specifies the exact value of the transaction and your unique address, (which can be set up for single or multiple use).
If They are Electronic, Where Do You Keep Them?
You download a wallet from Bitcoin.com. This is actually a client program that is installed on your particular computer. If you have a Windows computer, for example, you download the Windows version of the wallet. Similarly, download the Android or iPhone wallet if you use those systems. If you use more than one, you can download a client to each and have them all reference the same wallet. Treat this as a real wallet. Don't let it get destroyed or stolen. Luckily, you can backup your wallet at any time and even print it out. You can then protect your backup or your printed wallet in a safe or other secure mechanism.
A Real Bitcoin Experience
What is Bitcoin Mining?
Because Bitcoins are electronic, they must have security built in. The security is generated through complex calculations which are performed by computers. Anyone can install a software application on their computer which will start mining on their behalf. This is similar to mining for any commodity, such as gold. In this case, however, the mining activity is entirely electronic. Your computer starts to perform calculations which can result in Bitcoin payments to you. You can either set up a new computer for mining or install the software on your existing computer. The process isn't free to use because your computer uses electricity while performing calculations. If your computers is running anyway, you can mine and it will not cost any extra money.
Can My Computer Mine Bitcoins?
It depends. If you have an older computer, you are likely out of luck. If your machine is new, you may be able to. Mining is very specialized activity. The best miners are actually very high end graphics cards that are installed in desktop computers. These devices are able to execute millions of calculations which is perfect for Bitcoin mining. They are rather expensive and they use additional electricity. They return far more coins so there is a cost/benefit to using them.
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What Are Bitcoins Worth?
The trading site, mtGox, currently lists BTC at just over $90, (April 2013). In 2011, the exchange value was 1 BTC for 7 US cents. The rise has not been steady, however. BTC exchange rates are very volatile. In March, 2013, BTC reached a high of $220 on April 9, 2013. At that time, a newspaper article suggested that a bubble was forming in the exchange value. They were right.
The Bitcoin Bubble
After April 9, 2013, the value of BTC plunged from $220 to $65 a week later. They then increased to $90 a few days later. That indicates extreme volatility. Interestingly, before the peak value was reached, rarely did more that 100,000 BTC trade in a day. During the Bitcoin crash, trading volume topped B500,000 in a day. People were obviously cashing in their expensive BTC while the price was plunging. For many, it likely made great sense.
Some people may have had BTC from 2011 that cost them the equivalent of 7 US cents each. $70 would have bought 1000 BTC back then. If these were held for 2 years, they would have been worth up to $220,000, an amazing gain. Less than two weeks later, the same $70 of BTC was only worth $90,000. This is still a staggering profit. Doubtless, many people had more than 1000 of the cheap coins from 2011.
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The Future Problems
The orginal specification for Bitcoins establishes a maximum number of units that can ever be created, 21 million. In 2013, mining blocks allow 25 to be created at a time. This value will fall to 12.5 in 2017. It will continue to be halved at various points in the future. In this way, the total number created will not exceed 21 million. As more people hear about Bitcoins, and more trade is started using the "currency", they availability of it will be restricted. This is an absolute guarantor of future rarity. If continued use of BTC occurs, one of two things may happen: either the value of BTC will skyrocket, or the system will collapse. Of course, other options might be that the total number of BTC will be increased or some other electronic "currency" will supplant BTC.
Get Your BTC Now
Since the exchange value of Bitcoins to dollars has risen significantly over time, everyone should find ways to earn them. As a long term plan, earning a few to hold seems like a good idea. Due to the volatility, however, few people should invest significantly in BTC. Instead, opt to hold a small portion of a portfolio in the electronic units. If you have an option to earn BTC for some activities, do so and hold some, (perhaps 10%), for long term gain. Watch the exchange rate, however. If the value runs up significantly again, be prepared to liquidate your small holding. If history repeats, you will be able to buy them back at a substantial savings. This will translate into a realized gain for your efforts. Good luck!