Bitcoin: The Currency of the Future?

Over the course of the last decade, all of our normal activities have slowly been digitalized into online equivalents. Business has been no different. Online business has grown exponentially to the point where there is more choice online than there is in a traditional brick and mortar store. In 2009, the internet got its first online currency. Since then, a number of other online currencies have appeared, but Bitcoin is still the industry leader.

What is Online Currency?

Bitcoin is an online cryptocurrency that operates using blockchain technology. Don’t worry, it’s not as complicated as it first sounds. Basically, a cryptocurrency is an online currency that is based on military grade encryption, making it very secure. Block chain technology is a special type of software that keeps track of all the transfers. The reason that block chain technology is so important is that if I send you a Bitcoin, it has to be impossible that I also saved a copy on my computer, or sent a copy somewhere else. For online currency to work, it needs to behave like a physical object instead of being freely copied and redistributed.

Block chain does this by having a ledger keeping track of all the bitcoin transfers that have ever happened. It stores a copy of the ledger on every computer on the system. This makes it virtually unhackable because the hacker would need to get into every single computer in order for the change to work.

Who accepts Bitcoin?

Bitcoin has undergone rapid growth and is now accepted by most online businesses, as well as a few in store locations. Bitcoin price is determined on the open market. Right now it’s trading around $990 per Bitcoin. However, Bitcoins are divisible up to the 8th decimal place, so you don’t have to buy them in whole number denominations. Bitcoins can also be acquired through a process called mining. For most of us, this is not a realistic option. To learn more about mining look here.

Pros

The nice thing about online currencies is that they are completely free of third party regulation. There are no banks, creditors, or governments that can regulate or place fees on your Bitcoin. Bitcoin wallets charge very small fees, and there is no taxation on sending funds internationally. Transfers are immediate and typically take around 10 minutes to clear. You can also make Bitcoin transfers from your wallet to anybody you want, including other individual users.

One of the most common critiques I hear about online currency is that there’s nothing backing it. The problem with that argument is that there is nothing backing your government currency either. Most modern currencies are what we call fiat currencies, which means that the only value they have is that we are confident other people will accept it for goods and services. Another positive of Bitcoin is that the founders programmed it so that there will never be more than 21 million Bitcoins in the world, which protects Bitcoin users from harmful monetary policies that can lead to hyperinflation.

 Cons

That’s not to say that Bitcoin is not without its negatives. As of right now, online currencies are not legal tender. That means that if something goes wrong, there isn’t a legal safeguard. Also, like anything online, there have been concerns over the security of the various Bitcoin wallet applications. Online currencies are not recognized by legal tender, so they qualify for capital gains tax. This means that if you turn a profit from the appreciation of your Bitcoins, you have to pay a capital gains tax like any other type of financial asset.

Because Bitcoin’s value is determined on the free market. Since the market is still relatively small, it has a tendency to be very volatile. This is typical of smaller free markets. Should Bitcoin continue to grow it will likely become more stable in the long run.

Also, it can be inconvenient to use all the time, as most physical businesses don’t accept Bitcoin. There are apps to find which businesses accept Bitcoin, which can help. Since the currency is also very new, so there could be unforeseen issues that have yet to surface.

Conclusion

Bitcoin is a new and convenient way to interact with online businesses. It offer a lot of convenience with not having to deal with the government or third party banks (particularly internationally). This convenience is paid for by its lack of stability and higher risk than traditional currencies. While I do think that the price will increase, I personally wouldn’t invest in them. You will have to decide for yourself how much risk you are comfortable with.

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