Since their introduction in 2009, Bitcoin has managed to confuse nearly everyone. The virtual currency is in its infancy, and only time will tell if it will be able to scale up to global standards or if it will fizzle out of existence due to unpopularity or government intervention.
So, what the hell is a bitcoin, actually? A bitcoin is a virtual form of currency, or crypto-currency created as an alternative to more traditional forms of currency. The value of a bitcoin is constantly fluctuating between values of $50 and $1100 dollars. Currently, bitcoin’s value is similar to the value of gold, being traded on exchanges for around $900 – $1000 per bitcoin.
Users find Bitcoin appealing because it is not run by a centralized entity and boasts many unique features – some good and some bad. For example, it is a global currency, so users need not worry about exchange rates or transaction fees, and it prevents inflation because only a finite number of bitcoins can ever be “mined” by its total user base. On the other hand, bitcoin raises concerns with some users because of its ability to double-spend coins, its use in money laundering, and — most recently — the Silk Road scandal where bitcoins were allegedly being used to purchase illegal drugs.
Economist and Adjunct Professor at the University of Iowa Dr. David Barker said, “Bitcoin is being used for things we didn’t predict. Some stores accept bitcoins. Some suppliers of illegal goods and legal goods also use bitcoins. The primary demand for bitcoins seems to be for moving money from one place to another. In China and other places, people who are trying to move money out of the country are finding bitcoins useful for that.”
Former owner of Iowa City’s Hemingway Repair, Emery Hemingway, used to trade bitcoins for cash as a side business out of his repair shop.
“There’s a site called localbitcoin.com and it will list people in your city who are selling bitcoins. You give them an offer, and because the way the prices move, you put a percentage of the spot price of the market and then people can make offers and then meet up and trade,” Hemingway said. “It’s a physical trade. I only accept cash, because checks can bounce. Once bitcoins are gone, you can’t get them back.”
There are a few different ways that an interested party might acquire bitcoins. “Mining” is the process of acquiring bitcoins through a program called a bitcoin miner. “Exchanges” are online services where users can look for others who are trading bitcoins. The most straightforward way to buy bitcoins is by trading locally with cold, hard cash.
“I had an advantage having an office that I could trade out of, because people could come in and not feel like they were intruding on me or my home. It worked out well to do it that way,” Hemingway said.
Transferring the bitcoins took about 10 minutes to validate. The buyer could use their mobile device to verify that the transfer had been made. Usually around two people per week bought bitcoins from Hemingway in his business.
In order to store bitcoins, one must also have a bitcoin wallet. This is the most important thing to consider when investing in bitcoins, because once they are transferred it is impossible to reverse the transaction. In addition, if bitcoins are lost because of server shutdown, hard drive crash, or government intervention, those bitcoins are also deleted, lost somewhere in the internet forever.
Hemingway discovered Bitcoin in 2010 when looking for an easier way to transfer money to someone in another country. Growing up, he expressed an interest in economics and currency value and fluctuations. The service allowed him to explore this interest in economics during his adult life.
Hemingway began, quite simply, as a bitcoin miner. In order to mine, a user downloads a bitcoin mining program. The mining program then solves complicated algorithms in order to unlock coins. It’s not that simple, however, as the complexity of the “problems” ensures that coins can only be created at a predictable, limited rate. If a user is mining and another user has a faster computer, the person with the faster computer will get the bitcoins first.
This led to the creation of pools, which are communities of people mining for bitcoins as a group. This allows computers to solve smaller algorithms and allows users to acquire bitcoins at a more consistent rate.
Another way to trade bitcoin is through online exchanges. Hemingway recommends CampBX and Bitfinex, and he uses both. He says using more than one exchange helps him gauge the value of his bitcoins in other markets.
Barker explained that the value of currency, just like the value of any other product or service, is based on supply and demand. The value of a bitcoin is based on how many people want to acquire bitcoins and whether or not businesses will accept them as payment. Because of its potential use in illegal activities, he also speculated that governments could potentially view Bitcoin as a threat to national security which may cause them to step in and shut off services, similar Napster’s shut down in 2001.
While the future of bitcoin remains unclear, one thing remains certain. Currency, or rather, the definition of currency is changing, albeit slowly. And although Bitcoin’s role in this paradigm shift is still unclear, its influence is undeniable.