What is Bitcoin and Why Should I Care?

Over the last couple of weeks you may have heard that Bitcoin is being accepted at Overstock.com and, just today, it was announced that Tiger Direct will also be accepting it. Richard Branson’s Virgin Atlantic, some Las Vegas casinos, and the Sacramento Kings basketball team all have agreed to start accepting Bitcoin.  In the beginning of 2013 the Bitcoin price was under $20 and hit an all-time high of $1,100 before going back down and stabilizing at the $800 range.  So what is Bitcoin?

Bitcoin is a “crypto-currency” meaning that it is 100% digital; despite seeing little shiny coins with the Bitcoin currency symbol on the face—those are just to identify it in pictures. The currency is digitally encrypted with the strongest public encryption and is traded back and forth between users using encrypted “wallets”. The fact that the currency is digital versus printed concerns many people, but people must look at how digital their US Dollar has become over the last 10 years. Many people infrequently use printed money anymore. The encrypted “wallets” provide anonymity for those who wish to use it and an easy means to transfer funds to a wallet. A young man was pictured on ESPN holding up a sign that said all he wants for Christmas was Bitcoin and had a picture of his digital wallet scan (a QR [Quick Response] code for your Smartphone). Several forums gave him micro amounts of Bitcoin to his wallet using a blown picture of his wallet’s QR code and he made $23K in one weekend. Conversely, a drug circle called the Silk Road used Bitcoin to conduct transactions and has put Bitcoin on the radar of the Federal Government. That being said, popular online games known as Massive Multiplayer Online Role Playing Games (a.k.a. MMOs), have also been used for illegal operations because the online currency used in the game can be converted to real currency.

There are two main characteristics between Bitcoin and any other country-produced currency and they are 1) acceptability and 2) regulation. All currencies must be accepted by both the seller and the vendor. US Dollars are known throughout the world and almost all vendors and seller accept the US Dollar.  The Bitcoin must gain acceptance for it to be a legitimate currency. With the rise in popularity of Bitcoin, others such as LiteCoin and PeerCoin have started too. They are competing for the most regarded acceptance thus complicating the legitimacy for Bitcoin. The other characteristic of a currency is in its regulation. Countries use Central Banks, such as America’s Federal Reserve, to regulate its currency. Bitcoin is not regulated by any central authority. Its price changes on popularity, scarcity and other free-market principles.

This unique characteristic of not being regulated by a central authority is one of the sources of controversy and popularity of Bitcoin and other crypto-currencies. Some argue that crypto-currencies will be manipulated by the rich and powerful and all financial institutions should be auditable and regulated.  Some argue that is exactly what’s wrong with Central Banking and to this day, America’s Federal Reserve is not a federal entity or a civilian corporation and it is not auditable.

Another unique characteristic of the crypto-currency is that individuals can “mine” for currency. For people unfamiliar with highly technical computer terms, “mining” seems like something that would undermine (no pun intended) the legitimacy of Bitcoin. But this “mining” increases the security of the system as a whole and is another way of creating new Bitcoins in its decentralized currency scheme. It requires advanced computers and computer programming skills to do and it is often joked that the utility costs required to have a mining operation will consume any potential profit. If you are interested more in “mining” you can read it in plain English in this excellent article: http://codinginmysleep.com/bitcoin-mining-in-plain-english/.

Bottom line:  This could be the start of the future and a potential amazing investment for those getting in early or this could be a fad and early investors could lose a lot of money.  What are your thoughts on this?

Disclaimer: The author has a small investment in Bitcoins yet it represents less than 5% of his overall portfolio.