Using Bitcoin means not having to place trust in these institutions. While this argument was the primary selling point for Satoshi, there are many other advantages that Bitcoin offers as well.
Simple to use.
While they may not be very easy to obtain, they are easy to spend. All you need to do is input the receiver’s public address (often done by scanning a QR code), enter the amount, and hit send.Internet Integrated. Bitcoin is made for the internet, and it shows.
It is very easy to integrate Bitcoin into online services. Many websites offer Application Programming Interface (API) around Bitcoin services such as the current price, or details on the blockchain. One good example is Bitcoin tip bot on Reddit, a popular website that aggregates content. This bot allows users to send Bitcoin to each other, within Reddit itself.
A Bitcoin transaction occurs as quickly as sending an email Wiring money to another country could take days, but only takes seconds with Bitcoin. However, it is wise to wait for verification from the network.
– I’ll talk about that soon.
The cryptography behind Bitcoin is very advanced, and currently it isn’t feasible for anyone to break it. Nearly all theft of Bitcoin has occurred because of improper storage of the coins, or a hacking of the exchanges themselves. As far as anyone in the community knows, no one has ever broken the cryptography — and it isn’t for lack of trying! Several well known security experts have openly tried to expose security holes in the code, only to admit defeat.
There will only be 21 million Bitcoins ever created — we are at 11 million now — and this slow monetary growth means that the coins will likely increase in value over time. While there is no certainty that this increase relative to fiat money will continue, if the coins are in demand and used for transactions as they are today, the price should continue to slowly rise as fewer and fewer Bitcoin become available.
Because of these advantages, the number of people using Bitcoin has continually grown since its introduction in 2009.
However, Bitcoin isn’t perfect. Here are some of the disadvantages.
Steep Learning Curve.
Many people are turned off to Bitcoin before they even try it, due to the complexity of the issue. Learning about cryptography, the blockchain, mining, maintaining wallets, updating software — all of these things intimidate everyone but the most tech-savvy.
Fortunately, as Bitcoin becomes more popular more effort is put into explaining Bitcoin in a more accessible way (as this book is doing!).
Obtaining Bitcoin. Getting your hands on some coins is still not a simple process. It can take days, or even weeks, to obtain them online.
Again, this is changing — new exchanges are opening every month and as more people own Bitcoin themselves they are more able to sell them in person.
Confirmation Takes Time.
Transactions occur quickly, but to be certain that the rest of the network agrees the transaction is valid, there is a wait for confirmation. For larger transactions, the recommended time is 6 blocks, and this typically takes an hour. Of course, you don’t have to wait that long — many users accept zero confirmations.
Protecting your Wallet.
Just like in real life, if you don’t protect your Bitcoin wallet you can have your money stolen. Securing Bitcoin can be somewhat difficult, since any computer connected to the internet is potentially vulnerable. There are ways to secure your coins, but they do require some effort and technical knowledge.
The number of merchants accepting Bitcoins is increasing daily, but it is only a small fraction of the overall economy. For online services especially, Bitcoin is gaining credibility and notoriety, but in other sectors it is only now making inroads. It may be many years — if ever — that Bitcoin is accepted as widely as other options such as Visa or PayPal.
While all signs point to Bitcoin becoming the first true currency of the internet, there are no guarantees. It may completely crash and burn, leaving hundreds of thousands of users with worthless coins.
Taking all the advantages and disadvantages into account, who is Bitcoin most useful for? Who shouldn’t be using it?
Historically, the most typical Bitcoin user was a technically adept young man in his late 20’s or early 30’s who has libertarian political leanings. The appeal is obvious: Bitcoin appeals to the tech-savvy, it is something new that is interesting, and it has political implications that tend toward less government control over society.
But this profile of a stereotypical Bitcoin user is beginning to break down as more people are interested in Bitcoin purely for its business benefits. The story of Bitcoin in 2013 has been the business interests that are starting to take Bitcoin seriously.
PayPal CEO John Donahoe made headlines when in May he told the Wall Street Journal, “It’s a new disruptive technology, so, yeah, we’re looking at Bitcoin closely. There may be ways to enable it inside PayPal.” Peter Thiel’s Founders
Fund invested $2 million in the Bitcoin company BitPay. Fred Wilson of Union Square Ventures — early investor in Twitter and Kickstarter — invested $5 million in another Bitcoin company, Coinbase. Cameron and Tyler Winklevoss, of Facebook fame, invested heavily in Bitcoin, reported capturing 1% of the entire market.
These investors aren’t interested in Bitcoin because they are passionate about cryptography, or because of their political leanings — they recognize that it might be the currency of the internet in the future, and want to be involved in that process.
So, should you use Bitcoin? If you primarily transact business offline, then I wouldn’t make the investment now. Wait a few years until the big investors have created a larger infrastructure, and the Bitcoin economy has grown. Then there will be a smaller learning curve, fewer barriers to obtaining coins, and you won’t need to understand the technology.
However, if you buy or sell goods or services online, I would familiarize yourself with Bitcoin now. For a seller, an active community of Bitcoin users already exists, and accepting Bitcoin for your services is a low cost way to appeal to an emerging market. As a buyer, transactions are simple, quick, and don’t require any fees or signing up with your personal information. Using
Bitcoin online will make you understand why it is dubbed the currency of the internet.
There is a reason to have Bitcoin apart from being a part of the internet economy– investment. There are two primary reasons people invest in Bitcoins.
1. If central banks across the world continue to devalue their currencies,then holding Bitcoin may protect against inflation. Despite the valid concern over inflation, I would caution against significant investment in
Bitcoin as an inflation hedge. The currency is still young and needs to prove itself; if we did face a severe economic downturn it is unknown how widely accepted Bitcoin would be.
2. If Bitcoin becomes widely adopted, even replacing some national currencies, then it will become incredibly valuable. Since the supply of Bitcoin will never exceed 21 million, if the demand for coins rises because it is widely used, then the price will necessarily increase as well. Some predict prices in the thousands, or even tens of thousands, per 1.0 BTC. I don’t believe it is likely to ever achieve that amount of acceptance.
However, the potential upside is significant, so as long as you can afford to lose the investment, it may be a speculation worth making.