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Bitcoin: A Primer

March 7, 2014 by Bautis Financial

Over the ages, we have used all sorts of things as money: feathers, shells, paper, etc. Yet, we wonder what makes money what it really is?  The question comes up as a new kind of currency is graving attention. The Bitcoin is an innovative payment network and a new kind of money for today’s digital age, no printing press required.

Just like you can have a dollar, a euro or gold, you can have a Bitcoin. It holds a store of value like any other currency. Bitcoin is completely digital and is stored on your computer. It is decentralized and runs on a peer-to-peer network, which means that not one person or institution can regulate or control Bitcoin. Instead of a trusted third party like a bank, Bitcoin creates trust through a cryptographic system, making sure that only you can use your Bitcoins.

Like gold, no central bank controls Bitcoin currency so governments cannot print or mint more of it. Using computers and complex software, people can “mine” Bitcoins by solving complex mathematical problems. If they solve the problem, they get Bitcoin. But since the process of mining is so difficult most people just buy Bitcoin from various exchanges popping up.

People can choose to pay for things using their Bitcoins. Sites like Overstock.com and Reddit.com are already accepting this digital currency and/or they can invest in the Bitcoin currency as they would invest in the stock market or in gold, and earn a return on their investment as the price in U.S. dollars per Bitcoin rises. In recent months, one Bitcoin unit has been worth about $700. It has been as low as $50 and as high as more than $1,200.

Although it isn’t a household name, Bitcoin has quickly gained cult status among believers in virtual currencies, thanks to wild fluctuations in its price , moves by mainstream retailers to accept it for payment and increased regulatory scrutiny.

Now, what about the market volatility and other concerns such as security, raised by Bitcoin detractors? Bitcoin has only been around for five years, and since then it has exploded. Any security will be very volatile in its infancy. As time goes on, volatility decreases.
Mt. Gox, a Bitcoin exchange based in Tokyo, Japan, suspended all trading on February 24, and several hours later its website went offline – as in, no data; a blank page. It was revealed that possibly $350 million to $380 million in Bitcoin had been stolen from the exchange due to a security breach. This left people who had entrusted Mt. Gox with their Bitcoin wondering if their digital currency was forever lost. The sudden disappearance of Mt. Gox, the first and most widely known Bitcoin exchange, has raised concerns about the sustainability of the online currency market. The Mt. Gox debacle sent the Bitcoin value down more than $100 earlier in the week, causing people who had invested in the currency to experience heavy losses, if only temporarily. By the end of the week, it was trading around $550 a unit.

While many people use Bitcoin as a payment, some prefer to use it as an investment like a security to hold on to and sell off later. Mahir Jethanandani, a junior at Saratoga High School in Saratoga, California, has become a self-described Bitcoin enthusiast, immersing himself in the news and research surrounding this new digital currency. In March 2013, Jethanandani invested in Bitcoin through Coinbase, an exchange with low transaction fees. He purchased Bitcoin at around $100 a unit and sold his investments eight months later when the news about China was emerging. “I managed to pull out of Bitcoin with an obscene investment return,” notes Jethanandani. “I bought Bitcoins at $100 and sold them off at $900.”

Bitcoin can be used entirely as a payment system; merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want.  In addition, merchants are highly attracted to Bitcoin because it eliminates the risk of credit card fraud.

Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are buying, using and selling Bitcoin, all around the world. The overall numbers are still small, but they are growing quickly; and, ease of use for all participants is rapidly increasing as Bitcoin tools and technologies are improved. Remember, it used to be technically challenging to even get on the Internet. Now it’s not.
Money is money because we think it has value today, we think it will have value in the future and we will be able to use it as a medium of exchange. In other words, money is money because we believe in it; clearly all those who bought in believe that Bitcoin has value.

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