In less than a year its price went from about 600USD to almost 5,000USD, only to fall dramatically in just two weeks to about 3,500USD. No, this is not the price of gold, or diamonds or a piece by a famous artist. This has been the recent behavior of bitcoin, probably the most famous cryptocurrency.
But those are big words, so let’s start defining concepts -just to make sure that we are all on the same page and that we all have a clear understanding of what it is that we are discussing here. A crytocurrency is
a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency.”
In other words, this is digital money (that you cannot see or touch) made highly secure thanks to encryption, that escapes the regulation of the banking system as we know it (no central banks, such as the Federal Reserve or the European Central Bank) and that is not served by your traditional banks or credit unions.
Then, who controls these cryptocurrencies? (note the plural, for there is life beyond bitcoin in this realm). Nobody, because these are decentralized assets, produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known.
Within cryptocurrency systems the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: members of the general public using their computers to help validate and timestamp transactions adding them to the ledger in accordance with a particular timestamping scheme. Think of this, for a lack of a better example, as somewhat similar to the system used to create and maintain Wikipedia articles -although cryptocurrencies go well beyond that, reaching a level of decentralization unknown before they showed up.
Undoubtedly, the most popular cryptocurrency (understanding by popular here that it is most likely the only one most of us has heard of) is bitcoin: invented by an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto and released as open-source software in 2009, the system is peer-to-peer, and transactions take place between users directly, without an intermediary.
In that context, it is totally understandable that the legal status of bitcoin varies substantially from country to country and that it is still undefined or changing in many of them: while some countries have explicitly allowed its use and trade, others have banned or restricted it.
That lack of regulation has made bitcoin especially interesting to black market operators, having been used for transactions that range from drug trade, child pornography, murder-for-hire services or weapons sales. But the same could be said of many other currencies, such as the U.S. dollar, so we should refrain from viewing bitcoin as just the tool of the trade for criminals.
In fact, according to research produced by Cambridge University there are between 2.9 million and 5.8 million unique users using a cryptocurrency wallet and more than 100,000 merchants accepting bitcoin -from overstock.com to Microsoft (yes, that Microsoft) or PayPal, so there is nothing necessarily shady involved here.
So, is bitcoin for the average Joe/Jane or just for hackers? Bitcoin is perfect for you if you want to get rid of the middleman and/or if you distrust banks as we know them. However, a certain proficiency using tech tools is a must if you want to be able to buy and use bitcoins. This is how you do it:
- get some bitcoins: you can buy them online or use a bitcoin ATM to do that.
- set up a bitcoin wallet: you can do that on the web or directly on your mobile device.
- create a public bitcoin address: use the wallet you created in the previous step to create a public address for you. Think of a public address like an email address in that you can share it with anyone you want to send you bitcoin.
- test your bitcoin address: send a small amount of bitcoin to the public address you created above using the “withdraw” or “send” function in the place you bought your bitcoin. You may need to wait 10-20 minutes for a confirmation, but if you did everything correctly you should now see the small amount of bitcoin you sent in your personal wallet.
- use your bitcoin to invest, shop, donate or give away, just like you would do with your hard-earned dollars (or euros, or pounds, or whatever).
No, I don’t have a bitcoin wallet just yet, but yes, I’m interested in this phenomenon -even as I wonder if this is the future of banking (but that is a topic for a different blog post, coming up soon).