What do I need to know about bitcoin?

What is it?

Bitcoin is a cryptocurrency that runs on a technology called blockchain. The idea behind this technology is to create a currency that is decentralized, meaning that the money is not printed by the government so they can’t increase inflation by printing more bills.

So, how does blockchain work?

Blockchain works by verifying transactions through computers essentially solving a problem. If the majority of the computers come up with the same answer, the transaction is considered valid and is added to a “block” of transactions. When the entire block has been verified, it is added to the “chain” of transaction information. Unless you are very interested in technology, you don’t have to understand more than that.

How can you buy bitcoin?

You can acquire bitcoin in one of two ways: mining (owning one of the computers that do the solving and being rewarded with bitcoin when your computer is the first one to solve it) and buying it with another currency like dollars or euros. Mining has become so competitive that the amount of computing power and electricity needed to keep up is immense. As an average person, your only choice is to buy it.

The pros of bitcoin:

It’s anonymous and decentralized. The government’s actions won’t affect the value of your money and no one can monitor what it is you used your money for or who you sent it to.

Bitcoin is owned by everyone who uses it, there is no private company controlling it.

It is very easy to send back and forth between users.

It has had very high returns in recent years.

It’s global so easy to use between people all around the world without currency conversions.

The cons of bitcoin:

Anonymity and decentralization allow for crime and fraud. Once you have sent bitcoin, the police can’t track it and you can’t get it back.

It is not accepted by most companies as a form of payment so you can’t really use it.

The price is very volatile so it is not reliable as a currency. Also, there are a few large companies that own large amounts of bitcoin. The risk is that if they decide to sell, the markets will be flooded, and the price will drop unexpectedly.

Its value is based purely on how many people want to have it. There is no other asset to secure its value.

Cryptocurrency is subject to the same tax laws as any other investment property. If it goes up in value, you are subject to capital gains tax when you sell it. There might one day be a large tax bill on your holdings.

One of the large claims of bitcoin is that it is a “hedge against inflation” because it is not influenced by the government printing more and that there is a cap of 21 million bitcoin that will ever be in circulation, therefore securing its value. However, that is not a confirmed statement. In order for bitcoin to truly be a hedge, the price has to remain high and growing. As Bitcoin has a relatively short and volatile history, we have no confirmation that it will be so. In addition, because bitcoin’s value is based purely on demand, it doesn’t make a difference if there are only 21 million coins. If a day comes that demand drops, the limited number won’t protect it from a drop in value.

Because it is purely digital, your money can be stolen or lost if you lose the key to your online “wallet” or your hard drive crashes.