Understanding Bitcoin

2017-04-24

What is Bitcoin?

Bitcoin is one of the most widely known virtual currencies, a form of electronic payment that is not issued by any bank or regulated by any government. Exempt from the rules regarding traditional currencies, Bitcoin is generally viewed by its users as liberating, and by its detractors as risky.

Why use Bitcoin?

Bitcoin’s primary purpose is to anonymously make online purchases. Under some circumstances, Bitcoin can make purchases easier and cheaper because it is not subject to typical exchange rates and transaction fees. Some users collect Bitcoin hoping their relative value will increase.

Where do you get Bitcoin?

Bitcoins are created through a process called mining, in which computers are used to solve complex math problems. Users then trade Bitcoins in much the same way traditional currencies can be transferred electronically. Bitcoins can also be purchased online using a traditional currency.

Where do you store Bitcoin?

Bitcoins are stored in a virtual wallet, either on your computer’s hard drive or online, similar to an email account. This is where the risk of virtual currency is especially obvious: your virtual wallet is not insured or protected. If you accidentally delete your Bitcoins, get a computer virus, or are hacked, there is generally no recourse to recover your losses.

Will Bitcoin be the Currency of the Future?

No one knows for certain what role virtual currency will play in the future. However, governments are increasingly moving to introduce many of the same regulations that control traditional currencies.

In the United States, Bitcoin was recently dealt a setback by the Securities and Exchange Commission, which denied an application to establish a Bitcoin Trust Exchange-Traded Funds (ETF). The Commission ruled that the ETF, an otherwise common investment tool, would be too susceptible to fraud if tied to Bitcoin.

Users closely watched this case because an ETF would have enabled them to trade Bitcoins at market value without having to set up their own virtual wallet. This would have made Bitcoin accessible to more traditional investors and was expected to greatly increase the virtual currency’s value.

Two other applications for Bitcoin-based ETFs are currently being considered by the Commission, and users are again anxiously awaiting a ruling.