What are Bitcoins?

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Bitcoins – You’ve probably heard of them, on the news and online. But do you really know what they are? Let’s look at what bitcoins actually are, where they come from, and whether you’ll ever need them’

What is a bitcoin?

When they first released, back in 2009, they were hailed as the future. A digital currency designed to allow anonymous transactions, with no fees, that ultimately cuts the bank out of the picture. They can be used to digitally purchase goods and services online, in the same way you can now with existing currencies. In short, bitcoins are a decentralised cryptocurrency. That means, no financial institution ‘owns’ the electronic currency in the same way, for instance, the Bank of England ‘owns’ pound sterling. And that’s the whole populist point of bitcoins, created at the height of the financial crisis: It takes money out of the clutches of governments and financial institutions, and gives it back to the people.

Where do bitcoins come from?

Bitcoins are ‘mined’ by the online community, who use the power of their computers to form a distribution network. This leads to another major difference between bitcoins and banks. While banks can simply produce more money (and thus, devalue the currency), the bitcoin protocol dictates that only 21 million bitcoins can be created. That’s because bitcoins are maths-based So, you can’t just conjure up a billion bitcoins out of thin, digital air – you need to follow a precise mathematical formula (it’s available online, for free, so you can check it out).

What are the risks of bitcoins?

Bitcoins have a reputation as the criminals’ currency of choice since they’re totally anonymous. That may not be an accurate picture, but it’s certainly a fear, particularly for experts who know they can’t track bitcoin usage the way they can track existing transactions. It’s also an unregulated market, featuring a cryptocurrency that’s non-repudiable, meaning that if you spend or lose your bitcoins, that’s it. No refunds. No take-backs. That’s especially important, since bitcoin exchanges have been susceptible in the past – formerly the biggest exchange, Mt. Gox head Mark Karpelèsonce lost 650,000, and there’s no getting them back.

How do I get bitcoins?

Perhaps the greatest irony is that if you’re looking to get your hands on bitcoins, you’ll have to use hard currency – although you’ve got plenty of options as to which you use. Bitcoins can be bought at ‘exchanges’ where, as you’d expect, you can buy or sell your bitcoins. You’ll want to do some research, to find the right one for you – and check their security measures, since you don’t want to place your new-found cryptocurrency in an unsecure exchange.

Should I use bitcoins?

While bitcoins aren’t exactly widespread – and likely won’t for some time to come, if at all – they are increasing in popularity as awareness rises. Because they’re not individually tied to any one country, international payments are incredibly easy, and generally free. In fact, that lack of fees attached to bitcoins is one of the primary attractions for users – particularly small businesses who would otherwise have to up their prices to afford processing transaction fees. It means you keep, or spend, more of your money without handing it over to a bank.

Will bitcoins last?

Regarding longevity, the jury’s still out on bitcoins. As more and more of our lives are spent online, they have vast potential. They’re cheap, transactions are instant, and you get more bang for your buck.

However, the lack of regulation or financial guarantees remain off-putting for some – and given the libertarian spirit in which bitcoins were created, don’t expect that to change. Hacking, too, will be a constant risk, both of bitcoin exchanges and individual accounts.

While there are plenty of reasons why bitcoins could take off in a big way, it’s unlikely that banks – and everyday consumers – will be willing to embrace a new way to pay for some time to come. A currency to keep an eye on, but don’t expect to be withdrawing your salary in bitcoins from a cash-point any time soon.

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