Confused about Bitcoin? Here are 5 things to know

Here are 5 key things to know about this virtual currency

bitcoin

Everyone has heard about Bitcoin by now, especially since its value has soared to as much as $20,000 (N7.2 million) recently from about $1,000 (N360,000) at the beginning of the year. Interest in the virtual currency is now growing worldwide.

It’s complicated stuff, so here are some answers to key questions when the subject inevitably comes up at your Christmas party:

1. What Is Bitcoin?

Bitcoin is a virtual, or “crypto” currency, which is to say it exists only in digital form.

It was created in 2009 by a coder or coders using the alias Satoshi Nakamoto. The idea was to create a peer-to-peer system of commerce independent of banks, governments, and other financial institutions, says Matt Mitchell, an American-based tech security researcher who founded CryptoHarlem, a foundation that teaches digital security techniques to marginalized communities.

While Bitcoin may be the best-known virtual currency, it is just one of thousands, according to Mitchell. Others you may have heard of are Litecoin, Etherium, Zcash, Ripple, and Monero.

2. Why Would Anyone Use It?

One reason many early adopters liked using Bitcoin was because they could buy and sell it anonymously. In its early days the currency gained notoriety as it was often used for illicit purposes, such as to pay for sex and drugs, says Mitchell.

Bitcoin also had a particular practical benefit as well. It allowed users to make payments online faster and more cheaply than they could through banks, a situation that has very recently changed as banks have moved to faster payment processing.

Some people like using Bitcoin as a way to buy and sell stuff. A number of retailers, including Expedia, Overstock.com, and Whole Foods, accept Bitcoin as payment.

But perhaps Bitcoin’s chief draw right now is its surging value and attractiveness as an investment, says Mitchell.

The founders of the currency capped the number of Bitcoin that can be issued at 21 million, making it inflation-proof. More than that can’t be created arbitrarily.

3. How Do You Buy Bitcoin?

There are only a few methods that are practical for most people.

One is to pay cash money to someone who owns Bitcoin and have that person transfer it to you. The process is similar to the way peer-to-peer cash payment systems such as Venmo operate. The seller accesses his Bitcoin wallet—an app on his laptop or smartphone— which contains the currency. He then selects the number of Bitcoin to transfer to you and hits the send button. You get a code representing the Bitcoin and you add it to your Bitcoin wallet.

Another option is to go to an online cryptocurrency exchange such as Coindesk, GDax or Kraken. You tell the exchange how much Bitcoin you want to purchase and it walks you through the process. Keep in mind that you don’t have to buy a whole Bitcoin—you can buy a fractional share.

If you have a small business, you can also set up the wallet that works with Bitcoin or other cryptocurrencies and advertise that you accept Bitcoin as payment.

4. What’s ‘Mining’ Bitcoin?

Mining is how new Bitcoin are created. It generally requires special hardware and software, so it’s not practical for most people.

The idea is to join a network of computers that processes complex mathematical problems. The computers that solve the most problems first are the ones that usually earn the most Bitcoin. Again, this is not for average people.

5. It All Sounds Very Risky

It is. One risk on the mind of many investors today is that the value of Bitcoin has risen so much that the market for it is now considered to be in bubble territory.

This week one Bitcoin (BTC) topped out around $20,000 but in January one Bitcoin traded at around $1,000. On Thursday it was trading at around $15,000.

If the bubble bursts, Bitcoin’s value could fall and investors who bought now could lose their investment.

There are other risks, too. Bitcoin doesn’t offer any consumer protections and isn’t overseen by a regulator equivalent to the Central Bank of Nigeria (CBN) or Nigeria Deposit Insurance Corporation (NDIC), which protects money in banks and savings institutions. There’s also no remedy from a third party in the event of fraudulent transactions.

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Adapted from Consumer Reports

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