Unlike the money that you can actually hold in your hand, such as coins and paper bills, cryptocurrency is a digital currency that uses encryption technology. Although the use of cryptocurrency has been gaining momentum in recent years, the Office of the Director of National Intelligence (DNI) reports that this type of currency is not likely to become the primary payment method for most consumers at any time in the near future. Leading the cryptocurrency revolution is Bitcoin, which ushered in this new type of virtual currency in 2009.
What Is Bitcoin and How Does It Work?
With its distinction as the first type of cryptocurrency, Bitcoin is a peer-to-peer, decentralized, digital money system that's part of a blockchain setup. Breaking down these components, Bitcoin's decentralization simply means that there is no central authority or regulatory agency that oversees its operation. Instead, virtual transactions are peer-to-peer verified to provide accountability, which eliminates the need for a regulatory agency. A blockchain is simply a digital, public ledger, in which cryptocurrency transactions are recorded and verified by Bitcoin users. The DNI's 2017 report recognized Bitcoin as the cryptocurrency that was responsible for the highest number of daily transactions among all other types of cryptocurrencies.
What Is Bitcoin Worth?
Bitcoin's value fluctuates widely. Money Magazine cites its all-time high as approaching $20,000 in December 2017. But only two months later, in February 2018, its value was below $6,000. CoinDesk, the crypto-tracking website referenced by Money, charts the ever-changing Bitcoin values on a graph that updates Bitcoin's prices each hour. You can view these prices by visiting CoinDesk.com/price.
What Is Bitcoin Mining?
Bitcoin mining is a term used to describe how bitcoins are actually "discovered." Bitcoin "miners" are network participants who use their computers to solve difficult math problems. Successful miners receive bitcoins as their reward. When Bitcoin debuted in 2009, using an algorithm design by an anonymous user, a finite number of bitcoins was established – 21 million. As of April 2018, 17 million of these had already been mined, leaving a total of 4 million left unmined. Because of the complex rules behind the mining protocol, these 4 million bitcoins cannot be completely discovered for another 122 years.
How to Get Bitcoins
Acquiring bitcoins begins with mining this digital currency. To be a miner, you need a powerful state-of-the-art computer and the technical knowledge that drives the mining search. If you're in this category, you can get bitcoins on your own. If you're not, you can buy bitcoins on one of many digital marketplaces called "bitcoin exchanges," such as Coinbase, Bitstamp and Bitfinex.
What Is Bitcoin Backed By?
As a cryptocurrency, bitcoin is not backed by a commodity, such as gold, or by a government. It's also not insured by the Securities Investor Protection Corporation (SIPC), which insures many securities accounts, or by the Federal Deposit Insurance Corporation (FDIC), which insures many bank accounts. When you acquire bitcoins through mining or purchasing through a bitcoin exchange marketplace, you hold them in a "digital wallet." Your digital wallet may be on your computer or stored in the virtual cloud. This wallet is essentially a virtual bank that not only holds your bitcoin funds but also allows you to pay for goods or services and send or receive bitcoins.
Risks and Challenges
There are security risks associated with any digital platform or digital product, including cryptocurrency. Computer hackers continually hone their skills as cyber thieves to steal your money. If your ATM card, credit card or debit card is compromised and someone uses your card or account number for identity theft, you can typically recover your stolen funds by filing a debit-card fraud claim. The Electronic Fund Transfer Act (EFTA) and the Fair Credit Billing Act (FCBA) are two examples of safeguards that protect you against this type of theft. But if someone steals bitcoins from your digital wallet, you have no way to recover your money because Bitcoin doesn't offer any protection or insurance against loss.
- Office of the Director of National Intelligence: 2017 Public-Private Analytic Exchange Program
- Investopedia: What is a Blockchain?
- Money Magazine March 9, 2018: Bitcoin Drops Another 25%, Plunging to a One-Month Low
- CoinDesk: Bitcoin Price
- CNNtech: What is Bitcoin?
- CNBC: There are now 17 million bitcoins in existence - Only 4 Million Left to 'Mine'
- Federal Trade Commission: Lost or Stolen Credit, ATM, and Debit Cards