Until a month ago, I didn’t know that there was such a thing as cryptocurrency. I had never heard the term “bitcoin”. Then I received a solicitation for a bitcoin trading software, and since then it seems it is all I hear about. Companies of all sizes, from multi-nationals to local retail and professionals to a lemonade stand in San Francisco are now accepting bitcoin as payment.
The following is my understanding as to how it works. Any opinions expressed are my own, and do not reflect the opinions of Stan, John or anyone else at Marketing Rebel. I am trying to leave opinion out of this, though, and give only the facts as I understand them. A lot of what you are about to read is a bit strange, and “Twilight Zone” may come to mind. You will have to suspend your disbelief at times. Just stick with me and if you have any questions, comments or corrections, please post them at the end of this article.
This is just an introduction to the concept of Bitcoin. It is not meant to make you an expert, nor to cover the subject in any kind of depth. It is for anyone who is totally unfamiliar with the concept and wants to gain a basic understanding. So the next time the subject comes up at least you know what they are talking about.
What is Bitcoin?
Bitcoin is what is known as a cryptocurrency. It doesn’t exist in any physical form. It is created by computers that run a certain software, and is accounted for on a network of computers. The creation of bitcoin is called “mining”. The people who create and account for bitcoin are called “miners”. The rate at which bitcoin is created is regulated, and the maximum number of coins is capped at 21 million. At this time there are just over 12 million in circulation (according to blockchain.info).
Why doesn’t everyone just mine bitcoin instead of buying it? The process of mining is pretty complicated, and is getting more and more difficult and expensive, so for most people it is not worth it. The system is designed so the coins are produced at an even rate, and there are more and more people trying to do it. As a result, each miner is less able to successfully produce a bitcoin.
Bitcoin is not controlled by any banks or governments, which is one of its greatest appeals. Its value fluctuates constantly against regular currencies. There are at least 3 exchanges on which it is traded. A discussion of trading bitcoin as an investment is beyond the scope of this article. If you want more information about that, let me know. For now, just understand that its value fluctuates. I will tell you that about a year ago one bitcoin was worth about $15, and is now worth about $800, so it has had a huge spike over the past year. Whether this is a bubble or not is unknown. In fact, it’s really difficult to set an actual value on bitcoin, because it doesn’t really exist. This is one of its greatest drawbacks. It is a virtual currency, not backed by anything at all. How do you value that?
Bitcoin has no physical form. It exists merely as an accounting entry in a virtual spreadsheet. When someone buys or sells it, a new entry is made. All transactions are recorded, and every time a purchase is made it is verified by 1 to 3 “miners”, who trace the coin back to its inception, through all previous transactions. Transactions don’t have to be made in whole bitcoins…a good thing when one bitcoin is worth $800. They can be divided in amounts as small as one hundred millionth of a bitcoin, which is known as a “Satoshi”. It was named after Satoshi Nakamoto, who originally developed the concept.
Why use bitcoin?
There are several reasons why a company may prefer bitcoin to regular currency. They include the following:
- Fees are much lower, because no banks or clearinghouses are involved.
- There are no chargebacks. A bitcoin transaction is like cash, and if the customer wants a refund he must go back to the vendor and get it from him in a separate transaction.
- You can accept payment from anywhere in the world without having to deal with a myriad of different currencies
- Your account cannot be frozen and there are no limits on the size of transaction you can enter into.
- It is also great for marketing because it’s a way to stand out in your niche, at least for a little while…how many of your competitors even know what bitcoin is?
How does an individual buy bitcoin?
The first thing to do is open an online “wallet”. There are many websites that provide this, but I will use coinbase.com as an example, because that is where my wallet is. Actually, if you are going to hold a lot of bitcoin it is best to maintain several wallets. Even with the strict security they have, your wallet could conceivably be hacked and all your coin stolen. All transactions are recorded, but they are anonymous. So, your bitcoin is much like cash in this respect.
Once you have set up your wallet, there are several ways to buy bitcoin.
- You can go to a local dealer and do it face to face. This is the most expensive way, because the local dealers charge more than the online dealers. You can find local dealers on a website called localbitcoins.com. You may also be able to do a google search.
- You can go to a website like coinbase.com. I believe that this is the least expensive way to buy bitcoin, but there may be a delay of a few days between the time you buy it and the time it becomes available to you. If you are just buying and holding it that doesn’t matter, but if you need it right away or are trading it this may not be acceptable. I am pretty sure that there are ways to get immediate access at coinbase but am not sure what they are, and that is beyond the scope of this article.
- There are individuals who buy and sell bitcoin online. The cost for this is less than the local dealers but more than a site like coinbase.com. To purchase this way you go to a website such as localbitcoins.com. You will see a list of people who are offering bitcoin and how they accept payment. The method with which I am most familiar is “cash deposit”. You choose a seller from the list, contact him and then make a cash deposit into his checking account. (I told you this gets a bit strange). To do this safely, you have to find sellers with a high rating and a lot of transactions. This info is all available on the site. One good thing about this method is that the bitcoin is available to you the same day (in a few minutes to a few hours depending on the seller). The coin is deposited into an account that you set up at localbitcoins.com You then send it to your wallet. One drawback (at least with the cash deposit method) is that you have to run to the bank and it can only be done during banking hours. These sellers do not accept online transfers. It might be that they are afraid you will charge it back or something like that.
Those are the 3 ways with which I am familiar to buy bitcoin. If you are trading and have an account at an exchange and are not a US citizen you can do a wire transfer directly to the exchange. Up until a few weeks ago US citizens could do that, as well, but can’t at this time.
How do you store bitcoin?
You can hold bitcoin in your online wallet. As I said before, these sites, even though they use double authentication with random access numbers can be subject to hacking, or their computers may crash, or any of a number of other things can happen, in which case your account could be lost.
You can hold bitcoin on your desktop computer or on a mobile device. In this case you would install software on your computer or an app on the mobile device which would store the access keys for the bitcoin you have. Storing it on the mobile device makes it much easier to use the coin to make purchases, if that is your goal.
You can also store the access numbers offline, in what is called cold storage. I am not familiar with this option, but if you are going to hold a large amount of bitcoin it is not advisable to keep it at an online wallet or on your computer. Bitcoin security is a subject in and of itself, and can get confusing, especially for those that are not technically oriented.
How do companies accept bitcoin?
This is probably the most straight-forward part. There are websites that allow you to accept bitcoin. One of them is bitpay.com. When someone goes to your site and wants to buy, they open their wallet and send the coin to your address. The address is generated by the software provided by bitpay.com. The exchange rate is determined at that time, also by the software. It is really no more difficult than using paypal or a credit card.
If there is interest in this I can create a video that shows how to send bitcoin, but anyone that has an online wallet will know how to do it, and if you sign up with a payment service like bitpay.com they will explain how it works with their software.
There are several other virtual currencies, as well. One of them is litecoin. They haven’t yet gotten the traction of bitcoin, which has been around since 2009. It looks like bitcoin has a first-mover advantage, but you never know. One of the others may get a leg up and replace bitcoin as the front-runner.
So, that is it in a nutshell. Like I said, some aspects of this are a bit strange, but it seems that virtual currency is becoming more and more mainstream, and is definitely something with which you should have at least a passing acquaintance. I hope this has given you a basic understanding of what bitcoin is and how it is used.
If you have any questions or want more information, just post your question, comment or request below this article. Thanks.
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