March 29, 2024

12 questions about Bitcoin you hesitated to ask

This week has been a good one for Bitcoin. Against the backdrop of New Year's optimism and growing confidence in the brightfuture of cryptocurrency following reports thatThe practical use of Bitcoin is expanding in online industries such as &#171;adult content&#187; and social games, the digital currency rate again exceeded 1000 on leading exchanges.</strong>

Due to the fact that the use of bitcoin is nowexpands and covers those circles that have practically never encountered it before, many new users have questions that seasoned bitcoiners have long figured out. What is Bitcoin, how to use it and what is it for? Since our surveys show that at least 20% of our readers are still not very familiar with the most basic concepts of cryptocurrencies, below we provide answers to these and other questions.

1. What is Bitcoin?

Bitcoin (with a capital letter) is a financial network,used to make payments between users. In many ways, Bitcoin is similar to traditional payment systems like Visa or Paypal. However, Bitcoin has two important differences.

First, Bitcoin is completely decentralized.The Visa and Paypal systems are owned by commercial companies that operate them in the interests of their shareholders. The Bitcoin system is not owned or operated by anyone. It has a peer-to-peer (peer-to-peer) structure in which all users are equal, and hundreds of thousands of users' computers jointly process bitcoin transactions, coordinating their efforts over the Internet.

Thanks to its decentralized architecture,Bitcoin became the world's first fully open financial network. To create a new financial service in the traditional banking system, you need to partner with existing banks and follow many complex rules. The Bitcoin system does not have such restrictions. People do not need anyone's permission or assistance to create new financial services based on Bitcoin.

The second difference that Bitcoin makesunique, is the presence of its own currency. Paypal and Visa conduct transactions in common currencies such as US dollars. Bitcoin conducts transactions in new currencies, also called bitcoins (with a lowercase letter).

2. This is very strange! Why use an “imaginary” currency based payment system?

Yes, it's weird. Probably everyone who came across this idea for the first time (including myself) reacted the same way: it simply cannot work. However, the market has so far denied skeptics' fears:

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(Bitcoincharts.com)

This chart shows the change in Bitcoin pricesince the beginning of 2013, when this currency began to attract the attention of the masses. The rate was extremely volatile, for example it fell by 60% in April and December 2013. The same happened before, for example, after the crash in June 2011, the rate took more than a year to recover. However, throughout the 4 years of its existence, Bitcoin showed an undeniable upward trend, growing on average 10 times per year. From $0.30 at the beginning of 2011, the rate has risen to $1000 today. There are already 12 million Bitcoins in existence, so the value of Bitcoin's "money supply" is now around $12 billion.

Bitcoin has captured the imagination of venture capitalistscapitalists. Bitpay, a startup that helps merchants process Bitcoin payments, has seen its capital rise by more than $2 million this year. Coinbase, a startup that helps users buy and sell bitcoin, has seen its capital rise by $25 million. And the Bitcoin startup Circle received only its first investment of $9 million.

What attracts people so much?Bitcoin enthusiasts believe that its peer-to-peer architecture and low barrier to entry will enable the creation of a new generation of advanced financial services, just as the open architecture of the Internet enabled the creation of new online services. Many Bitcoin fans also see it as a hedge against the inflationary policies of central banks.

3. It all looks like a bubble. Is this currency used for anything other than speculation?

I just mentioned Bitpay.The growth of this company confirms the popularity of using Bitcoin for “real” transactions. In September 2012, the company announced that more than a thousand merchants had signed up for its services to accept Bitcoin payments. Just a year later, the company announced it was serving more than 10,000 merchants. The Bitcoin payment option is also available at tens of thousands of online merchants using the Shopify platform. Some stores have saved so much money by completely switching to paying their customers and suppliers in Bitcoin that they can offer extremely low prices to their customers. For example, the electronics and gadgets store bitcoinstore.com consistently keeps the price of all electronics cheaper than on Amazon &#8212; which was previously considered simply unthinkable.

The Bitpay payment system allows you to acceptbitcoins to a variety of sellers. Some sell online services such as web hosting or virtual private networks. Others sell jewelry or electronics. Even some restaurants and bakeries accept Bitcoin as payment. Well, recently the use of bitcoins has been increasing in online industries such as &#171;adult content&#187; and social games.

And yes, Bitcoins are also widely used in non-completely legal transactions. Programs like Satoshi Dice allow people to gamble over the internet (which is illegal in, say, the US). Until recently, the Silk Road website helped dealers sell millions of dollars worth of illegal substances.

It is hardly unusual that newpayment technologies attract the attention of users who break the law. The development of the porn industry also received a powerful impetus with the advent of the first video recorders and the Internet. New payment technologies often attract offenders who are constantly looking for ways to get their capital out of government control.

Another Bitcoin Uses That Should Becomeeven more important in the not too distant future is international payments. Today international money transfers are made using slow, expensive and inconvenient services such as Western Union. Bitcoin is an international system and its fees can be much lower than traditional money transfer systems. The system has yet to be refined to make it affordable and user-friendly, but over time it could revolutionize the entire international payments industry.

4. Who Created Bitcoin?

Nobody knows for sure.This currency was created by a man who called himself Satoshi Nakamoto. As the name suggests, he may have been Japanese, but the creator of Bitcoin never revealed his identity. He has collaborated with fellow Bitcoin fans on online forums, but never met them in person. Starting in 2010, it began to gradually move away from the development of its currency. The last message on his behalf was published in 2011.

Мы не знаем, кто такой Сатоши Накамото, но знаем, that if he ever showed up, he would be an extremely wealthy man. In the first two years of this currency, millions of bitcoins were created, and Satoshi most likely owns hundreds of thousands of them. In terms of today's rate, he should be a multimillionaire.

Before leaving the stage, Nakamoto transmittedbaton to the humble developer Gavin Andresen, who is currently the lead developer on the project. Andresen now works for the Bitcoin Foundation, the most "official" structure that the anarchic bitcoin community has been able to create.

5. Where do bitcoins come from?

In the traditional financial system, new moneycreated by central banks such as the banks of the Federal Reserve System. But there are no central banks in the Bitcoin system. Therefore, the system needed an alternative mechanism for putting money into circulation.

The Bitcoin developer solved this problem quitewitty. As I said above, hundreds of computers scattered across the Internet are collaboratively processing bitcoin transactions. These computers are called "miners" and the process of processing transactions is called "mining". This process got this name due to the fact that every 10 minutes (on average) one of the miners wins the "computational race" and receives a prize. The reward is currently 25 bitcoins, which is worth around $ 25k. These rewards are a major incentive for more and more people to join the process of processing bitcoin transactions, helping the currency remain decentralized.

The remuneration is reduced on the basis of a firmgraphics: every four years it is halved. So, from 2009 to 2012 it was 50 BTC, now it is 25 BTC, and from the end of 2016 it will decrease to 12.5 BTC, etc. It is easy to calculate that the number of bitcoins in circulation will never exceed 21 million. There are currently almost 12 million bitcoins in circulation, so the "money supply" of bitcoins will never more than double the current volume.

6. Is this a problem? In economics classes, we were taught that deflation can lead to economic problems.

Indeed, many traditional economistsbelieve that deflation is associated with economic problems. However, even if this is true (and this thesis has never been proven), there is no reason to think that this will be a problem for Bitcoin. The fact is that deflation is a problem only for certain national economic systems.

For example, in the United States, the size of salaries, payments forloans, rents and other long-term financial obligations are set in dollars. If the dollar rises unexpectedly, these "firm pricing" could cause serious economic disruption. Unable to cut wages, employers will not be able to pay them. Homeowners will not be able to pay off their mortgages if banks refuse to renegotiate loan agreements. Tenants will go broke if they cannot pay their rent. All this will lead to a recession.

It is unlikely that anyone is now using bitcoins inas a unit of account or accounting currency. You have to be reckless to sign a loan agreement paying 100 BTC over 10 years, or to accept a fixed salary bitcoin job. Even the Bitcoin Foundation, which pays its employees in bitcoin, sets the salary in dollars and converts it to bitcoin at the time of payment. Therefore, fluctuations in the bitcoin rate do not lead to such serious economic consequences as fluctuations in the rates of conventional currencies.

7. How do I get bitcoins?

You can become a miner and earn bitcoins,but this is not the best option for beginners. Even amateur miners are now forced to invest serious money in specialized equipment in order to be competitive in the face of increasing mining complexity. And it is far from the fact that you can earn money on this now. Your best bet is to buy some bitcoins with regular money. Bitcoins can be bought and sold for regular money on websites called exchanges. Even more convenient are companies like Coinbase, which can withdraw money from your bank account and convert it to bitcoin at current exchange rates. Unfortunately, this option is currently only available in the US and Canada. There are also more and more Bitcoin ATMs that directly exchange paper money for Bitcoin. Here's a video demonstrating the use of a Bitcoin ATM in Vancouver:

8. I bought some bitcoins. Now what?

You will need a place to store them.Bitcoins are stored in “wallets,” which in this case are simply files with encryption keys or secret codes that allow transferring Bitcoins to other people. There are several storage options. For example, bitcoins can be stored on a computer in one of the wallet apps that are available for Mac, PC, and Android systems.

Alternatively, you can trust one of the websites called "online wallets" to store them.

There is also a storage method called a “paper wallet,” where you print out the encryption keys and store them in a safe place, such as a bank vault.

Finally, there is a way to store bitcoins directly &#171;in your head&#171;.

Each method has its own risks.If you store Bitcoins yourself, you can lose them through a hacker attack, hard drive failure, or loss of your mobile device. When storing in an online wallet, you need to be sure that the site owner does not cheat you or go bankrupt. The Bitcoin market is largely unregulated, so you probably won't be able to count on legal protection when choosing an unreliable online wallet. Paper wallets allow you to eliminate vulnerabilities in other methods, but they are not so convenient to use and, of course, paper can simply be lost.

9. I have bitcoins and have found a reliable way to store them. What should I do with them?

Thousands of online merchants are ready to sell you anyBitcoin products - from jewelry and electronics to illegal substances. You can pay with bitcoins and in "real". To do this, you need a mobile wallet app. The store where you will shop will show you a QR code representing the Bitcoin transaction. This QR code can be scanned with a mobile phone and the mobile wallet will send the requested amount in bitcoins to the store's address. Thus, your purchases will be paid for.

Of course, not everyone accepts bitcoins yet.offline stores. Earlier this year, Forbes' Kashmir Hill conducted an experiment in which she was able to live on Bitcoin for an entire week. Since she lives in the "tech capital" of San Francisco, she has been able to find enough merchants that accept Bitcoin, but with difficulty. A little later, newlyweds from the USA decided to repeat this experiment, traveling around the world for 3 months using only digital currency. Overall, however, Bitcoin is still far from being a practical currency for everyday use.

10. Do I need to buy bitcoins?

Decide for yourself. You may need bitcoins for two reasons: to pay for goods and services, or to speculate.

Bitcoin has not yet become a convenient payment methodtechnology for ordinary users. The software is too complex, and the risk of losses due to hacker attacks, forgotten passwords, hard drive failure, etc. is too high. In addition, Bitcoin is currently subject to extremely high volatility, so the bitcoins in your wallet can go from $ 100 to $ 50 in one day. And at present, this technology is not yet widespread enough to carry bitcoins in your pocket or wallet to pay for everyday goods. For most people, traditional payment technologies such as credit cards remain more convenient for now.

What about speculation on Bitcoin exchanges?Once again, this currency is not very suitable for ordinary users. The security and reliability risks will be much higher if you invest thousands of dollars in Bitcoin. You don't want to risk losing thousands of dollars if you forget your password or suddenly discover that you wrote it down incorrectly. Moreover, this currency is extremely volatile. The rate can rise for a long time, and then fall by 60% in one week. In other words, you need strong nerves to invest &#8212; however, many serious investors are already investing in digital currency and are advising others. Of course, when investing, you need a well-thought-out and correct strategy in order not to lose all your money as a result of a frantic series of purchases and sales.

11. If you don't buy bitcoins, why all this reasoning?

Let me remind you once again about the analogy with the Internet.Until the 1990s, the Internet was not a practical technology that ordinary people could use. To work with it, complex programs with a text interface were used, and you had to be a computer specialist to figure it out.

However, not a single columnist in 1990 becamewould reject the Internet on the grounds that it is too "clever" for mainstream use. Over time, entrepreneurs have embraced the basic infrastructure of the Internet and created innovative and user-friendly online services such as Google, Facebook, and YouTube.

Bitcoin Proponents Are Sure Bitcoin Is Waitingthe same success. The raw bitcoin network is not very user-friendly, but startups such as Coinbase and Bitpay are gradually fixing this. The day is not far off when, based on Bitcoin, someone will develop a "killer app" that will offer a much more convenient financial service than ordinary banks. It could be an international money transfer network with low fees, a practical micropayment system, or something that no one has even thought of before. After all, disruptive innovation in the open Bitcoin network is available to everyone.

12. Could bitcoins ever replace regular money?

This is possible, but not very likely.People want to use the currency that most people use, and in the United States, the dollar will remain that currency for the foreseeable future. And that's a good thing: if bitcoin becomes the standard currency of the US economy, its fixed money supply may pose a risk of economic downturn and depression.

However, Bitcoin remains a huge niche forcompetition with traditional financial systems. In the end, Paypal was able to evolve because traditional financial networks did not meet all of the users' needs. With an open architecture, Bitcoin can grow even faster. It is unlikely that people will ever completely abandon conventional financial systems, but a significant market for bitcoin services could emerge that is much more efficient or affordable than traditional alternatives.

: Washington Post