Watching Bitcoin’s price is like watching the latest high tech IPO stock price or a good run at the Black Jack tables in Vegas. It’s exhilarating while it’s going up, but there can be wild fluctuations along the way. Today, one bitcoin is hovering around $4400 based on the current supply of 16,546,138 bitcoins with a market cap of $72.8 billion (www.coindesk.com). In comparison, one bitcoin in July 2010 was $7.

What is Bitcoin?

Bitcoin is a bank-free, decentralized, internet currency whose concept was introduced to the world by a programmer called Satoshi Nakamoto (his true identity remains hidden) late 2008, a short time after Lehman Brothers filed for the largest bankruptcy in U.S. history. The first Bitcoin, also known as the “Genesis Block” was mined on January 3, 2009. It contained the text, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”, perhaps as a relevant political commentary.

Bitcoin is also a digital currency with code and rules that are open source, and therefore, not controlled by one person, company, bank or country. The total number of bitcoins was defined in the public ledger back in 2009 and because it’s a public ledger, everyone can see everyone else’s bitcoins to make sure that no one cheats or makes extra copies. Because it isn’t regulated, there is no interest rate or exchange fees and its value cannot be diluted by any government that may want to release its own bitcoins. Confused? Hang in there, it’s about to get more interesting.

Acquiring Bitcoins?

The first way to acquire bitcoins is to buy one through many of the online Bitcoin exchanges like Mt. Gox, Bitcoin’s largest exchange which handles 80% of Bitcoin trade. This requires a Bitcoin wallet installed on your computer or smartphone. After you install a Bitcoin wallet, you receive an encrypted address, secured by Blockchain protocol, that can be shared with anyone who wants to send or receive payment in the form of bitcoins. Every transaction ever processed is recorded in the Blockchain public ledger, which prevents counterfeiting, but also makes the details a matter of public record. 

Bitcoin Mining

Bitcoin is underpinned by a peer-to-peer network similar to BitTorrent’s file sharing system. Bitcoins are mathematically generated as computers in this network perform complex number-crunching tasks (bitcoin mining). Several tech companies like AntMiner and Avalon manufacture ASIC computers that are capable of handling the calculations required for bitcoin mining. If you tried to mine bitcoins on your laptop, it would take more than three years to generate any coins, so it’s better to join a mining pool syndicate that splits the group’s mined bitcoins based on the amount of work your computer completed. The bitcoin system was originally created to have an upper limit of 21 million bitcoins, so the mining of bitcoins gets more difficult the closer we approach the ceiling. 

Bitcoin is Volatile

The price of a bitcoin can increase or decrease dramatically based on certain economic, financial or world news. It is a high risk asset and should not be used for savings accounts. In fact, if you can’t afford to lose your nest egg, you shouldn’t store it in bitcoin

Payments are Irreversible

Once a bitcoin payment has been made, it is irreversible and can only be refunded by the recipient of the funds. You should only do bitcoin business with people and companies that you trust.

Bitcoin Anonymity

All bitcoin transactions are stored publicly and permanently on the bitcoin network. The balance and transactions of any bitcoin address can be seen by anyone. The identity of the user behind the address remains anonymous until more information is revealed during the transaction.

Unconfirmed Transactions are not Secure

Transactions are reversible in the confirmation stage (between1-90 minutes) but are irreversible after the confirmation which averages 10 minutes.

Trust Factor

Trust in Bitcoin requires no trust at all. It’s fully open-source and decentralized where all transactions and bitcoins issued into existence can be transparently consulted in real-time by anyone. The whole system is protected by peer-reviewed cryptographic algorithms similar to those used in online banking.

Taxes & Regulations

Bitcoin is not an official currency of any country, however most jurisdictions require payment of income, sales, payroll and capital gains taxes on bitcoin. It is the bitcoin users’ responsibility to contact the state and federal agencies for any taxes due from the sale or trade of bitcoins. In March 2014, the IRS stated that all virtual currencies would be taxed as property rather than currency, and that gains or losses from bitcoins held as capital will be realized as capital gains or losses, while bitcoins held as inventory will incur ordinary gains or losses.

Insurance

Regular checking and savings accounts are insured by the FDIC, however, Bitcoin exchanges and Bitcoin accounts are not insured by any type of private, federal or government program.

Where can you spend them?

Bitcoins can be used at several retailers and websites such as Expedia, CheapAir, Overstock.com, Subway and Whole Foods. For the truly adventurous, Virgin Galactic will even take you into space with Bitcoin. 

Bitcoin intermediate service companies are providing access to most online retailers that don’t typically support Bitcoin. There is typically a small transaction fee to convert your Bitcoin. Until large retailers like Amazon, Apple or BestBuy accept bitcoin directly, services like eGifter, Gyft and Purse.io can be used to gain access to these retailers.

If this Bitcoin phenomenon is still to confusing to comprehend, don’t worry. If you didn’t invest in the early days of its existence, it’s probably too expensive to start now without risk. Although that’s what they said about Apple & Google.