Bitcoin is the experimental indie band of currency. It's been around for a few years, has a small but loyal following, a stupidly cute name that kind of makes you want to punch something, and, of course, the unsure feeling whether there's a valid reason to be interested, or if everyone is simply latching onto what they hope will be the Next Big Thing.
Bitcoin might disappear into the same Internet oblivion that swallowed Ask Jeeves and Friendster, or it could change the way we buy and sell online. In case the latter happens, we've put together this handy beginner's guide to all things Bitcoin.
What are bitcoins and where did they come from?
Bitcoin is a peer-to-peer payment system in which users pay bitcoins—a digital currency—in exchange for goods and services. It was first unleashed on the web in 2009, when inventor Satoshi Nakamoto released the software. Satoshi Nakamoto is an alias—the guy's/gal's real identity is unknown, and there's reason to believe that the name may actually represent a syndicate of people involved in the creation of Bitcoin.
Bitcoin itself is the payment system, bitcoins are simply the currency.
How do I get bitcoins?
There are two basic ways to get your hands on this kind of cash: "mining" for bitcoins, or buying them.
To mine for bitcoins you've gotta run software on your computer that solves complex math problems which "unlock" the bitcoins stored away in block chains. Unfortunately, this is time-consuming, there are no guarantees attached, and most PCs aren't equipped to handle it efficiently. Your computer is competing with many others on the same equation, and the odds of yours solving it first are slim. Joining a mining pool, in which your computer supports a group of others handling the mining, ups your chances, but also limits the payment you'll receive, which will have to be split among the group. Assuming the guy running the pool isn't a jerk who decides to keep it all for himself, of course.
For a beginner, you're better off simply buying your bitcoins. Fortunately, you've got some options. Coinbase, which bills itself as "The easiest place to buy bitcoin," lets users link their bank accounts for payment. Trucoin accepts major credit cards, and tends to be one of the faster methods, but isn't available in all states yet. If you want to pay in cash, sites like LocalBitcoins.com connects users who are willing to meet in person to conduct the transaction. They even have ATMs!
How do I hold onto my bitcoins?
Right now, there are a few different ways to store your bitcoins, each with their own set of risks and benefits. You can keep them on your computer using the bitcoin software, but it can be tough to use, and obviously, you're more vulnerable to viruses and malware. Keeping the bitcoins on a flash drive or CD-R protects them from hackers, but still involves use of the cumbersome bitcoin client. Keeping them in an online wallet is efficient and easy, but you do have to worry about the site owner stealing your coins. There is no best option; you'll need to weigh the pros and cons yourself.
Why would I want bitcoins?
If you're willing to put up with the hassle, there are legit reasons you'd want to snag some. First of all, bitcoins have no serial number attached, and no third party is involved in transactions—as such, Bitcoin lets you make anonymous purchases that can't be traced back to you. We won't ask why that might interest you. Just putting that out there.
Perhaps more appealing, though, is the fact that the value of bitcoins is constantly fluctuating. On the one hand, this means that any you buy can be worth a lot less tomorrow. On the other hand...they could also be worth a lot more. People have made major profits getting their hands on bitcoins and selling them when the value rose. That's definitely risky, but the potential payoff might be worth it to you.
What can I buy with bitcoins?
Since bitcoins are still a fairly fringe currency, not a lot of businesses accept them as a form of payment just yet. If Bitcoin rises in popularity, that will change. In the meantime, the types of places where you can spend bitcoins are varied, from online casinos to OKCupid. Check out this list for a comprehensive rundown of how and where to use them.
There is one type of transaction that Bitcoin is especially useful for. Since Bitcoin protects your identity, using it to buy drugs (and any other less-than-legal goods and services) online is a key draw of this currency...not that we'd ever encourage you to do that!
Are bitcoins a good investment?
That's tough to say. Short answer: no. A lot of experts are quick to warn people off the idea of putting money into a bubble that could burst at any second.
Long answer: well, you know, maybe? As long as you're smart about it. There are some financial gurus who think there might be a benefit in this investment, but only if you can afford to lose all of the money you put into it. In other words, don't put any money into bitcoins if you're not ready to see that money disappear the instant things don't go as you had hoped.
Are there any risks involved in Bitcoin?
Sure. Aside from the fact that you never know from day-to-day just how much your bitcoins will be worth, there's also the fact that, unlike the cash you carry in your wallet, bitcoins are not backed by anything like the Federal Reserve. Some hackers steal your supply and it's not like losing your money in a bank heist. The government won't give you a thing back.
The fact that bitcoins have no backing also means that their value really is arbitrary. They aren't legal tender, so no one has to accept them as payment. If we all decide we're not interested in using them anymore, they're no good to you.
What's the future of Bitcoin?
So, is Bitcoin primed to overtake the almighty dollar as a currency, or will it fizzle out into Internet obscurity?
Honestly, no one knows. Peter Thiel, former Bitcoin skeptic and The Social Network side character, has revised his views, now stating that the currency has the potential to change the world. Warren Buffett, on the other hand, has called it a "joke." The best way to think of Bitcoin now is the same way we look at the early elements of the Internet. This type of currency may become something big, but maybe not in this form. It could be the AltaVista to an eventual Google, but it's still too early to tell.