You’ve heard a ton about it, from the stock market to small businesses. But how does it work?
An Internet-based virtual currency. You can’t get bitcoin from your local bank, but through exchanges or mining. Like coal and gold mining, mining for bitcoins is difficult. A miner makes computer hardware solve complex math problems that confirm transactions through the system, creating an open-source security system. Miners are rewarded with newly “minted” bitcoins. It’s referred to as mining because, like physical mining for resources, it requires work (mental more than physical) and slowly makes the new currency available at a rate similar to gold, which is mined. Bitcoins can also be obtained through online exchanges, just like gold.
There are 21 million coins for the people to mine. So far, 11 million have been uncovered and move about society; as the 10 million remaining continue to be mined, the equations to discover them become more and more difficult so that coins won’t flood the market and implode. Unlike national currency, which can be printed and introduce inflation, bitcoins are finite. But, like all money, their value depends on their surroundings. As valuable as people see bitcoin, that’s how its price is set. This makes it incredibly volatile; it is uninsurable and can’t be returned. There isn’t central regulation, it’s easily hackable (since it’s totally virtual), and the value of a bitcoin jumps and falls drastically from day to day.
On the other side, Bitcoin is freeing. It is a completely tax-free type of money that can be exchanged directly from person to person with no banks involved. For small business owners, it is a great option that is extremely low cost, gives high visibility (as long as Bitcoin is trendy) and is easy for international transactions. And though it’s still a bit rocky as a currency, it’s market valuation caps at $10 billion — so, it’s not going away fast. As it becomes a more common and “liquid” currency, it’s possible that you’ll be paying for your coffee virtually.