Bitcoins - Should You Invest in Bitcoins?

Bitcoin was launched as a private initiative in 2009. Unlike traditional currencies, such as the Euro, Sterling and Dollar, it is not controlled by a central monetary authority. Instead, it is underpinned by a peer-to-peer network of its users' computers. This is similar to how Skype, a video chat service, operates.

The basic unit of value is the bitcoin. However each bitcoin can be subdivided into satoshies. One satoshi is equal to one hundred millionth of a bitcoin (ie, a bitcoin divided to eight decimal places).

Bitcoins and satoshies can be transferred from one internet user to another in order to pay for goods or services at virtually zero cost. This allows you to make international transfers without having to mess around with exchange rates and onerous bank charges. Bitcoins can be bought and sold for traditional cash at special exchanges.

Bitcoin wallets

In order to use Bitcoin, you need a wallet, a special piece of software in which you store, send and receive bitcoins. There are three kinds of wallets, software wallets, mobile wallets and web wallets.

Software wallets are installed on your computer and they give you full control over your wallet. Mobile wallets are installed in your smartphone or tablet and allow you to use Bitcoin for daily transactions in shops and supermarkets by scanning a quick response (QR) code. Web wallets are located on the World Wide Web, ie they are a form of cloud storage.

Payments using bitcoins are super easy. They can be made from wallets on your computer or smartphone just by entering the receiver's address, the amount and then pressing send. Smartphones can also obtain a receiver's address by scanning a QR code or by bringing two phones that contain near-field-communication (NFC) technology, a form of radio communication, close to each other.

Receiving payments is just as easy... all you have to do is give the payer your bitcoin address.

Protecting your wallet

A bitcoin wallet is like a wallet full of cash. To reduce the risk of loss, you should keep only small amounts of bitcoins in your computer or smartphone and keep the bulk of your bitcoins in a safer environment, such as an offline wallet. Provided your wallet has been encrypted, an offline back-up will allow you to recover your wallet, should your computer or smartphone be stolen.

Encrypting your wallet allows you to set a password that must be input before funds can be withdrawn. However, recovering a bitcoin password is impossible if it is lost. That is why you need to be absolutely sure you can remember your password. If the value of your bitcoins is significant, you could store the password in a bank vault or wherever you store important papers.

In order to be as secure as possible, you should store off-line back-ups in several locations using various media such as USB flash drives and CDs.

Because bitcoin runs on software you download to your computer (PC or laptop) or smartphone, you need to update this software regularly in order to keep your wallets and transactions safe.

Advantages of bitcoins

Bitcoins have several significant advantages:

1-you can send and receive limitless amounts of money instantly at any time to and from anywhere in the world.

2-processing does not cost any fees or only very small fees.

3-bitcoin transactions are irreversible, which protects sellers from the fraudulent chargebacks that are increasingly common with credit cards.

4-payments are made without personal information being exchanged, which provides strong protection against identity theft.

5-the receipt and payment process is completely neutral, transparent and predictable.

Disadvantages of bitcoins

However, using bitcoins has several disadvantages:

1-they are not yet accepted universally and thus cannot be used everywhere.

2-their value is volatile because the number of bitcoins in circulation is quite small so relatively small transactions can affect their price significantly.

Should you use bitcoins?

The short answer is NO or, at least, not in a major way yet.

Bitcoins are fungible assets with durability, portability, divisibility and scarcity, ie they have all the characteristics of conventional money (Euros, Dollars, Pounds etc). They have value so they can be exchanged for other currencies at exchanges.

Therein lies the danger. There are times when the value of the bitcoin can fluctuate widely, by 50% in one day. So, as a store of value, they are not for the faint-hearted. In other words, you should not have more money than you can afford to lose in the form of bitcoins.

However a wallet with small amounts of bitcoin in it could be used for minor day-to-day transactions which would help familiarise you with internet currencies. As the amount of bitcoins in circulation increases, their value viz-a-viz other currencies should stabilise and you can start using them for larger transactions.