BITCOIN

The Benefits, The Limitations & The Risks

What You Need to Know

Heard the hype about bitcoin but not sure what they’re all about? You’re not alone but follow our guide and get saavy about the benefits, the limitations and the risks of this brilliant barter system.

Back to Basics

Historically, barter systems or exchanges of value were done face-to-face, so that participants could instantly verify the respective physical properties being exchanged. As purchasers and sellers became geographically distant however, agents or other third-parties became necessary to verify the quantity or quality of the property being transferred. Credit card issuers, for example, are a third-party standing in for a buyer, guaranteeing to the seller that the buyer’s funds are good.

The growth of the internet and the extent of digital transactions today have exposed various limitations to traditional currencies and exchange systems in our borderless, electronic world, such as high expenses, time delays and security risks.

As a result, the concept of an international currency, independent of a country or central bank and designed for a globalised economy, has been toyed with for years. The ideal currency would provide anonymity, protection from inflation and security from theft and fraud. These ideals led to the concept of a digital currency, enabling the concept of cash or cash equivalent to be used over the Internet.

Enter Bitcoin

Digital currency, bitcoin (BTC) first appeared in 2009. In technical terms, bitcoins are a finite, verifiable, open-sourced, victual currency that relies upon cryptography for security. It’s basically a more secure, fast and more affordable option for transferring funds.
Bitcoin is based around the idea of a currency created and transacted through cryptography instead of issued and tracked through a central bank. Even the creater of bitcoin only goes by a pseudonym. Instead of any legal authority, bitcoin transactions are verified through peer-to-peer interactions. If a user sends bitcoins to another user’s “wallet” file, that transaction is verified through other users and is written into the collective transaction log.
Instead of a mint, bitcoins are created through a process called ‘mining,’ where computers attempt to solve for a certain number, and once found, are rewarded with new bitcoin. The rewards decrease with time, however, and there will only ever be about 21 million bitcoins created, three-quarters of which by 2016, and all by 2140.
Their performance has been outstanding and attracted lots of interest but there are limitations to the system:
• Glitches
 Not having any legal regulation, bitcoin has attracted plenty of thieves through the websites that create trading markets
• Price instability The market forces behind the bitcoin are far from solid and predictable. There is a large demand from speculators while actual use of bitcoins for trading goods and services is small.

• Legality As bitcoin can be exchanged between anonymous parties, it could be used for illicit activities with little trace. Bitcoin is already a popular currency on what’s called Silk Road, a website accessible only through anonymous Internet connections that acts as a marketplace for many illegal substances.

• Valuation Bitcoin is the first major digital currency with no backing from a state or government nor any physical presence. Unlike gold, which exists in physical form and has some actual applications, bitcoin is made up of data and all value is solely what we perceive. If world governments decide to fight the currency, it could severely hurt any value bitcoin holds. If humans begin to change their mind on what these bits of data are worth, then it could also hurt bitcoin’s value.

Our Take?

Bitcoins are a fascinating concept, for mathematicians, economists, traders and investors in particular, but at this stage, this experimental currency carries far more risk than reward. Attempting to trade in established currencies is difficult enough!