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The buzz on Bitcoin is loud.

Yes, it’s an enigma. Yes, it’s still new. Yes, it has its risks. But Bitcoin is proving to be an auspicious flame that’s spreading like wildfire. For the non-technical, here you’ll find an answer to “Bitcoin Explained?” and an explanation on how it works, and why its so important.

To address the most obvious question on everyone’s mind, what in the world is Bitcoin? Quite simply, it is a decentralized digital money, like virtual cash. It functions the way our paper money works: you can use it to pay for things with the bitcoins you possess in a secure, pseudonymous (your identity is basically just a bunch of letters and numbers), peer to peer transaction.

How Bitcoin Works

You’re probably thinking, “digital money, huh? Okay, you’ve got my attention–but how does it work?” This is where most tend to get befuddled by Bitcoin, but by the time you’re finished reading, you won’t be. Without getting too technical, the jist of Bitcoin is this: the Bitcoin system functions based on peer-to-peer transactions, which appear on a public ledger upon completion of a transaction. In order to legitimize any transaction, a transaction is recorded on the Bitcoin ledger with a unique, one-time digital signature: the only detail available about each member of any transaction. These signatures are produced by what are called “miners.” Miners are in charge of the Bitcoin protocol; they perform the mathematical footwork to ensure that transactions are secure, verified, and that no transaction is made that cannot be fulfilled. The pseudonymy of these digital signatures are only half of the private nature of Bitcoin: since this type of currency is decentralized, there are no banks monitoring your spending and charging high transaction fees as they would for credit/debit/prepaid card transactions. Because of this, the need for a middleman is, in a way, eliminated.

To make you feel absolutely sure that Bitcoin is safe to use, consider the fact that with Bitcoin, unlike with credit cards, there’s no personal information involved. Bitcoin user identities are completely protected because everyone can see what transactions have occurred through Bitcoin’s public ledger, meaning there’s no risk of fake money transfers. if you don’t have the bitcoin/cash in your bitcoin wallet, the math and the protocol of bitcoin won’t allow the transaction to happen.

See? No befuddling technical jargon. But let’s take it a step further–here’s an example of how Bitcoin would work:

Michelle and her friends decide to go to brunch at a trendy new spot in SoHo that accepts Bitcoin as a form of payment. When their stomachs are satisfied and the group has received the check, Michelle opts to pay for brunch in Bitcoin. The waitress presents Michelle with a unique QR code–representing the merchant’s Bitcoin digital signature–on one of the restaurant’s iPads, Michelle scans the QR code on her iPhone’s Bitcoin wallet app, and the cost of brunch is automatically subtracted from Michelle’s Bitcoin balance. Within minutes, Michelle receives confirmation from Bitcoin that her transaction has been verified. The restaurant now possesses the cost of brunch in Bitcoin (which they can convert to dollars or any other currency at any point if they so choose) and Michelle and her friends have had a lovely brunch at the new place they’d been meaning to try. Everyone’s happy.

Bitcoin is very much holding its own in the business and financial world. Tons of different businesses are starting to accept Bitcoin as a method of payment, like Expedia, Overstock.com, eBay, and PayPal. Even EVR, a bar in Midtown, Manhattan, accepts Bitcoin. Speaking of alcohol, Budweiser has announced it will team up with CoinBase, a Bitcoin digital wallet, to spearhead a Bitcoin payment venture. At their annual Budweiser Made In America Festival, Bitcoins will be accepted at concession stands and $10 worth of Bitcoins will be given out to eligible concert goers in order to further promote the event. CoinBase and Budweiser’s partnership at this event in August could prove to be a huge influencer for Bitcoin among the younger masses. Case in point: Bitcoin is slowly but surely making its way into everyday life.

How to Use Bitcoin The Right Way

Bitcoin sounds good so far, right? Right. Yet, among all the good buzz, there are some very valid concerns surrounding Bitcoin that I would like to address, as well as some myths about Bitcoin that have been touted as truths.

Firstly, like with any currency, there are precautions to be taken when using Bitcoin. Because Bitcoin is still a new currency, it is volatile: its value changes every day. The reason for this volatility is primarily based on user sentiment–many are simply unaware of Bitcoin’s existence, so the number of people and businesses using Bitcoin and the number of Bitcoins in circulation is still much smaller than what it could be. However, it’s not the firecracker that many think will eventually fizzle out: Bitcoin is constantly evolving, so that volatility will inevitably decrease. Furthermore, Bitcoin is still in the process of maturing, so you should still exercise caution using it–just as you should be cautious with your money anyway!

Secondly, there has been a major spotlight on the issue of Bitcoin’s legality. As far as the U.S. is concerned, Bitcoin is legal–specifically classified as virtual currency by the US Financial Crimes Enforcement Network (FinCEN). The Law Enforcement Community has now fully understood that all transactions involving Bitcoin can be investigated as an illegal activity if suspected as such and the identity of users involved can be traced. In the furthering of this notion, the FinCEN’s guidelines stress the importance of Bitcoin’s adherence to the laws that apply to money transmitter businesses. These guidelines state that Bitcoin users who simply use the currency for the exchange of goods and services are not classified as money transmitters. The key to Bitcoin is playing by the rules. So get yourself a Bitcoin Wallet, buy some Bitcoin, and try to use them when you see an advantageous opportunity, but always keep in mind that your Bitcoins might gain or lose a portion of their value–just as the dollar’s value fluctuates against the euro, pound sterling, yen, etc.

Bitcoin wants to play by these rules, and others want to help it do so: for example, Marco Crispini, CEO of MatrixVision, offers a “Know Your Customers” service for Bitcoin startups. The service is comprised of “a set of tools designed to help Bitcoin businesses self-regulate: to quickly and reliably identify money-laundering behavior on their services” (CoinDesk). Where the government is concerned, what’s interesting is what Ben Bernanke–former Chairman of the Federal Reserve–has said about Bitcoin: “[Bitcoin] may hold long-term promise, particularly if [Bitcoin] promote[s] a faster, more secure and more efficient payment system” (NY Times). In sum, significant measures are being taken so that Bitcoin and the government can coexist and Bitcoin can prosper.

 

The Future of Bitcoin

What’s undeniable about Bitcoin is how much headway it has made as a digital currency considering what it’s up against–government intervention, for one big thing. Though the concept of Bitcoin can be elusive, ideologically one might ask, “could Bitcoin be poised to replace paper money completely?” Bitcoin has been touted by the tech-savvy who understand the inner workings of its technology, but has been skepticized by renowned economists and professors of economics–with good reason–because of its potentially leery economic nature. Public opinion on Bitcoin differs, but in a foretelling thought in 1999, the late prominent American economist Milton Friedman predicted the need for a functioning “internet cash,” and how important it would be in the new millenium. Though auspiciously noted by Friedman in 1999, Former Chairman of the Federal Reserve Alan Greenspan expressed a lack of understanding of Bitcoin’s intrinsic value, terming it “a bubble” rather than a viable long term financial system. Conversely, venture capitalist Marc Andreessen has commented in response to Greenspan, “Bitcoin is an enabling technology for other technologies.” True, progress comes about from change–and change does not occur overnight–but Greenspan’s remark comes from a wary, yet well-informed economic standpoint while Andreessen, a Bitcoin investor, provides the technologist’s standpoint to emphasize Bitcoin’s potential. Instead of emphasizing either extreme, and before you tell me that the idea of Bitcoin as a currency is completely preposterous, consider the opinion of one of the most influential minds of all time: Benjamin Franklin, “without continual growth and progress, such words as improvement, achievement, and success have no meaning.” Franklin’s ideals were timeless, and in truth, only time will tell what will become of Bitcoin. Perhaps Bitcoin will be like the fantasy of hoverboards as transportation that we had fifty years ago, or maybe Bitcoin will do to the Banking System what email has done to the Postal System. Perhaps we are even standing witness to the growth and improvement of our financial world as we know it.

What are your thoughts on the future of Bitcoin? Share your comments below!