BitCoin is a new, all-digital, peer-to-peer (p2p) currency, which can be used to replace cold, hard cash when buying and selling goods and services online.
Unlike most money online, which is stored in banks and transferred using payment processors like PayPal, BitCoin is completely distributed between its users and sent between users without the need for a middleman.
There are a few major advantages to using BitCoin in place of your normal currency for online transactions, most of which stem from how BitCoins are stored.
First of all, BitCoin is a global, decentralized currency. This means that there is no country to which BitCoin specifically belongs, making it a viable currency to use all over the world. This makes international transactions simple; no longer does there need to be a discussion over whether the payment should be made in the buyer‟s currency or the seller‟s, nor at which exchange rate the transaction should take place.
Another big advantage that decentralized currencies have is that a Federal Reserve or national bank does not manage the value of the currency. This means that the currency will retain its value regardless of the performance of the global economy, similar to the value of rare metals and commodities like oil. It has no single point of failure; the entire Internet would have to go down for BitCoin to fail.
Second, because transactions are made directly from one person to another, there is no middleman, and therefore no fees. In a few years time there will be a slight charge for transactions due to the way that the currency is managed, but it should be much less than the standard alternatives.
Third, because the BitCoins you own are stored in a wallet file on your computer, you have full control over your funds. Since the BitCoins are not stored in an “account” they cannot be frozen, meaning that you will never be left without cash. Furthermore, there is no “small print”, transaction limits, forms or other limits like you would have with a bank.
Finally, while it does cost money to exchange fiat currencies to BitCoins and vice versa, it doesn’t cost anything to accept them, making it a great way to be paid online for goods or services.
Of course, like all things, there are some downsides to using BitCoins, which may mean that using them is not for you. It‟s worth giving it some thought before rushing in.
First of all, because you hold on to the money and don‟t store it in a bank, you won‟t earn any interest on any money stored as BitCoins. While to most people this isn‟t a major problem (since you‟re likely only using BitCoins to send to somebody else), if you‟re a merchant dealing in BitCoins, not collecting interest could have significant implications.
Reliability is also a major issue. While in theory its internet-wide distribution should make the currency stable, it is still potentially susceptible to shocks in supply or demand, which could cause rapid changes in its value. It‟s important to remember that BitCoin is a fledgling currency that has only been around for a couple of years and is one of the first of its kind, so there‟s no real way to tell how successful it will be.
Furthermore, while its decentralized nature can be advantageous, it does also mean that if something does go horribly wrong there‟s no bank or government to back it up.
Simply put: BitCoins could be worthless someday.
Another problem is the way that money is sent from peer to peer. While it is possible to create more complex transaction systems for BitCoin, the simple transfers that make up the majority of BitCoin transactions have no set securities. That basically means that all transactions are final and there are no refunds, making it great for scammers; once the money is gone, it‟s almost impossible to get it back without the other party returning it voluntarily. There is no bank or credit card company to appeal to.
The other main downsides to using BitCoins come down to the disadvantages it shares with physical cash – its ability to be lost or stolen. As the BitCoins are stored in a simple file called a wallet file, they can be at risk to hackers and viruses that can transfer the money from your wallet to theirs (which, again, is almost impossible to reverse due to the nature of transactions). However, it‟s a fairly simple and straightforward process to secure your wallet file – we‟ll touch on that later.
While it is quite difficult to “lose” the wallet file in the same way you might lose your real wallet, there are still the possible dangers of file corruption, hard drive failure and accidental deletion. Since the only record of the BitCoins you own is the wallet file that they‟re stored in, losing the wallet means losing the BitCoins.
So, now you know the risks involved. There are a few, to be sure, but most are easily avoided.