Internet money: What you need to know about Bitcoins
Bitcoin tokens at 35-year-old software engineer Mike Caldwell's shop in Sandy, Utah, April 3, 2013. (AP / Rick Bowmer)
The crypto-currency made headlines again this week after James Howell, an IT worker from Newport, Wales, discovered he accidently threw out a hard drive containing 7,500 bitcoins -- now worth almost $8 million.
Howell obtained the bitcoins in 2009 for almost nothing. When he discarded his hard drive last July -- now buried in a Newport landfill the size of a soccer field -- the bitcoins were worth nearly $900,000.
Today, the value of one Bitcoin has soared to over $1,000.
Here are a few things to know about the virtual currency:
What is Bitcoin?
Bitcoin is a decentralized peer-to-peer digital currency and payment network. It is completely based on the belief that Bitcoin has value.
Hoss Gifford of OneMethod Inc. explains that “unlike traditional currencies, it’s not tied to any one country or any bank.”
“Unlike a traditional currency, it doesn’t have a reserve; there is no big vault underground somewhere with a lot of gold,” he says.
Instead, Bitcoin relies on a sort of honour system, and is traded on the web.
According to the Bitcoin website, Bitcoin is free from the highs and lows of inflation, interest rates and market fluctuations, and its value is determined by the number of bitcoins in circulation. The total number of Bitcoins is capped at 21 million.
How does Bitcoin work?
According to the Bitcoin website, “Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them.”
Bitcoins are typically bought through an exchange. The process involves setting up an account, then transferring funds into the account in order to start buying bitcoins. Bitcoins can also be exchanged in physical form through the Casascius coin -- each is worth one digital Bitcoin.
Individuals can acquire bitcoins through:
- Payment for goods and services
- Purchasing them at a Bitcoin exchange
- Exchanging bitcoins with other individuals
- Earning bitcoins through competitive mining (a process whereby users create money through computing: users donate their computer power to Bitcoin so it can be used to solve complex mathematical problems required to validate transactions. When a problem is solved, bitcoins are issued).
The world’s first Bitcoin ATM went live in a downtown Vancouver shop in October, allowing people to exchange cash for the digital currency. Approximately 20 businesses in Vancouver now accept Bitcoin.
In November, British billionaire Sir Richard Branson’s commercial flight company Virgin Galactic announced it is now accepting the digital currency for its Virgin Galactic flights to space. And on Nov. 28, University of Nicosia, Cyprus’ largest private university said it will start accepting Bitcoin for tuition fees -- the first university to do so.
What are the advantages?
- Efficiency: Money can be sent and received instantly anywhere in the world, at any time, without a bank or middleman.
- Low fees: Payments are processed with either no fees or very small fees.
- Privacy: Transactions do not contain users’ personal information, offering stronger protection against identity theft.
- Control: Users are in full control of their transactions.
- Transparency: All information on transactions is available in the database.
What are the risks?
Because Bitcoin isn’t backed by a mint, transactions are not subject to the same regulations as other currencies. While every single transaction made using Bitcoin is posted publicly, the identity of the user remains anonymous -- making it hard to track perpetrators in the case of theft.
The now-defunct online drug market Silk Road was an early driver in Bitcoin’s growth, taking advantage of the currency’s ability to provide anonymity to users.
But according to the Bitcoin website, the most common vulnerability is user error. Similarly to physical cash stored in a digital form, Bitcoin wallets that store private keys can be accidently deleted, lost or stolen.
With reports from CTV News and The Canadian Press