Currencies have gone through so many variations over the centuries.
First we had simple bartering (“your sheep for my cow!”), then we moved
onto paper money and coins. Back in 2001, we had a big currency shift
when most of the European Union scrapped their currencies and moved to
the Euro. Today, the next phase of currency evolution is arguably the
move to digital, namely Bitcoin.
What Is Bitcoin?
Bitcoin is the world’s biggest digital currency, taking up almost 50% of the digital currency market. There are other digital currencies too, such as Ethereum, Ripple, Litecoin, and Dogecoin. Each has its own exchange rate.
To avoid any confusion, we are going to stick solely to Bitcoin today, since it is the biggest and most widely used. There are over 16 million Bitcoins in existence, at the time of writing this.
It is unique in that there is no actual currency (i.e. no banknotes and coins), and is instead merely numbers on the screen. It is also unique in that nobody has any control over Bitcoin. Actual physical currency is controlled by the government of the issuing country. But Bitcoin has no issuing country, because it is used everywhere.
A Peer-To-Peer System
Physical currency is controlled and manipulated by the banks – Bitcoin isn’t. It is a peer-to-peer (p2p) currency in that instead of a bank or another financial institution calling the shots, it is decentralized. It is passed from one user to another. This also means lack of oversight and regulations, which is partly why Bitcoin has been very slow to catch on. People are understandably nervous about investing money in something which has no rules attached.
Bitcoin transactions are recorded in a public ledger called the “blockchain”. This information is permanently and publicly viewable on Blockchain.info and cannot be edited or deleted. Blockchain therefore acts as the proof of a transaction.
Bitcoin was invented by an anonymous individual called “Satoshi Nakamoto”, but nobody really knows who this person is. It is claimed he is actually an Australian called Craig Wright, but quite honestly, does it really matter? Bitcoin has now outgrown its inventor.
Is It REALLY Anonymous?
Yes – and no. Yes, in the sense that you can send and receive Bitcoins without revealing anything personal about yourself to the other party. So for example, you wouldn’t have to give your name, bank address, routing number, etc, to a complete stranger. There would also be no bank with your actual identity details on file, to link that Bitcoin address to.
This is an example of a Bitcoin address :
1AhN6rPdrMuKBGFDKR1k9A8SCLYaNgXhty
This means no-one can see who owns a particular Bitcoin address. But if anything subsequently reveals it to be your address, then all transactions to that address will be linked to you. This is why it is generally recommended to use multiple wallets, and to not reuse a Bitcoin address for multiple transactions. That way, it becomes more difficult to pin a particular transaction on you.
Not impossible, just more difficult.
Bitcoin Wallets
Since Bitcoin is not an actual physical currency made up of banknotes and coins, the only way to buy and sell is online. This is done through the use of a “wallet”. It enables you to pay someone, in much the same way as you would with an ordinary bank transfer.
There are so many options for wallets, that I am going to limit recommendations to 2 of each. These are what I consider to be the best, in my opinion.
Desktop Wallets
Our two choices for desktop wallets are Multibit and Armory.MultiBit (Windows, MacOS, Linux)
Multibit impressed me from the very start. There is so much to recommend it.
As well as a nice user-friendly interface, your funds are encrypted inside the desktop app. It never stays with a third party, thereby reducing the chances of getting hacked. It is also available in over 40 languages and is totally free to download.
Multiple wallets are easy to manage as well, improving your chances of security.
What really got my attention though was Multibit’s integration with a piece of hardware called KeepKey. When used, KeepKey displays all outgoing Bitcoin transactions, and each one has to be approved before being processed.
Multibit has made a YouTube video, explaining step-by-step how to set up a wallet for the first time.
Armory (Windows, Mac, Linux, Raspberry Pi)
Armory is a bit more involved on the technical side, as it stresses its great encryption features, some of which I’m not sure I totally understand. But after giving it a twirl, it looks solid enough, especially if security is your main concern when using Bitcoin.
Armory is free and open-source, which means right away its code is freely available for inspection. This allows people to see how secure the code REALLY is, and you don’t have to take the company’s word for it.
You can manage multiple wallets, as well as use something called “Cold Storage”. This is when all private encryption key data is stored on an offline computer, making it impossible for someone to hack in and steal accounts.
Finally, if you are looking for a guarantee of the company’s long-term viability, look no further than this statement on their website :
All Armory source code can be found on GitHub. It is also found on other parts of the internet intended for archiving and saving this kind of information, such as GoogleCode and Amazon Web Services.If that doesn’t reassure you, nothing will!
In order for Armory to “disappear”, basically the internet would have to be wiped out, along with most of the people who ever used or installed Armory (including all the people who ever understood the code).
Mobile Wallets
My criteria for mobile wallets is that it had to be available for both iOS and Android.CoPay (Multiple Platforms)
CoPay manages multiple Bitcoin wallets with ease, enabling you to maintain your privacy and security, without breaking a sweat. Everything is open-source, and free to download.
The best part of CoPay is that the account is held by a group of people (yourself and friends, for example). To make any transaction requires the permission of every account holder. That’s a really neat feature.
CoPay is available for multiple platforms, including Google Chrome and even the Windows Phone.
Xapo (iOS & Android)
The Xapo app comes with its own debit card, so you can withdraw your balance from ATM machines. You have to pay for it (via your Bitcoin balance, naturally), but the card is not actually needed. You can simply use the app on its own.
Xapo also touts their heavy security vault for storing Bitcoin balances for their customers. The vault is apparently in a decommissioned Swiss military bunker.
Xapo has some big endorsements, such as the Wall Street Journal. One of their advisors is Larry Summers, who was President Clinton’s Treasury Secretary.
Buying Bitcoins
Now that we have looked at various options for maintaining a Bitcoin wallet, it’s now time to get some Bitcoins in there. You can buy Bitcoins online, in your wallet apps, and you can even find in some offline places, Bitcoin ATM machines.
Keeping Track Of The Exchange Rate
The exchange rate for buying Bitcoins is expensive. For example, this is the exchange rate today (May 25th 2017), if you want to convert one Bitcoin into US dollars, Euros, Chinese Yen, or British Pounds (or vice-versa).
At this point, you are probably thinking “well that’s that then! I don’t have almost $2,700 to buy ONE coin!”. But wait, because you can also get fractions of a Bitcoin, in the same way that a physical currency is made up of 100 cents, pence, whatever.
If you go to Preev, and enter one dollar (or another currency), it will automatically tell you on the left-hand side how much Bitcoin that comes to. It updates in real-time, so you WILL notice changes in the amount at any time.
So if you were to pay one dollar, you would end up with a Bitcoin balance of 0.0004169. This doesn’t take into account any fees the wallet service may charge though.
The exchange rate has fluctuated wildly throughout the years though. This revealing article from Ars Technica says that if you bought $1,000 worth of Bitcoin back in 2010, it would be worth $35 MILLION today. Back in January of this year, one Bitcoin was $1,000. Today, 5 months on, one Bitcoin has hit an all-time high of $2,730. Tomorrow though, it could be worth nothing – just like playing the stock market.
It should also be pointed out that yesterday it was $2,400 per Bitcoin. So in 24 hours, it has gone up more than $300.
Paying With Bitcoins
So now you have some Bitcoins in your wallet, let’s see what you can use them for.
Despite improvements in security and making Bitcoin less anonymous, it is still the currency of choice for criminals, especially on the Dark Web. But there are legal uses too.
For example, my Internet Service Provider now accepts Bitcoin as payment (although he admits he doesn’t have many who do it). These two Bitcointalk threads – here and here – also highlights some of the growing legal uses of the currency. From online gaming to coffee to Reddit subscriptions.
Conclusion
As everything else in the world moved online, it made logical sense for finance to move online too. Digital currency, despite its many faults, is here to stay. But it has to overcome its teething problems first.
It needs better oversight, better security protocols, a more stable exchange rate, and more importantly, more merchants willing to trust it and accept it as payment. That will be when digital currencies such as Bitcoin will mature and come of age.