I know we’ve all heard of bitcoins, but what do you actually know about them?
Bitcoins are a virtual or cryptocurrency that are used as part of a decentralized electronic cash system.
The way I understand it, there will only ever be 21 million bitcoins in the world. Initially, they were only obtained through mining which involves using a computer to break a 64-byte number code. If you are the first one to decipher the code, you are rewarded with a block of 25 bitcoins. Since the system is very sophisticated, miners spend a lot money on hardware for mining, and time and energy breaking the codes—that’s how their value was first established. Now that many people have bitcoins, mining isn’t the only way to obtain them, they can also be bought and sold and on exchanges.
Bitcoins can be a quick and easy way to pay for goods and services inexpensively. But the thing is, they are not backed by a government or central bank and they are not insured like deposits to U.S. banks are. The only reason why bitcoins or other virtual currencies are worth anything is because people agree they are worth something.
Remember paying an arm and a leg for a Cabbage Patch doll or selling a specific Beany Baby for a lot of money. As long as there is a demand, their value increases. Same goes with virtual currencies, their value rises and falls depending on demand.
The other thing to consider when utilizing virtual currencies—payments are not reversible—unless the seller agrees. Let’s say you purchase something online and it does not come in the allotted time. If you used a traditional credit card, you could simply cancel the transaction. Not true using bitcoins, once sent, the money is gone. It’s important to only use bitcoins for transactions with companies you know you can trust.
Bitcoins are stored in a ‘wallet’ either on a computer, or an online wallet service. If they are accidently deleted, stolen, hacked or damaged through a virus, they are gone. According to consumer information on the FTC website this has already happened to some bitcoin users.
As long as people trust bitcoins they will continue to have value. The more value the have, the more people will invest in them. Before you invest in bitcoins or other cryptocurrencies do your research and understand the risks.
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