Into to Bitcoins - Online Currency

8/10/2013
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Ever heard of a bitcoin?  Sounds weird doesn’t it?  Like the name of an indie rock band or maybe a cool new gadget?  If you spend time online, you are eventually going to bump into bitcoins.  I know it keeps happening to me.  What are they?  Some sort of bug bite medicine?  My husband thought it sounded like a laundromat.  Nope.  Although, in their own way, bitcoins are something just as simple…and just as necessary.  Bitcoins are…a new kind of money…

For most of us, money and how money is used is part of our fundamental understanding of the way the world works.  If I go to the store, I cannot pay in glitter or smiles.  I cannot use foreign currency or transfer money directly to the store without the help of a bank or credit card company.  We have a system.  We all understand it.  It makes sense to us.  And I think that is what makes the bitcoin so fascinating.  Because, in spite of their simplicity, they are something quite new to us.  Bitcoins are an entirely digital and decentralized form of currency.  They know no borders or governments.  They cannot be regulated by a national bank or agency.  And, perhaps most novel of all, you cannot actually hold one.  Bitcoins are not coins or paper money.  You cannot go to an ATM and withdraw some bitcoins.  They exist entirely online. While they hold no tangible form they are a legitimate type of payment that is growing in popularity.  They can be used in any country and can be transferred directly from one person to another –digitally–with no middle man. 

Bitcoins were created in an odd and fascinating way.  In 2008 someone using the name Satoshi Nakamoto posted a research paper explaining his idea for an online currency to an obscure listserv.  Longtime listserv users did not now Nakamoto and subsequent attempts to discover his identity were unsuccessful. While he did interact with others in discussing the digital currency, he never provided any information about himself.  In fact, it is possible that Nakamoto is an organization rather than an individual.  Either way, Nakamoto’s ideas became a reality.  Previous attempts at online currency had been riddled with problems and ultimately failed.  Nakamoto though, provided key high tech solutions to some of the challenges facing the concept.  A small online community worked through Nakamoto’s ideas and Bitcoins were born.

So, if there is no bank, where do you store your bitcoins?  Bitcoin users store their currency in a “bitcoin wallet.”  This service is inherently private and allows you to perform transactions.  Unlike a traditional bank, bitcoin wallets do not invest your money.  They simply hold on to it.  Also unlike a traditional bank, bitcoin wallets are not FDIC insured – meaning if something goes wrong with your account, you are likely on your own.bitcoin

As bitcoins continue to grow in popularity more and more vendors are starting to accept them.  Popular web-based merchants include WordPress, Reddit, OkCupid, Etsy, and 4chan.  Ebay is now contemplating the best way to allow for bitcoin transactions.  Even brick and mortar stores and service providers are beginning to accept bitcoins.

So, at this point you are probably asking yourself  – where do bitcoins come from? Well, it’s super complicated.  Bitocoins can be purchased from an exchange or created by a process called “mining.”  Miners use their computers to decipher mathematical puzzles and arrive at a sequence of letters and numbers that match a security key established by Nakamoto’s work.  Hardcore miners use computer programs to work through mathematical problems and attempt to unlock Bitocoins.  This is easier said than done, since the low hanging fruit has been grabbed up.  Because the process is so difficult, miners often work together and combine computing power.  When they accomplish their task, they unlock Bitcoins.

I’m sure you have heard the phrase regarding life’s two certainties – death and taxes.  Well, this seems to be the case…even when dealing with internet currencies.  The IRS does not provide a lot of clear direction on how to handle online currency, and the Government Accountability Office has stated that if more Americans understood that Bitcoins are taxable, government coffers would likely have a bit more money in them.  To address the confusion surrounding the issue the IRS released a series of examples in which an individual would have to pay taxes on virtual currency.  As the world moves in an increasingly digital direction and more online merchants start accepting Bitcoins as currency, the government will likely have to provide more detailed instruction as to how to report the income. 

While Bitcoins may sound a little intimidating and there are potential tax ramifications, their growth is also very exciting.  The success of Bitcoins represents the potential for continued innovation and opportunity within the digital world.

 Nicole Palmisano

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