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Back in 2009, a few early adopters took the gamble and invested money in a new digital currency that was released in a bid to create an international online money system. Fast forward 8 years and what started as an internet experiment is now a digital phenomenon, with a single bitcoin now worth well over £3,000. This 'crytocurrency' now has everyone from tech experts and to banking and financial institutions foaming at the mouth, so what's all the fuss about?
How does it work?
Bitcoin is not like existing currencies that are used to pay for goods and services in a normal sense. They still need to be 'earned' and certain companies accept them as payment, but the system is fundamentally different to say, the British Pound.
Instead of a centralised, regulated currency that is carefully controlled by a dedicated authority, Bitcoin is open source. This means anyone can 'earn', buy or sell bitcoins and influence their value, leading to things like bitcoin 'mines' and exchanges that act like a sort of digital stock market.
Bitcoins aren't generated by a bank, but are given as a reward for 'mining'. This is done by using a high-speed computer to process vast amounts of information, with coins rewarded for a set amount processed. This information is kept in blocks, an innovative, de-centralised solution to stop fraudulent transactions, hackers or thieves by requiring a network of communicating nodes running bitcoin software. As all nodes must be in agreement, it is impossible for hackers to change information at a single location as these blocks, a.k.a the Blockchain, which can be stored in millions of locations.
Bitcoin allows a certain element of anonymity, as peer-to-peer exchanges are all public, but can be made without the identity of the bitcoin address holder being made available. The official stance however from some organisations that accept bitcoin is that the transaction must be 'signed for', with some personal data collected to aid with things like taxation and money laundering.
Where can I use it?
Thanks to an improved public understanding and some big names including the Winkelvoss twins (of Facebook fame) and millionaire investor Jared Kenna who have brought bitcoin investment into the limelight, lots of (mostly internet based) companies will accept bitcoin. Wordpress, the Microsoft Store, Steam, Wikipedia and even Subway will exchange goods and services for Bitcoin, although users must waiver any anonymity.
One industry that could benefit from bitcoin is the world of online casino gaming. With millions of real-money transactions made everyday in multiple currencies, casino providers could save a lot of money on bank processing fees and exchange rates if their customers adopted to a fluid, deregulated currency like bitcoin. The only issue with this however, as highlighted in the bitcoin & poker guide, is that poker transactions need to be fast and fluid to keep gameplay exciting. Bitcoin transactions are currently extremely slow (only around 7 per second at any one time worldwide) and take even longer if they are larger transactions. Unless you're throwing your Trezor digital wallet into the pot, it wouldn't make much sense converting a valuable bitcoin into cash; there aren't any gaming providers that accept bitcoin currently.
Is it worth it?
At the moment, bitcoin suits the investment model. Mining is time-laborious and supercomputers aren't cheap to buy, so buying and selling at the right times is more profitable in its current state. The other element is scalability; there will only ever be a limited number of bitcoins that will become available, sending coin values even further skyward. If you're trying to buy a pizza for £9.99 for example and a single bitcoin is all of a sudden worth £10,000, getting change is going to be difficult.
As it stands, bitcoin is a great addition to any investment portfolio, but trying to earn it or spend it has become a lot more difficult and won't change any time soon.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.