What is Bitcoin?
Bitcoin is the first and biggest cryptocurrency in terms of market cap. It is a distributed ledger that utilises blockchain to allow peer-to-peer transactions, i.e. sending and receiving Bitcoin. The network is maintained by Bitcoin nodes (e.g. miners), computers from all over the world that validate transactions in a decentralised, immutable way. Using the Proof of Work consensus algorithm, the cryptocurrency has received some criticism recently. Tesla CEO Elon Musk also commented on Bitcoin’s energy requirements. On the other hand, many vocal Bitcoin supporters, such as Jack Dorsey for example, think that Bitcoin could play an important role in boosting green energy sources.
Is Bitcoin a currency? Is it digital gold? Or both?
One of the most interesting aspects of Bitcoin is that it’s a couple of things at the same time. On the one hand, it's a decentralised payment network - think PayPal or Visa, but without any company, CEO or office building behind it. On the other hand, many of its characteristics resemble gold, therefore it also ticks all the boxes of an asset that acts as a store of value. Another aspect is that Bitcoin’s blockchain can act as an immutable record of information, an element that is already one of the key aspects of other cryptocurrencies like Ethereum and which may become a bigger topic for Bitcoin in the future.
Pros of paying with Bitcoin:
+ Decentralised transactions: No bank, nor any centralised authority has power over the Bitcoin network, therefore the user sending and receiving Bitcoin remains highly autonomous. This, combined with the immutability of transactions, eliminates the need for relying on third parties for one’s finances.
+ Your whereabouts don’t matter: Bitcoin can serve as an alternative financial system for people in remote and unbanked regions all around the globe, irrelevant of where they are. All you need is an internet connection and a device such as a smartphone or a cheap computer for example.
+ More efficient international transactions: Bitcoin transactions are relatively inexpensive compared to traditional international transfers. Furthermore, the transactions also tend to be settled faster, no matter what time of day it is. Additionally, Bitcoin transactions do not need the approval or waiting time of a traditional transfer.
Cons of paying with Bitcoin:
- Volatility concerns: The crypto market is known to be highly volatile, meaning the price of Bitcoin can rise and drop significantly within a short time period. This can be a problem, as by the time you receive your Bitcoin transaction if the relative dollar or euro price dropped (or went up) in the meantime.
- No “forgot password” option: Bitcoins are stored on the Bitcoin blockchain under so-called “Bitcoin addresses”. To use the bitcoins of an address, one must have the public and private key (passwords, if you like) of that address. These keys are normally stored on a wallet, which can be anything from a piece of paper to sophisticated hardware. If the private key is lost, or can’t be accessed, the same will be the case for all the bitcoins associated with the address: private keys are not recoverable.
- Bitcoin transactions are irreversible: If you accidentally sent your bitcoins to the wrong address, and that address is not willing to return the transaction, there is no way for you to claim back what’s yours.
Before you pay with Bitcoin
So, you’re considering paying for your next coffee with Bitcoin? The important thing to note here is that before paying with Bitcoin you definitely have to make sure that you are fully aware of the positives and negatives of such a transaction. If you pay for various services or items (or anything for that matter) with Bitcoin, you are basically redeeming your investment. This can mean that, depending on your country of residence & applicable tax laws, your payment with Bitcoin might be a taxable event, in which case you should account for extra expenses.
Conclusion
To sum up, Bitcoin has already changed and is continuing to change the way we look at finance and money. Using the Bitcoin blockchain, the network has demonstrated the power and usability of decentralised finance. While use cases are growing every day, Bitcoin has the potential to become a universally accepted exchange of value beyond a speculative store of value.
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