Should You Buy Bitcoin?

As the world’s current front runner in the Crypto Currency market, Bitcoin have been making some serious headlines, and some serious fluctuations in the last 6 months. Almost everyone has heard of them, and almost everyone has an opinion. Some can’t fathom the idea that a currency with any value can be created from nothing, whilst some love the idea that something without Government control can be traded as a valuable entity in its own right.

Where you sit on the “Should I Buy Bitcoin?” fence probably ultimately boils down to one question: Can I Make Money from Bitcoin?

Can You Make Money from Bitcoin?

In just the last 6 months, we have seen the price go from $20 a coin in February, up to $260 a coin in April, back down to $60 in March, and back up to $130 in May. The price has now settled to around $100 a Bitcoin, but what happens next is anyone’s guess.

Bitcoin’s future ultimately rests on two major variables: its adoption as a currency by a wide audience, and the absence of prohibitive Government intervention.

The Bitcoin community is growing rapidly, interest in the Crypto currency has spread dramatically online, and new services are accepting Bitcoin payments increasingly. Blogging giant, WordPress, accepts Bitcoin payments, and African based mobile application provider, Kipochi, have developed a Bitcoin wallet that will allow Bitcoin payments on mobile phones in developing nations.

We have already seen people make millions on the currency. We are seeing increasing numbers of people experimenting with living only on Bitcoin for months on end, whilst recording the experience for documentary viewing.

You can buy a takeaway in Boston, coffee in London, and even a few cars on Craigslist using Bitcoin. Searches for Bitcoin have rocketed in 2013, with April’s hike and subsequent fall in the Bitcoin price. Last week the first large acquisition of a Bitcoin company was made for SatoshiDice, an online gambling site, for 126,315 BTC (about $11.47 million), by an undisclosed buyer.

This rapid growth in awareness and uptake looks set to continue, if trust in the currency remains strong. Which leads to the second dependency. Government regulation.

Although specifically designed to work independently from Government control, Bitcoin will inevitably be affected by Governments in some way. This must be the case for two reasons.

Firstly, to achieve high levels of adoption, Bitcoin will have to be accessible to large numbers of people, and that means spreading beyond the realms of hidden transactions to normal everyday transactions for individuals and businesses. Secondly, these Bitcoin transactions could become a trackable part of people’s taxable wealth, to be declared and regulated alongside any other kind of wealth.

The European Union has already declared that Bitcoin is not classed as a Fiat currency, or as money, and as such, will not be regulated in its own right. In the US, the 50 state system and number of bureaucratic bodies involved has inevitably made decisions more difficult, with no consensus reached thus far. Bitcoin is not considered to be money as such, but it is considered to act like money.

A thriving Bitcoin market in the US has a more uncertain future for now, and any conclusive legislation in the US could either have a very positive, or a very negative effect on the future of Bitcoin.

So, Should You Buy Bitcoin?

The answer depends mostly on how risk averse you are. Bitcoin certainly isn’t going to be a smooth investment, but the potential of this currency is huge.

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Bitcoin in a Nutshell

Bitcoin has almost become a household name with ever increasing coverage in the media, and fair to say its notoriety continues to increase. So what’s all the fuss about? Bitcoin appeared around 2009 as a new form of digital currency and was develop from the off as open-source by a clever chap called Satoshi Nakamoto. We are told his true identify is ‘shrouded in mystery’ like he’s some kind of Marvel superhero, I suspect this simply means he’s a super nerd, but there’s no question, he’s certainly a pioneer…

So what’s it all about?

Bitcoin is a form of currency the same as any other, however it is not under the control of any government or financial institution. The premise is for it to be owned and managed by its own community. Bitcoin is de-centralised and managed by peer-to-peer members who all partake in new transaction activity and store previous activity in what are known as ‘block chains’. This means that a full ‘copy’ of all transactions are stored locally and used to verify, between participants, new activity, thereby preventing any one person from malforming, adding or creating fake transactions within the block chain. This ‘consensus’ approach protects the security of Bitcoin transactions.

Bitcoin works in not a dissimilar way to PayPal in that you have a digital wallet with a unique address where people can send you Bitcoins. You can simply install a wallet on your device, or you can download the full Bitcoin wallet and participate in the network as a node.

Bitcoin’s value is very much an effect of supply and demand with risky investors gambling on the highs. Currently a single Bitcoin (shown as 1.0000000) is worth £573 or $935. You can purchase Bitcoins at any of the 8 decimal places so for example 0.0100000 would cost you £5.70 and 0.1000000 would cost you £57.00, no surprise where Bitcoin got its name!

OK, where do I buy Bitcoins?

Unless you have some Bitcoins coming your way via a payment, you will need to purchase Bitcoins in your existing currency. Purchasing is all about trust as it is not regulated, however that’s sort of how eBay started out, where users trusted each other to pay for and send items, and they’ve done rather well for themselves…

The Bitcoin coal face

Bitcoin mining, as it is known, is the process of generating (and securing) Bitcoins and a small payment in the form of units of Bitcoins are paid for the time and effort your hardware is used and your level of participation. This is done via a number of methods from using your own PC’s CPU or GPU (not dissimilar to other grid based BOINC projects such as Seti @ Home) to using ASIC miners (Application Specific Integrated Circuits), these are designed for the singular purpose for which they are built, which in this case is generating Bitcoins. Unless you have significant investment to purchase powerful ASIC miners such as those from butterflylabs.com which can run at 600GH/s (Hash’s per second) you will have to look at USB ASIC Miners such as the popular BlockErupter which generate 336MH/s. Using the BlockErupters you can create your own USB hub style rig running lots of them concurrently.

The reality though, is that it may be too late in the game to make any serious money from Bitcoin mining. The complexity (Hash rate) of the Block Chain is now such that even joining and contributing to a Mining Pool, where miners work together and share the profits, will likely see more spent in electricity than in any real financial return. Also there is a maximum limit of 21 million Bitcoins and at present it is nearing 12.4 million and as more miners join, the quicker this limit will be reached. It is now more likely you will make money buying Bitcoins themselves than generating them.

The future of Bitcoin…

Bitcoin is an emerging technology, as such the price has been volatile, however recently it has started to become more stable as the community of users grows. As of this writing, Bitcoin is seeing the number of transactions reach as high as 100,000 per day. While banks and big business are yet to consider whether Bitcoin is a threat or an opportunity, there is no doubt they are beginning to sit up and take notice of this new digital currency which continues to grow its user base daily.

Interestingly our mysterious Satoshi, the inventor of Bitcoin is thought to own, depending on fluctuations, $1 billion dollars worth of Bitcoins. Don’t we all wish we had an idea like that…

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