You may have heard the term Bitcoin and wondered what it means. Bitcoin is the most well-known form of digital currency. It came about in 2009 seemingly as backlash to the financial crisis created by big banks and their unscrupulous lending practices. “Satoshi Nakamoto” created it. However, it is unknown who Nakamoto is (or if he or she is a person). For example, Nakamoto could potentially represent a group of people.
More on Bitcoin
A bank or government does not control Bitcoin. There are little or no fees for transactions. You can get bitcoins by purchasing them with other international currencies on a Bitcoin exchange (such as Mt. Gox). You can also get bitcoins by having them transferred to you by someone else, or by earning the currency. For most people and businesses, it is not feasible to earn bitcoins. Only a few specialized computer companies or basement geniuses will earn bitcoins this way. An online ledger records all transactions, which are confirmed or authorized by the solution of complex math problems. Computer companies approve the transactions and then they are paid for their work with bitcoins. Therefore, there is no central administrator.
While bitcoins have not replaced the almighty dollar they are becoming an alternative. Mainstream companies (such as WordPress, OKCupid, Tiger Direct, Overstock.com) accept bitcoins. In addition, some private businesses accept bitcoins. A few small businesses and law firms have joined the bitcoin bandwagon because of the advantages it offers (like low transaction fees, ease of international exchanges, anonymity, and is a universal currency). Bitcoin advocates tout it as the next revolution in electronic payment.
However, while using bitcoins is legal, there are some potential problems you should be aware of before you trade in all your dollars for digital currency. Unlike back accounts (which are insured by the FDIC) bitcoins are not protected from loss or theft. You get access to your bitcoins with a digital private key. If that key is lost or stolen and there is no central administrator to help you recover it, the bitcoins are lost to you. The digital wallets where your bitcoins “live” are susceptible to being hacked. If a thief steals your bitcoins, there is no way to stop them from using them or to get them back.
The currency’s value is highly volatile—swinging from a low of $13 to a high of $1,200, back to around $400-$500 currently. If your company accepts bitcoins, you would be smart to designate how bitcoins will be valued and when they will be converted into another type of currency (like the dollar).
Perhaps the biggest draw for some users (and the biggest detraction for others) comes from the currency’s anonymity. This makes it an attractive means to obtain illegal items and to contract for illegal services as well as to launder money obtained through illegal means. Some of the first law firms to publicly accept bitcoins are criminal defense firms. Lawyers are subject to ethical rules, such as placing unearned money (like an up-front retainer) in an interest bearing escrow account until that money is earned, and to not accept any money or property from illegal sources. A retainer paid in bitcoins would need to be converted to dollars and placed in a bank escrow account to comply with the rules. An attorney is legally obligated not to accept funds he or she does not believe were obtained legally.
Does Consumers Use Bitcoin?
Seven years after its launch, Bitcoin has still not become mainstream. Nevertheless, bitcoins have a worldwide value at $6 billion. They, along with other digital currencies, may be the wave of the future. Visionaries, those willing to gamble with their money, and those who value anonymity over security are the most frequent users of bitcoins. Likely the average person who cannot afford to lose their money to thieves, lost keys, or who have no need to keep their transactions anonymous will not jump on the bitcoin bandwagon unless and until bitcoins become more secure.