10 things you should know about Bitcoin and digital currencies

Bitcoin has injected itself into a lot of conversations about the future of technology, economics, and the internet. The future of digital currencies remains a controversial topic. After reading these 10 things to know about the confusing world of digital currencies, you'll feel confident joining the conversation.



1. The difference between virtual, digital, and cryptocurrencies

Virtual currencies were developed because of trust issues with financial institutions and digital transactions. Though they aren't even considered to be "money" by everyone, virtual currencies are independent of traditional banks and could eventually pose competition for them.

First, there are three terms that are sometimes used interchangeably that we need to sort out: virtual currency, digital currency, and cryptocurrency.

Virtual currency was defined in 2012 by the European Central Bank as "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community." Last year, the US Department of Treasury said that digital currency operates like traditional currency, but does not have all the same attributes — as in, it doesn't have legal tender.

Digital currency, however, is a form of virtual currency that is electronically created and stored. Some types of digital currencies are cryptocurrencies, but not all of them are.

So that leads us to the more specific definition of a cryptocurrency, which is a subset of digital currencies that uses cryptography for security so that it is extremely difficult to counterfeit. A defining feature of these is the fact they are not issued by any central authority.

2. The origin of Bitcoin

Bitcoin is a cryptocurrency, a number associated with a Bitcoin address. In 2008, a programmer (or group of programmers) under the pseudonym Satoshi Nakamoto published a paper describing digital currencies. Then in 2009, it launched software that created the first Bitcoin network and cryptocurrency. Bitcoin was created to take power out of the hands of the government and central bankers, and put it back into the hands of the people.

There are currently about 12 million Bitcoins in circulation, though when it was created, the programmer said there is a finite limit of 21 million Bitcoins out there. They are currently valued at around $460 each, according to Bitcoin Charts, which tracks the activity. The value surged as high as $1000 each in December 2013.

3. The origin of Dogecoin

Dogecoin is a form of cryptocurrency that was created in December 2013. It features Doge, the Shiba Inu that has turned into a famous internet meme. It was created by Billy Markus from Portland, Oregon, who wanted to reach a broader demographic than Bitcoin did. As of March, more than 65 billion Dogecoins have been mined, and the production schedule of this cryptocurrency is in production faster than most.

Earlier this year, the Dogecoin community raised funds for the Jamaican bobsled team to attend the 2014 Winter Olympics when they could not afford to go. The community also raised 67.8 million coins (about $55,000) to sponsor NASCAR driver Josh Wise, who drove the Doge-themed car in several races.

Because there's a lot of them, Dogecoin is valued pretty low — 1,000 Dogecoins are worth $0.46.

4. Other types of digital currencies

There are other types of digital currencies, though we don't hear much about them. The next most popular is probably Litecoin, which is accepted by some online retailers. It was inspired by Bitcoin and is nearly identical, but it was created to improve upon Bitcoin by using open source design.

There are many other types of cryptocurrencies, such as Peercoin, Ripple, Mastercoin, and Namecoin. Cryptocurrencies get some flack because they are often replicates of other versions, with no real improvements.

5. Bitcoin regulations

Who is in charge of Bitcoin? The point of the currency is that it is decentralized, but there are legalities that differ in every country. Law enforcement and tax authorities are concerned about the use of this cryptocurrency because of its anonymity and the ease of using it for money laundering and other illegal activities. Bitcoin was the prime currency on Silk Road, which was used to sell illegal goods, including drugs. It was shut down in 2013 by the FBI.

The US Security and Exchange Commission (SEC) hasn't yet issued specific regulations on digital currencies, but it often warns about investment schemes and fraud. The Financial Crimes Enforcement Network (FinCEN), an agency under the Department of Treasury, took initiative and published virtual currency guidelines in 2013. Many countries are still deciding how they will tax virtual currencies. The IRS is specifically concerned with virtual currencies being used for unreported income.


6. How Ben Bernanke changed the Bitcoin game
In late 2013, the first congressional hearing on virtual currency was held to outline the pros and cons of Bitcoin. The hearing ended up providing a financial boost for the currency, because US officials talked about it as a legitimate source of money, as opposed to only discussing its role in illegal activities.

Although he didn't attend, Federal Reserve Chairman Ben Bernanke said in a letter to US senators that virtual currencies "may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system." Bitcoin, which was valued around $13 in the beginning of 2013, jumped sharply after news of his comments broke.

7. How to get Bitcoins

There are three ways you can get Bitcoins: buy them on an exchange like Coinbase, accept them for products and services, and mine them. We'll get to the latter process in the next section.

To start, download a Bitcoin wallet. There are many websites where you can download an app on your phone or computer to store Bitcoins. MultiBit is an app you can download for Windows, Mac and Linux. Bitcoin Wallet for Android runs on your phone or tablet. To store the Bitcoins, you have three options:

1. Desktop wallets leave you responsible for protecting the currency and doing your own backups.

2. Mobile wallets allow you to travel with the Bitcoins anywhere, and you are responsible for them. Mobile apps allow you to scan a QR code or tap to pay.

3. Web wallets are transacted through a third party service provider. If anything happens on their side or it gets hacked, you run the risk of losing the Bitcoins, so extra backups and secure passwords are suggested.

Problem is, Bitcoins can be stolen in huge quantities, just like money, and with no centralized bank, there's no way to recoup the losses. There are several types of Bitcoin ATMs, which exchange Bitcoins for flat currencies. Most machines are expensive and rare, ranging from $5,000 to $2,000. Skyhook, a Portland, Oregon-based company, demoed a $1,000, machine at a conference this month. It is the first portable, open source ATM.

8. How to mine for Bitcoins

It's like mining for gold, just on the computer. You need a Bitcoin wallet and specific software, which is free and open source. The most popular is GUIMiner, which searches for the special number combination to unlock a transaction. The more powerful your PC is, the faster you can mine. In the early days, it was easy to find Bitcoins, and some people found hundreds of thousands of dollars worth of the cryptocurrency using their computers. Now, though, more expensive hardware is required to find them. Each Bitcoin block chain is 25 Bitcoin addresses, so it takes a lot of time to find them on your own. The exact amount of time ranges depending on the hardware power, but mining all day could drive your energy bill up and only mine a tiny fraction of a Bitcoin — it may take days to mine enough to purchase anything.

To tackle that problem, there are now mining pools. Miners around the world can band together to combine the power of their computer systems and then share the profits between participants. The most popular one is Slush's Pool, where smaller, more steady payouts are given instead of a lump sum.

9. Where you can use Bitcoin

There are many places you can use Bitcoin to purchase products or services. There's no real rhyme or reason to the list, which includes big corporations and smaller, independent retailers including bakeries and restaurants. You can also use the currencies to buy flights, train tickets, and hotels on CheapAir; upgrades to your OK Cupid profile; products on Overstock.com; gift cards on eGifter. There's a list on SpendBitcoins that shows all the places that accept the cryptocurrency.

10. The future of virtual currency

The value of Bitcoin has fluctuated drastically throughout the last year, and there are still 9 million of the coins out there in cyberspace. However, many security issues remain, and that will continue to be a problem. In 2013, Mt. Gox, a Japanese exchange, handled 70% of all Bitcoin transactions, but they lost some 750,000 Bitcoins in February 2014 and filed for bankruptcy, and nothing has been proven in the case. Since it's universal, it's useful for international transactions, and could be helpful for transactions in developing countries.

Some experts suggest putting a few aside if you have them and see what happens in the coming months and years, because there are sure to be regulations on the currency soon. With businesses jumping on the bandwagon and investors becoming interested in cryptocurrency, look for momentum to grow, but it will take time for the situation to stabilize as governments, the international community, and the people of the internet decide on how the next generation of currency will transition to a digital world.


The Folly of Digital Money, the Lasting Value of Gold

Progress isn't always...well...progress.

Take what we use for our money, for example.

Who, today, doesn't employ a "symbolic" form of money, a credit or ATM card, several times a week (not to mention a day)? These digital transactions, though convenient, don't actually represent the transfer of physical cash from one hand to another. Instead, and in reality, electronic digits are the only things that are getting transferred.

And not from one hand to another, but from one computer to another.

Consider this cautionary tale. A bank customer - let's call him Dave - had accumulated 175,000 "bonus points" due to his bank credit card purchases. These points qualified Dave to buy, or in bank terms exchange, points for a variety of valuable goods (kind of like a frequent flyer program). He was all set to go.

At least until a controversy involving real money arose. Dave had wanted a top-of-the line gold watch valued at 200,000 points. He needed only 25,000 additional points - via more bank credit card purchases and/or cash deposits, deposits he promptly made - and that's when the glitch surfaced.


A deposit error involving the computer input of a single zero left Dave short of his watch. Fortunately Dave was able to produce his actual paper deposit receipt to expose the bank's digital error. Anxious now to keep its customer happy, the bank quickly "rewarded" him with the missing 25,000 "reward points."

All it had to do to make things right was instruct an employee to make a few keystrokes and the additional 25,000 points magically appeared on Dave's very next statement. One second he was short of the 25.000 digits he had rightfully earned, the next they were in his account.

All owing to a few keystrokes.

Not long later, the bank "devalued" its point system, 10-to-1. What used to take 200,000 reward points now took just 20,000. Again, this complicated devaluation process quickly and quietly took place through the magic of some keystrokes. Could our swooning greenback be devalued just as fast one day?

The point here? Instead of good old-fashioned gold-backed dollars or gold coins deposited in a bank, person to person, our new digital money is added, subtracted and transferred by some anonymous someone tapping a few keys on a keyboard. And by a digital network doing its thing. If a computer said you had $2.00 - or $200,000 - in your account, depending on the keystrokes made, that's what you had. After all, the bank's official computer said it was so.

You see, digits, in themselves, have no inherent value. They're something like electronic fairy dust. It literally takes nothing but milliseconds - not sweat - to add, subtract, copy or transfer them. Sadly, the same is mostly true of dollars: Consider that trillions of them have been produced by Washington in just the last few years. Sure, cash may be a little less convenient to produce than digits.

But not by much.

Here's how you make a million dollars digitally: you tap the number 1 on a bank computer's keyboard, type in a comma, type in three zeros, type another comma, then type three more zeros. Presto! Total elapsed time? Maybe a few seconds.

Here's how you make a million analog dollars: you work hard at a job that makes you $50,000, after taxes, a year, and then do that for 20 years.

Notice the difference? Needless to say, digital money is a politician's dream.

Gold, on the other hand, is not reproducible. It's a solid metal with a nice heft to it, and it won't pass through a router no matter how clever a computer nerd is. You could call it real working class money. When you own an ounce of gold, you get to own it until you hand it to someone else. No one can add, subtract, copy or transfer your gold by tapping on a keyboard. No one has ever succeeded in rendering it worthless. And since gold is rare and can't be printed on anyone's printing press, there's no danger of politicians diluting the precious metal as they can and do with the U.S. dollar. And that's why politicians hate it.

Gold has been mankind's hard money for thousands of years, easily outlasting countless paper currencies...and it's certain to outlast today's nerdy digital money, too.

In today's great recessionary fog, merely having keystroked digits represent the sum total of your life savings can be, to say the least, a bit unsettling. It might be a whole lot smarter for you to have a good percentage of your assets represented by hefty physical gold you actually get to hold in the palm of your hand rather than "electronic fairy dust."

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