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What Is A Bitcoin?

  Sanjiv Gupta CPA  Published 
What Is A Bitcoin?

A Bitcoin is a form of digital currency that is not controlled by the government or any other entity. It was invented in 2009 by an entity or person operating under Satoshi Nakamoto. It is a completely anonymous system. It exists on a peer-to-peer digital forum. Consumers purchase the Bitcoins on the forum and they store them online is a Bitcoin wallet totally free from the intervention of the government.

Bitcoin promises a totally anonymous currency system that has eliminated any possibility of inflation bred by the government. The Bitcoin system is based on cryptography and complicated mathematics. Over the past year, Bitcoins' popularity has soared exponentially in a speculative market that has created a Bitcoin bubble. The supporters consist of a population of select, tech-savvy, anti-government users due to the fact there is no digital trail.


The reason Bitcoin is a crypto-currency is that its existence is only online and is therefore free of systemic manipulation by the banking system.  Bitcoin mining is the process of creating Bitcoins and are entirely regulated by a network of holders of Bitcoins’ computers. All Bitcoin transactions and Bitcoin transfers happen internationally without banking fees, taxes, time delays or constrictions.

The Bitcoin Wallet

The way you store the Bitcoins you acquire is in a virtual Bitcoin wallet. These wallets are usually established through third-party sites or using computer software. Bitcoin wallets do not invest the money you have deposited in your wallet the way a bank does when they are holding your money. Since Bitcoins are free of any federal interference, the currency is not insured federally by the FDIC.

After you establish your Bitcoin wallet, you officially belong to a network where you can trade and make transactions of Bitcoins. For transfers, you just have to use the other person’s anonymous ID number. It takes several minutes to process the transfer.

Largest Known Investors In Bitcoins

The Winklevoss twins are outspoken believers in Bitcoins. They have spoken out that the reason they have chosen to use the Bitcoin currency is that they have enormous faith in the mathematical based framework free from human error and politics. These extremely wealthy twin brothers got their notoriety from making the argument that they were instrumental in the meteoric rise of Facebook. They were portrayed in the movie “The Social Network”.

Bitcoin Mining

Bitcoin mining is the first step to create Bitcoins that holders can trade. Power computers create Bitcoins using the solution of complex mathematical equations. By design, the equation is exceptionally complex and labor-intensive to limit the existing Bitcoin supply.

Bitcoin mining has a downside. It uses an extraordinary amount of energy with computers that are excessively powerful in order to solve these complex equations. It is estimated that 24 hours of Bitcoin mining equates to $147,000 of electricity use just to operate the hardware for mining.

What Can You Purchase With Bitcoins?

Almost anything you can think of can be purchased with Bitcoins. is a retailer that has the most online traffic. There was an online black market retailer that helped to make the Bitcoin popular known as Silk Road. Before it was taken offline, you could buy any imaginable drug-totally anonymously because the Bitcoin is untraceable.

Many retailers are beginning to accept Bitcoin as a payment method. You will more and more retailers showing the Bitcoin symbol to let people know they are accepting Bitcoins. People are using the crypto-currency to purchase everything from ordering pizza to clothing to paying bar tabs. Some hotels are also beginning to take Bitcoins for hotel stays, dining, room service, and drinks.

The Bitcoin Craze

How Big Is The Bitcoin Craze? Bitcoin surpassed a $1 billion total valuation for all existing Bitcoins on Apr. 3, 2013, an all-time high. The high valuation proved that the Bitcoin craze was in the middle of a bubble that had been growing with the ever-increasing media coverage since inception. In 2010, if you owned $100 worth of Bitcoin, the value would have increased to $72,500 only one year later. In a ‘Gawker’ article written one week later helped the value skyrocket to $250,000. On Apr. 3, 2013, that same $100 bought in 2010 was worth approximately $1 million dollars.

Is The Bitcoin Bubble Unstable?

The Bitcoin is a very volatile market as you can imagine based on the extraordinary rise in value after only a few years. On Apr. 9, 2013, it reached a new high value at over $200 for each Bitcoin. On Apr. 10, just one day later, the value dropped to $105 for each Bitcoin. The reason that the Bitcoin market is unstable is that the speculators determine the value based on its potential investment value. It is not determined by the amount of Bitcoin use or trade.

Is Bitcoins Secure?

Bitcoins that are stored in your Bitcoin wallet, should be secure because of the currencies' anonymous nature. The problem is if your wallet is hacked or if you trust a fraudulent person with a transfer, it is not possible to recover your losses or find the person who misleads you.

Can My Wallet Get Hacked?

Using a third-party Bitcoin wallet makes it unlikely to get hacked; however, there is still a risk that it can be hacked causing you to lose all of your Bitcoins. Although Bitcoin’s cryptography is declared secure because it is extremely complex, it is a public source which means hackers all over the world can try to hack it. The problem with Bitcoins is you either have to trust a third party to store your Bitcoins or you can use your own software which increases the chance of being hacked. In 2011, a Bitcoin holder went to bed with his computer on. When he woke up, his 25,000 Bitcoins were gone. There was no chance of them ever being recovered.

Will Bitcoins Fade Away?

It is illegal to create a currency that competes with the United States currency so it is not clear if using Bitcoins is level. The Bitcoin supply is intended to be scare which makes it practically impossible to use Bitcoins on an international level. It has been said that the Bitcoin cannot succeed long term because the ever-increasing value of the Bitcoin would be disastrous to the economy if millions started regularly using Bitcoins.

Bitcoin is nothing less than a roller coaster ride

Now here’s a chart of Bitcoin over the past year, using data from Coinbase, a leading Bitcoin exchange: