bitcoin

Best Money Tips: 5 Alternatives to Bitcoin

Amy Lu — Fri, 23 Feb 2018 09:30:05 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found articles on alternatives to Bitcoin you should know about, how to get the best deal on a mortgage, and storage ideas for bathrooms.

Buying Virtual Cats Might Be the Future of Investing

Aja McClanahan — Tue, 26 Dec 2017 09:00:08 +0000

The latest trend in virtual goods is taking shape in the form of digital felines called CryptoKitties. Launched November 28, 2017 as one of the world's first blockchain-based games, these virtual cats are already selling at outrageous prices. As of this writing, CryptoKitties are currently selling for an average price of about $84 per cat, though some are selling for tens of thousands of dollars.

The only way you can purchase, sell, or "breed" CryptoKitties is with a smart contract-based token (ERC-721) based on Ethereum blockchain technology. Blockchain is the distributed ledger technology behind many cryptocurrencies, including Bitcoin. And Ethereum is a type of cryptocurrency after the likes of Bitcoin, but with some additional features to facilitate "smart" money movement between users. (See also: What Is Cryptocurrency, Anyway?)

If you're in the market for some CryptoKitties, you've got to exchange whatever currency you have access to (say dollars or euros) to Ethereum currency, which is known as ether. At the time of this writing, one ether equals about $824.

What exactly are CryptoKitties?

CryptoKitties are digital cats that exist on a computer network. They each have different characteristics known as "cattributes," which are the result of digital genomes. With over 4 billion potential genetic combinations, the possibilities for your kitty are seemingly endless. Some cattributes, like wingtips or blood-red are more appealing and more valuable than others — which is what makes this an actual marketplace.

CryptoKitties have been likened to the Beanie Babies craze of the 90s, or trading baseball or Pokemon cards. If you've ever collected or sold these types of goods, you know that values can be very arbitrary or based on rarity. In this case, rarity is somewhat determined by the digital genome set by the developers of the game.

Why would I buy CryptoKitties?

Right now, CryptoKitties, seem to have no inherent value, aside from what the community assigns them. In other words, people are buying, selling, and breeding these cats only because they believe they will have more value in the future. When you sell or breed digital kittens, you get paid in ether, which converts to real money.

Aside from making money, CryptoKitties is fun to play. You don't know what the cattributes of your offspring will be until they appear, so there's a gaming aspect to this phenomenon in addition to being a way to earn money.

What does the CryptoKitties craze mean?

As mentioned above, there seems to be no inherent value to CryptoKitties. However, the CryptoKitties White Papurr created by the game's developer, venture studio Axiom Zen, explains the game's intent is largely to make blockchain technology, a concept many consumers find confusing, accessible to everyone.

The paper sums up the true purpose of CryptoKitties in this way: "By normalizing the practical application of smart contracts and cryptocurrency transactions, we will empower everyday consumers with a basic fluency in distributed ledger technology."

Who knew digital cats could introduce the average Joe (or Jenny) to the future of technology?

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What Is Cryptocurrency, Anyway?

Damian Davila — Wed, 11 Oct 2017 08:30:06 +0000

Investors are always looking for the next "big thing." Throughout 2017, cryptocurrencies have been experiencing a surge in market valuations with Bitcoin and Ethereum trading above $4,000 and $300, respectively, as of August.

With the price of one Bitcoin (BTC) trading well above the price of one ounce of gold, more and more people are jumping on the cryptocurrency bandwagon: On August 8, 2011, there were only 8,638 BTC transactions. Fast forward six years, and the daily number of BTC transactions has surged to 260,955! (See also: Here's Everything You Need to Get Started With Bitcoin)

So what exactly are cryptocurrencies, and should you invest?

What is cryptocurrency?

Basically, cryptocurrency is a digital or virtual asset that uses cryptography as a security measure. Designed by somebody under the pseudonym "Satoshi Nakamoto" back in 2009, Bitcoin was the very first cryptocurrency. Today, there are over 1,050 cryptocurrencies (often referred to as "coins") with funny names, including Dogecoin, Veritaseum, Factom, and Counterparty. However, their valuations are no joke: The total market capitalization of all coins stood at $151 billion as of August 23, 2017.

Unlike currencies issued by nations, cryptocurrencies can be issued by anybody with access to the right technology. Capitalizing on this fact, tech entrepreneurs all around the world are launching coins every day with the promise that once products or services are available, the coins will be redeemable for those products and services. For example, the developers behind Siacoin provide a decentralized storage marketplace in which hosts compete for your business, and those behind Monero deliver a private and untraceable cryptocurrency. Research firm Smith & Crown reports that so far in 2017, 65 projects have raised over $520 million in coins.

Should you invest in cryptocurrency?

The upside potential of a coin is huge, but this doesn't mean that cryptos are for everybody. There are a few important details you should know before you dive in.

There is high volatility

Take for example Neo (formerly AntShares) which was trading at $1.50 per coin on June 10, 2017 and peaked at $51.94 per coin on August 13, 2017. There are very few places that you can get a 3,362 percent return in just two months. But what goes up eventually comes down and Neo traded at $31.76 on August 18, 2017. Could you stomach over a 38 percent drop in value of your investment in just four days? With big price swings on a daily basis, coins aren't for investors with low tolerance to risk.

Investing requires some tech know-how

Buying and trading cryptocurrency requires you to be comfortable using some desktop or smartphone applications. Attention to detail is critical to avoid losing your hard-earned coins. Here are some important things to note:

Typing one wrong character in your 33- to 34-character long Bitcoin address when doing transactions could mean that your money ends up in somebody else's account.
Sending cryptocurrency into the wrong address (say, for example, sending Ethereum Classic coins into an Ethereum wallet address) will make your cryptocurrency disappear. Most exchanges won't even help you try to recover the misplaced coins for small amounts (Bittrex sets a $5,000 minimum) and will charge you a hefty fee for the recovery.
All exchanges recommend doing a small test amount before doing a large deposit or withdrawal.

The rules are always changing

With more and more people buying and selling cryptocurrencies, more government agencies at different levels are creating laws that affect consumers in different ways. For example, here are a few regulations that have been placed in recent years:

In 2014, The IRS deemed a cryptocurrency as property. This means that the same general tax principles used for reporting the sale of a piece of land would apply to the sale of 10 BTC (around $42,330 at the time this article was written).
In 2015, the New York State Department of Financial Services (NYDFS) passed the BitLicense regulatory framework, requiring Bitcoin companies serving New York residents to keep detailed records of all users in that state. Claiming concerns for user privacy, Kraken and Bitfinex decided not to serve users residing in this state.
In mid 2017, the Hawaii Division of Financial Institutions (DFI) created regulatory policies that required exchanges to hold cash reserves equivalent to the value of cryptocurrencies held by Hawaii residents. This requirement prompted all exchanges, including Coinbase, to stop operating in Hawaii or postpone their plans to open in that state.

Transaction wait times can vary

Despite the claims that cryptos are the way of the future, it surely can feel that you're back in the stone age waiting for a Bitcoin transaction to clear. In order to verify transactions, exchanges rely on a number of confirmations from the network. Depending on the volume of transactions and other factors, the wait time can vary from a few minutes to several hours. Waiting for a purchase of $5,000 worth of Litecoin could be a nerve racking experience for a new (and even experienced) investor.

This delay in transaction time also means that you won't necessarily get the price you wanted when buying or selling your coins. On Saturday August 19, 2017, Bitcoin Cash was trading as high as $996.92. By Tuesday August 22, 2017, one coin was now trading around $582. If you had been trying to dump your coins on Tuesday, you would probably have done so at a price much different from the one you originally wanted.

There are liquidity issues

With over 1,000 cryptocurrencies to choose from, you may end up with a "winner" that performs well for some time. But as government laws or exchange rules evolve, your coin of choice may be dropped from several exchanges.

IOTA is a great example. U.S. residents could buy IOTA from Bitfinex, but on August 11, 2017 the exchange announced that it would stop accepting new U.S. customers and will discontinue services to all current ones over the next 90 days. If you held IOTA, you're now forced to seek a new exchange to trade and/or wallet to store your coins. In the very worst case scenario, you may have to liquidate your position to avoid losing your money. Just ask owners of SpaceBIT, Quebecoin, and DAO.

The bottom line: Trade cautiously

There are several individuals who are making money trading Bitcoin and other cryptocurrencies. If you had purchased $100 BTC on January 1, 2011, you would have acquired 333.33 coins at $0.30 each. By August 24, 2017, that original investment would be worth over $1.4 million!

However, make sure that you understand all the potential risks involved with these virtual currencies. Given their inherent volatility, don't bet the house on cryptocurrencies. Additionally, to have a true picture of how much money you're making with cryptocurrencies, include all applicable fees. Remember that every cryptocurrency transaction, whether it's a purchase, sale, deposit, or withdrawal has a fee from an exchange, financial institution, or both. Happy trading!

[Disclaimer: The author owns some Bitcoin and Siacoin. He received no payment from any of the cryptocurrencies or exchanges mentioned in this article.]

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Who Really Owns Your Digital Assets?

Damian Davila — Wed, 27 Sep 2017 08:30:12 +0000

Throughout your life, you accumulate a wide variety of assets, including cash, real estate, and vehicles. But you've also probably been collecting assets of the digital kind — whether that be music downloads, frequent flyer miles, or cryptocurrency. When you put so many of your hard-earned dollars into virtual goods, there are some important considerations to keep in mind if you want to pass them on to your heirs.

What are digital assets?

Many people think of digital assets as digital copies of things that you purchase online, such as music or ebooks, but there are other types of digital assets. They include things that you store in virtual storage systems, such as Dropbox or iCloud. Some examples are photographs in your Flickr account, financial documents in your Box account, and bitcoins in your Coinbase account.

Social media accounts are also digital assets. Even if they don't have any monetary value, the contents may be something you want to bequeath to your heirs.

It can be easy to assign a dollar value to some digital assets, and difficult for others. The dollar value of an online-only savings account, for example, is as straightforward as it gets. On the other hand, a photo collection of the first 10 years of your son's life could be worth several thousands of dollars to you and nothing to the average Joe.

Taking care of your digital assets

Here are some best practices for taking care of your digital assets once you're no longer in the picture.

1. Read the fine print of your user agreement

Just because you hit the "Buy now" button for a digital file doesn't really mean that it's yours. Unlike physical books, CDs, DVDs, or vinyl records, purchasing digital works grants you no ownership rights. Most companies just license you the right to access and use the song or video.

For example, if you read Amazon's Conditions of Use, you'll find that "Amazon or its content providers grant you a limited, nonexclusive, nontransferable, non-sublicensable license to access and make personal and noncommercial use of the Amazon Services." In Amazon's Music Terms of Use, it also notes that your account can't be shared or transferred: "You may not share your Amazon.com username and password with others or use anyone else's Amazon.com username and password."

In other words, you don't own the asset and you can't get around that fact by giving your account password to anyone else.

2. Double check if digital assets can be in your will

If you haven't already, you need to create a last will and testament. But whether you can include a particular digital asset in the will depends. Not only must you actually own the digital asset, but also you must be able to transfer it.

Every company treats digital assets differently. For example, let's take a look at three cases of transferring airline frequent flyer miles upon death:

Air Miles Canada allows you to transfer ownership of air miles at no charge when an account holder has passed away.
American Airlines' AAdvantage program indicates that "mileage credit is not transferable" even to estates, successors, or assigns. However, American Airlines includes a clause that it may make exemptions upon its sole discretion and payment of any applicable fees.
Delta SkyMiles clearly outlines that "Miles are not the property of any member" and may not be transferred under any circumstances, including death.

3. Store a repository of all passwords

This is key. While your executor (the person executing your estate after your die) will need your login credentials to access your digital assets, they will have no legal authority to access your passwords under most state jurisdictions.

So, plan to leave a letter to your executor with the usernames and passwords of the accounts that you would like to pass on to beneficiaries. While a simple letter containing the account information can do the trick, there are also several digital alternatives. Some digital services that allow you to pass on digital assets are Password Box's Legacy Locker and YouDeparted.com.

4. Take advantage of existing programs

Some companies are already taking steps to plan your digital afterlife.

Google's Inactive Account Manager allows you to instruct Google to transfer data from several services, including Google+, Picasa Web Albums, and YouTube to specific individuals after three to 12 months of inactivity.
Facebook can "memorialize" an account after its owner has passed away.

5. Designate a beneficiary for all financial accounts

All types of banking and investment accounts provide you the option to designate a beneficiary. Without a beneficiary, your account will most likely end up in probate. While some states may grant your family some protection, designating a beneficiary well in advance is the best way to make sure that your digital moneys reach the right person(s).

You can change the beneficiary of your account as many times as you need. Every time that you go through a major life change, such as marriage, birth of a child, or retirement, you should revisit who your beneficiaries are.

6. Check your local and state legislation

In 2014, Delaware became the first state to sign legislation (House Bill 435) granting families the right to the digital assets of loved ones who become incapacitated or pass away. The law includes a wide rage of digital assets, including computer programs, audio files, images, and more. It's reasonable to expect similar legislation to appear in other states.

7. Instruct your beneficiaries to still give it a shot

Even when the company has a reputation of not budging and an airtight user agreement, tell your beneficiaries to try anyway. You never know when a company may make an exception. Airlines, in particular, are often willing to work with survivors who want access to a spouse's frequent flyer miles.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Is Bitcoin Still a Thing?

Paul Michael — Mon, 22 Aug 2016 09:30:23 +0000

Bitcoin. You may have heard the term. You may even know someone who has a bunch of them. But is Bitcoin just a fad that's dying out, or is it here to stay?

Let's dive into a brief history of Bitcoin, the troubles it has faced, and the answer to the question on so many lips…is Bitcoin still a thing?

What Is Bitcoin?

Bitcoin is a form of currency that falls under the umbrella of "cryptocurrency." To keep this simple, think of Bitcoin as currency that exists primarily in cyberspace, at a specific Bitcoin address that is linked with an access key. Unlike every other form of currency, it is decentralized, meaning large banks and corporations have no control over it. Plus, Bitcoins are not produced in the same manner as dollars or euros; they are generated by people through a process known as mining, which requires software that can solve complex mathematical problems.

Perhaps the biggest selling point of Bitcoin is the finite nature of the currency. There is something called Bitcoin protocol, and it stipulates that only 21 million Bitcoins can ever be created. That's it. So clearly, as the demand for Bitcoins increases, so, too, does their value. (It's a little like trying to move into a town or city that has outlawed new construction. The houses in that area continue to rise in value as more people want to move in.)

Another huge selling point is that it is completely anonymous. Plus, Bitcoin has tiny transaction fees, it's fast, and it's transparent. Every transaction is recorded (which is why Martin Shkreli's claim about losing $15 million in Bitcoins was bogus).

How Did Bitcoin Come to Exist?

Created by Satoshi Nakamoto, Bitcoins came into existence in 2008 after his paper Bitcoin: A Peer-to-Peer Electronic Cash System was published. The idea was to create a low-fee electronic payment system that was free from any central authority, and easily or instantly transferrable. It wasn't until two years later that the first Bitcoins were used, and at the time they were worth less than a penny each (today, Bitcoins are valued at over $560 each, but the price fluctuates daily, and has hit a high of $1216.73). The biggest draw of Bitcoins — anonymity — meant that it became the preferred unit of currency for illegal activities on the online black market, such as the now shuttered Silk Road. However, as the price of Bitcoins rose meteorically, people who simply wanted to make money took an interest.

How Do You Acquire Bitcoins?

You can set up an account at Bitcoin.org in seconds. Once there, you choose a wallet, and can then get Bitcoins in a few different ways:

Simply purchase them. You can set up a currency exchange with your bank, and have the Bitcoins (or pieces of a Bitcoin) deposited in your account.
You can accept Bitcoins as a payment for goods or services. If you sell items online, you can ask to be paid in Bitcoins. If you freelance, you can do the same thing. It's not easy at the moment, but as more retailers and people realize the value of Bitcoins, it could become as natural as using PayPal.
Mine Bitcoins. This is the hardest part. It would take a much longer article to explain it all, but just know it is not exactly a walk in the park. With the current difficulty level and requisite hardware, it will take you 1,367 years to mine just one Bitcoin!

What Troubles Have Plagued Bitcoin?

Aside from being associated with the sale and purchase of illegal guns, drugs, and other black market goods and services, Bitcoin has certainly had some setbacks.

For starters, Bitcoin is a digital currency, and anything digital comes with hackers ready to find a weakness and exploit it. Just last week, a major Bitcoin exchange called Bitfinex was hacked, and 120,000 Bitcoins (roughly $60 million) were stolen. Back in 2014, another exchange, MtGox, was hacked and lost over 850,000 Bitcoins, valued at the time at over $620 million!

Not only that, but some authorities refuse to even acknowledge that Bitcoin is a legitimate currency. Recently, a judge in Florida ruled that Bitcoin was not considered money because it "cannot be hidden under a mattress like cash or gold bars." Ironically, this statement is going to have people running to use Bitcoin if they now realize they can legally launder money with it. What's more, you can actually have physical Bitcoins. You can even print them with a 3D printer. As long as they are linked to a Bitcoin address, and have an access key, they work. But for millions of people, this idea of money existing only in cyberspace is very disconcerting.

So…Is Bitcoin Still a Thing?

In a word, yes.

Although the price of a Bitcoin is less than half what it was in 2013, the thing that makes Bitcoin a success is usage. Several years ago, few retailers were willing to touch Bitcoin as a method of payment. Now, more and more blue chip, big name companies are taking Bitcoin, and as more join the list, Bitcoin will become even more enticing. Here are just a few of the many companies now taking the cryptocurrency:

Expedia
NewEgg
Amazon
Overstock
AliExpress

With so many big names willing to accept Bitcoins, and the price of them rising as more people get into the market, Bitcoins are still viable and may even become more attractive to the average consumer. So, if you're interested, you may want to consider getting in sooner rather than later. After all, the person who spent 10,000 Bitcoins on two pizzas back in 2010 would have $4 million today!

Are you over Bitcoin and cryptocurrency? Or are you still mining?

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's Everything You Need to Get Started With Bitcoin

Damian Davila — Fri, 30 Oct 2015 13:15:50 +0000

It's understandable that you haven't heard about Bitcoin in a while. From an all-time high market value of $1,242 per Bitcoin back in November 29, 2013, the cryptocurrency is, at the time of this writing, trading at a much more humble value of about $246 per Bitcoin. (Update on 11/3/15: Bitcoin is currently trading at more than $400 per coin.)

But Bitcoin is still very much on the rise. The number of Bitcoin transactions per day has increased by 57% since 2013 and the Commodity Futures Trading Commission (CFTC) recently defined cryptocurrencies as commodities, paving the way for more open trading. That means everyday people like you and I will be able to trade Bitcoin more easily. (See also: 6 Mobile Payment Tools You Should Start Using Today)

Here's what this historic announcement means for the average investor, as well as some best practices for getting into the cryptocurrency game.

So, What's a Bitcoin?

In very simple terms, Bitcoin is a form of digital money that you can use to make purchases, or save as an investment. Unlike other virtual currencies, such as Second Life's Linden dollars, Bitcoin adds a layer of security through cryptography on all transactions and emissions of new units.

What Can I Do With Bitcoin?

You can use bitcoins for virtually anything. (Pun intended!)

Shop for products using Bitcoin at several retailers, such as Overstock, Dell, and Microsoft.
Get a magazine subscription, such as Time, Fortune, or Travel + Leisure, with Bitcoins.
Use Bitcoins to book your next flight at Expedia. If that sounds too boring, then book a space flight with Virgin Galactic instead.
Pay for a Master of Science in Digital Currency at the University of Nicosia (Cyprus) entirely or partly in Bitcoins.
Leave your wallet at home and convert your Bitcoins into cash at one of many Bitcoin ATMs around the world.
Buy and sell and Bitcoins in Bitcoin exchanges to try to make a profit.
Trade Bitcoin swaps and other types of derivatives in Bitcoin exchanges, such as TeraExchange.
Buy and hold Bitcoins for a long time to see what happens!

Since people can trade derivatives on Bitcoin, it was in the interest of the CFTC to classify Bitcoin as a commodity. That way the CFTC has jurisdiction over companies trading Bitcoin swaps, and can protect the interests of consumers.

How Do I Get Bitcoins?

To start using Bitcoins, you need first to get some coins into your digital wallet. The easiest way to get a hold of some bitcoins is to buy them at an exchange. Here's how to do it.

1. Choose a Wallet

You can pick from many available desktop (Windows, Mac, Linux), mobile (Android, iOS, Windows Phone, or Blackberry), hardware, or web Bitcoin wallets to store and use your Bitcoins.

Each type of wallet has it advantages and disadvantages, so take the time to review each option. Novice users of Bitcoin may be better off to sticking to a widely used alternative, such as Coinbase — it has 2.6 million users with four million wallets and is accepted by 40,000 merchants.

2. Fund Your Wallet

Most Bitcoin users complete their first deposit using a bank account. No matter what wallet you choose, you'll need to first verify your bank account with the company managing the wallet. Keep in mind that some wallets may require you to verify a bank account before you can start using the wallet.

3. Get Free Bitcoins

There are a few ways to score some free coins. First, you could receive Bitcoin tips by posting awesome content on certain sites, such as Reddit, or connecting your social media accounts to ChangeTip. Second, you could receive cryptocurrency payments for completing small tasks, such as viewing websites or completing surveys, at BitVisitor and FaucetBTC.

4. Buy and Sell Bitcoins

Depending on your Bitcoin needs, you may need to buy additional coins when your balance is running low or to exchange coins into dollars. Fees vary per exchange and financial institution. For example, Coinbase doesn't charge fees for accepting and receiving Bitcoins, but does charge you a 1% fee when converting Bitcoins to dollars. Some banks may charge you a fee for transferring funds from your wallet to your checking account.

What Are Some Best Practices?

Bitcoin is still in development, so it's better to be safe than sorry. Here are some key things to consider:

1. Keep an Eye on Market Value

The price of a Bitcoin in dollars is very volatile. On January 3, 2015, the market value of one Bitcoin was $302.33 and on the very next day, it was $270.93. If you're risk averse, then Bitcoin isn't for you.

2. Have Only What You Really Need in Your Wallet

Just like you keep only a few hundred or thousands dollars in your checking account to cover your monthly expenses and the rest on a saving or investment account, you should keep your Bitcoin wallet only with what you need. You don't walk around with $10,000 on your normal wallet, do you?

3. Understand That Bitcoin Payments Are Irreversible

Nowadays, even barbers and lawyers are accepting Bitcoin. When buying with Bitcoin, make sure to deal only with reputable merchants. Once a payment is completed, the only way to reverse it is by having the person receiving the payment reverse it themselves — which means they can refuse to do so. When making payments online, check out the company's reputation before handing over your coins.

4. Learn How to Maintain and Backup and Online Wallet

Depending on what type of wallet you use, you may be ultimately responsible for backing up its data. In the event that you receive a large amount of Bitcoins, it's a good idea to stash some of them in an offline wallet and have a backup. Learn from the lesson of the man who lost $7.5 million in Bitcoins when his computer hard drive got thrown away.

5. Don't Put Your Life Savings Into Bitcoin

Unlike bank accounts, Bitcoin wallets aren't covered by the Federal Deposit Insurance Corporation (FDIC). The FDIC provides coverage of up to $250,000 for a wide variety of deposit accounts. Any losses that Bitcoin exchanges suffer have to be covered either by themselves or by an insurance plan that those exchanges pay for. Exchanges have to be very vigilant of malicious hacker attacks, such as the $460 million heist on Mt. Gox.

5. There's More Than One Type of Cryptocurrency

Bitcoin is just one of several hundreds of cryptocurrencies. Just because Litecoin sounds like Bitcoin, doesn't mean that they are worth the same. One Litecoin is worth 0.01 Bitcoins. Some cryptocurrencies may have funny names, such as Dogecoin or Unobtanium, but they do have an actual market value.

6. Learn the Tax Implications of Using Bitcoin

Since the IRS treats Bitcoin as property, federal tax rules for property transactions apply to any transaction involving Bitcoin. If you only plan on using Bitcoin sporadically, keeping track of the market losses or gains of your few transactions won't be that hard. If you plan to pay with Bitcoin regularly, receive or issue wages in Bitcoin, or start a Bitcoin mining operation, then learn more about the tax implications of using Bitcoin.

Are you considering buying Bitcoin or other cryptocurrencies?

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why You Should Still Pay Attention to Bitcoin

Ryan Lynch — Fri, 23 May 2014 08:12:16 +0000

It might sound like something the Super Mario Brothers obsessively hoard, but bitcoin is a form of electronic currency that's worth real money. Little known and even less understood, bitcoin has been gaining steam on a global scale as digital commerce continues to dominate consumer practices. However, due to its early adoption on the black market and price volatility, bitcoin is seen as something of a financial urban legend. While bitcoin has a checkered past and uncertain future, it is being exchanged right now for real money. So the question remains, should you invest in this cryptocurrency? (See also: Here's What You Should Know About Bitcoin)

Introduced in 2009, bitcoin emerged as a peer-to-peer payment method; digital cash that users could trade for goods and services. Because bitcoins can be exchanged without an intermediary (such as a bank) it has its share of supporters and naysayers, each citing advantages and flaws in the system.

Fixed Supply

Traditional currencies like the US dollar are subject to inflation and price manipulation; however, the value of bitcoin lies solely with those willing to use and accept it as payment. Simply put, bitcoin's worth is derived from the basic concept of supply and demand.

The total number of bitcoins is fixed at 21 million; once all 21 million bitcoins have been "mined," that's it. It is estimated that there are 12.3 million bitcoins in circulation and it will take until 2140 for all available bitcoins to be mined. Bitcoins are introduced into circulation via a complex mathematical algorithm designed such that it mirrors the behavior of commodities like gold (hence why folks who discover bitcoins are called miners).

As more bitcoins are added into circulation, "mining" them becomes increasingly difficult. This self-propagating scarcity drives the value of each bitcoin up, provided the demand continues.

Small Transaction Fees

When bitcoin was introduced, virtually no reputable businesses had heard of it, much less accepted it as a form of payment. The anonymity and untraceable characteristics of the digital currency was seen as an advantage in some of the Internet's seedier recesses, and bitcoin found early adopters within questionable circles.

However, as bitcoin becomes mainstream, traditional businesses are opening up to the unconventional tender. While bitcoin hasn't asserted itself as the currency of choice with merchants, it can be spent on everything from pizza to online dating, and the list is only getting longer.

Bitcoin's surge in popularity amongst traditional retailers can be attributed to the low cost of transaction fees. Credit card companies charge merchants fees to use their services, something that retailers have derided for years. Because bitcoin is traded like cash, the processing fees are small when compared to more traditionally accepted methods of payment.

The intrinsic value of any currency is judged primarily on the ability to spend it. As the number of businesses willing to accept bitcoin grows, so does its value.

Potential Adoption in Emerging Markets

With basic financial services difficult to access in the developing world, bitcoin offers a method of transaction unrestricted by geographically isolated financial institutions like banks.

With Internet usage growing in these emerging markets and bitcoin payment systems accessible via phone or PC, bitcoin may very well become the method of choice by which these regions conduct business. Not only is this beneficial in terms of economic development in these areas, but it also increases bitcoin demand, resulting in good things for those holding on to these digital dollars.

Lack of Security

Bitcoin (as well as other forms of digital currency) is decentralized, meaning that there is no figure of authority that controls it (like a central bank). Consequently, end users are responsible for looking after their own bitcoins and, since they are intangible, you can't exactly make a withdrawal and stash them under your mattress.

Bitcoins are stored in a digital "wallet" that allows the user to access his or her bitcoins and spend them. Just as people fall victim to pickpockets and purse-snatchers, your digital wallet is not safe from cyber thievery. The wallet that manages bitcoins is safeguarded by nothing more than a password.

There are multiple methods to secure your hard earned digi-cash, however nothing is foolproof, as illustrated by multiple, near-catastrophic heists. One of the largest bitcoin thefts occurred when the exchange known as Mt. Gox fell victim to hackers. Using stolen passwords, the hackers made fraudulent trades on the Mt. Gox exchange and accumulated nearly $500,000,000 worth of bitcoin. That's half a billion…with a 'b'. The true owners of these bitcoins were left with empty pockets and, because bitcoins are notoriously hard to trace, there is little hope that they will ever see reimbursement.

As the value of bitcoin increases, so does the attention of criminals. Because bitcoin isn't backed by any bank or government, once your bitcoin is gone, it's not coming back. This makes bitcoin thieves a lot like Keyser Soze, a tap of the keys and a click of the mouse and just like that… poof. They're gone.

Status as Legal Tender

Bitcoin's impact on the global economy is subject to speculation and, as a result, most of the world's governments are keeping mum on how they plan to treat it. As a currency still very much in its infancy, the status of bitcoin as legal tender is questionable.

The IRS recently proclaimed that bitcoin is property and consequently must be declared come tax time. This adds a level of complexity that may impede bitcoin adoption, however many see this recognition as a step towards legitimizing bitcoin as a true method of payment.

Many of bitcoin's most vocal critics claim that the digital currency is inherently worthless due to its decentralized nature. When the FBI shut down the online narcotic marketplace Silk Road, the feds seized approximately $25 million worth of bitcoins, which they are now gearing up to sell.

With the federal government preparing to get their piece of the bitcoin pie, it is becoming harder to refute the validity of bitcoin's worth. Bitcoin may not be backed by financial institutions or governments, but the basic principles of supply and demand have solidified its place as a legitimate commodity. After all, gold is just a rock in the ground, and money isn't worth the paper it's printed on.

Do you own bitcoin? Have you considered it?

This article is from Ryan Lynch of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What You Should Know About Bitcoin

Carrie Kirby — Thu, 14 Nov 2013 11:24:03 +0000

Many people heard of the virtual currency bitcoin for the first time recently when U.S. authorities shut down Silk Road, an online marketplace for illicit goods. Bitcoin was the currency used to order everything from heroin to fake IDs on Silk Road — but the online-only currency is also used by law-abiding citizens who embrace it for a number of reasons, ideological, practical and profit-motivated.

Buying and using this digital currency doesn't make you a law-breaker — but is it a good idea? Here's a look at what bitcoin really is, and the pros and cons of using it. (See also: Should You Choose Debit or Credit at Checkout?)

What Is Bitcoin?

Bitcoin is a form of money that you can buy online using dollars or other national currencies, then spend at merchants who accept it, or save as an investment. There aren't any official bitcoin bills or coins; bitcoin holdings exist digitally and are stored on your computer or held for you by an online company.

Bitcoins are released into the economy when computers "mine" them by solving increasingly difficult mathematical problems. There are a finite number of bitcoins — and once they are all mined, no more can be created, since there is no central bank or federal reserve to manipulate the bitcoin supply. (See also: How Banks Increase the Money Supply With “Quantitative Easing”)

This system, an open source software protocol, was created by an anonymous person or group known as Satoshi Nakamoto, as an alternative to national currencies. Bitcoin is decentralized, not under the control of any one government, and is embraced by libertarians, voluntaryists, and anarchists as a way to effect transactions without government involvement. However, that doesn't mean it's immune to government regulation. U.S. authorities, for instance, are requiring companies that transmit bitcoins to register as money services businesses.

Another way that bitcoin is different from other forms of currency is that it can be transmitted online from person to person without going through any bank or clearinghouse. Because of this, fees for exchanging or transferring bitcoins are very low.

When the first bitcoins were released in 2009, the published exchange rate was just $1 for 1,300 bitcoins, but as more and more people became interested, the price climbed to a high of $31. Then, the value crashed to a low of $2. Further price gyrations have ensued, even as more bitcoins have been released and more and more people have acquired and used them.

Now, there is more than $1.5 billion worth of bitcoin in circulation. The value hit a record high of $266 in April 2013, and currently trades at around $137, making many early investors into millionaires.

Why Buy Bitcoin?

This all may sound like a crazy system that only hard-core computer geeks would try — or worse, some kind of fraudulent scheme. And it's true that many of the people I have met while writing about bitcoin are computer programmers. But bitcoin does have advantages that could appeal to anyone — if the downsides aren't too much for you.

Advantages

Bitcoin users point to a number of advantages bitcoin has over regular currencies.

Tiny Fees

If you want to send money to family overseas through Western Union or other companies, fees can amount to 9% or more of the amount you're sending. But you can use an online wallet to transfer bitcoin to another person's online wallet for just a few cents.

Privacy

Depending on what wallet app you use, you can transfer bitcoin without sharing as much identifying information as credit cards or bank accounts require. Some people call bitcoin anonymous, but because bitcoin transactions can be viewed publicly, it is sometimes possible to figure out who people are on the system.

Potential Investment

Many bitcoin enthusiasts just hold onto their bitcoins, because they believe that the value of the currency will keep going up. Remember that there is a limited number of bitcoins in the system — so the theory is that if the crypto-currency's popularity continues to grow, the price will keep growing as well. Some people make money by day trading bitcoins — buying when the price dips in the hopes that it will bounce back again.

Merchant Advantages

If you operate an online retail business, chances are you pay about 2.5% of everything you take in to credit card companies. Some merchants have started taking bitcoins just to avoid those fees. Other merchants chafe at credit card company rules — especially the fact that credit cards can force merchants to issue a refund even if they don't think the customer deserves one. With bitcoin transactions, only the merchant can decide to issue a refund. (See also: How to Get a Refund on Non-Refundable Goods)

Liberty

A lot of people who collect and spend bitcoins like the fact that it is not a government-issued currency. If you feel like the government has too much influence over your life, using bitcoin can be a small way of rebelling.

Disadvantages

Before you jump in, keep in mind that bitcoin is still relatively new and that it has a lot of challenges.

Volatility

The price of bitcoin moves around so much that the few people who get paid in bitcoins have their salaries pegged to the dollar or other national currencies. Bitcoin Foundation chief scientist Gavin Andresen warns, "don't invest your life savings in bitcoin unless you're willing to lose your life savings, because it is highly volatile and risky."

Legal Uncertainty

This is a biggee. As governments grapple with how to regulate this new virtual currency, they have frozen and seized accounts at companies such as bitcoin exchange Mt. Gox. If something like this happens to a company that's storing your bitcoins, you could have trouble accessing them.

Theft Risk

Hackers can steal bitcoins from your smartphone or computer if you're not using adequate security measures — a crime that experts say is probably growing. Even bitcoin companies have been robbed. And good luck explaining to the local police that someone cleaned out your bitcoin wallet. (See also: More Scams Everyone Should Know About)

Limited Places to Spend

This is probably the biggest reason that most people don't have any bitcoins. Compared to the number of merchants that accept dollars — every business in America, since it's legal tender — the number that accept bitcoins is tiny. You can't pay utility bills or taxes in bitcoins. You can order pizza, but paying your rent in bitcoins can be challenging. Bitcoin enthusiasts I have interviewed spend a lot of time convincing merchants to start accepting the virtual currency.

Do you own bitcoin? Have you considered buying bitcoin?

This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

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Here's What You Should Know About Bitcoin

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Advantages

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