The bitcoin may not look like much, but it has the potential to completely revolutionize global finance as we know it. Bitcoins may even revolutionize money itself. The bitcoin, like the dollar, peso, pound or yen, is a currency. That’s where the similarities between bitcoins and these other currencies stop, however: The bitcoin is a brand new kind of currency designed for the digital era.
What Exactly Is a Bitcoin?
The paper dollars you might have in your wallet were printed by a U.S. mint somewhere. When more paper or coin money needs to be injected into the financial system, the Federal Reserve, which is the central banking system of the United States, tells the mint to print more. The Fed also controls inflation rates to try to keep the dollar’s value at home and abroad relatively steady. There’s an equivalent to the Fed in almost every developed nation in the world.
Furthermore, when you pay someone else by giving them a check, swiping a credit card or making an online purchase, your money doesn’t go directly from you to the other party; your transaction is managed by banks and by clearing houses that lurk behind almost every transaction we make. In countries where banks are corrupt and/or the currency is distressed, bitcoins are an attractive alternative to this system.
Bitcoin is designed to do away with these types of central authorities. There is no Fed creating new bitcoins. There is no bank storing your money and doling it out when you ask them to. There’s just the payer, the payee and the bitcoins.
Bitcoins are also completely digital. They are stored in a user’s digital wallet, and when the user wants to pay someone else, the money is transferred through the Internet directly from that digital wallet to the payee’s. Because there are no banks involved, the transaction fees associated with bitcoin payments are significantly lower than fees associated with credit card or online payments.
Where Do New Bitcoins Come From?
Unlike a dollar, there’s no mint printing new bitcoins. Remember, bitcoins are a purely digital currency, so they can only be created in cyberspace. With no central authority regulating bitcoins, where do new bitcoins come from?
New bitcoins are created by individuals around the world engaged in a practice called “bitcoin mining.” Because there is no bank or regulatory agency to process bitcoin transactions, this process is handled by bitcoin miners. These individuals are rewarded for their work with a fraction of a bitcoin.
Although it sounds like this could create innumerable bitcoins in the world and thus lead to a plunge in the currency’s value, the mathematical formulas behind bitcoin mining are designed to ensure that new bitcoins are created at a steady rate. Once a total of 21 million bitcoins come into existence, the creation of new bitcoins will slow to a crawl.
Four Reasons Why Your Business Should Accept Bitcoins
As the news feed at Bitcoinista.com proves, bitcoins are a hot topic and they’re only getting hotter. Right now, there are already a number of businesses that accept bitcoins as valid payments, including WordPress, OKCupid and a variety of both online and offline businesses. The advantages to accepting bitcoins include:
1. Bitcoins can be exchanged for other currencies.
Just as there are foreign exchange sites where people can buy and sell foreign currencies, there are exchange sites for bitcoins. You can sell bitcoins for U.S. dollars, euros and several other major currencies.
2. Bitcoin’s supply is shaped by math, not by precious metals or politics.
In the past, a flood of gold into the market could suddenly change the value of a given currency. At other times, political maneuvering led to the destruction or inflation of a particular currency. The bitcoin currency, by contrast, was designed specifically to be more stable and less corruptible over the long-run than traditional currencies because it’s based upon mathematics instead of these other changing forces.
3. Bitcoins come with lower transaction fees.
Small businesses sometimes struggle with the fees they have to pay credit card companies. With no centralized regulation, bitcoin doesn’t have those fee levels.
4. The IRS hasn’t yet figured out how to tax bitcoin income.
There will be a day when bitcoin is taxed, probably in the same way that foreign currency income is currently taxed. Until that day, however, you can give the tax man just a little bit less by earning part of your income in bitcoins.
Conclusion: Now is the Time
The bitcoin currency is neither widely known nor widely popular yet, but that could change within the next few years. Be a pioneer in your industry by beginning to accept bitcoins now and help this amazing new monetary trend to grow.