Despite receiving worldwide media attention in 2017, as well as millions of new users, the way Bitcoin functions is still a mystery to a lot of people. Here are the answers to three questions often asked of this fast growing cryptocurrency:
1. Is Bitcoin real money?
The best way to answer this question is to look at the characteristics an asset must have in order to be considered money.
Uniformity—The concept is fairly self-explanatory. This means that every bitcoin must be identical to the next one. One cannot differentiate a dollar, euro or pound from another. Each single unit has equal value. Such is the case with bitcoin as well. Conversely, diamonds, could be identical in size but vary in value based on clarity. There is absolutely no variation between any two bitcoins, meaning that the cryptocurrency has complete uniformity.
Divisibility—Money must be divisible into smaller increments to cover a wide range of transactions. That’s why dollars have cents and bitcoins can be bought in fractions.
Profitability—A currency must be easy to transfer and store. Bitcoin’s potential of store of value or status of gold 2.0 has a huge benefit over most of the currency out there.
Durability—Older, agriculturally-based forms of money have a shelf life. Gold is the ultimate when it comes to durability and paper notes deteriorate. Because it is digital, Bitcoin cannot deteriorate.
Limited Supply—For a currency to have value, there has to be a scarcity of it. There’s a reason dollars in circulation is something that is regulated by the Federal Reserve Bank. If there’s no scarcity, a currency is worthless. I have a new 100,000 Bolivars note (worth $2) issued by the Venezuelan government—a simple reminder of what happens when governments try to endlessly print their way to prosperity.
Acceptability—To be considered money, the asset has to be widely accepted. People all over the world will take U.S. dollars. They won’t, however, take South African rand. Bitcoin is rapidly becoming more acceptable as e-commerce sites like Overstock.com and Expedia accept the cryptocurrency. Japan passed a law early in 2017 that made the cryptocurrency legal tender. Most importantly, bitcoins are accepted by millions of people as a peer-to-peer mode of payment.
As for the digital element of Bitcoin? Over 90 percent of all money that exists today around the world is not even physical; it’s purely digital, existing only on computer servers.
2. Can Bitcoin be hacked?
We often read about Bitcoin and other cryptocurrencies in the middle of hacking scandals. But the reality is that wherever money is being held, there will always be someone trying to steal it. Hackers, armed with coding skills, are the modern version bank robbers who used to use cars and guns.
One element that is important to understand is that the Bitcoin network is one of the most secured networks and has never been hacked. However, the coins stored in a centralized wallet can be hacked. It is therefore up to the individual coin holder to secure them the same way they do with cash. No users should keep large amounts of Bitcoin on an exchange. They should use “cold storage” in the form of a USB key for cryptocurrencies.
As a general rule, users are more at risk when using a centralized platform than any peer-to-peer network. Rating agencies, credit card companies and large retail chains are constantly victims of hacks, where the consumers end up with comprised data, often without their knowledge.
3. Can a few hundred dollars be invested to buy a fraction of bitcoin itself?
Bitcoin is divisible down to eight decimal places. The term “Bitcoin” is just a unit of measurement. The same rule applies for nearly all cryptocurrencies. Therefore, you can buy $10 worth of bitcoin without having to buy an entire bitcoin. It’s part of what helps drive demand: Bitcoin is actually available to every user and not just the 1%.