Getting Involved in Bitcoin

When bitcoin value skyrocketed in late 2013, everyone suddenly started paying attention to this unusual currency. A large number of online businesses already accept bitcoins as payment, and a handful of brick-and-mortar grocery stores and restaurants are joining the club. A NYC entrepreneur is working on installing the first bitcoin ATM.

Of course, the majority of us barely understand how bitcoins work. Why do you have to mine them? Are they backed by a stable currency? Are they even legal?

Here are some answers to your bitcoin questions, as well as how you can get involved in this emerging currency.

Are bitcoins legal?

Whether or not bitcoins are legal depends on the country. Many countries, including the United States, Canada, and Australia, have agreed that bitcoins are legal, in the sense that they can be used to pay for a transaction if both the buyer and seller agree. Governments are still working out how bitcoins should factor into income taxes, and whether there needs to be additional regulation placed on bitcoins to fully integrate them into the nation's currency.

How do bitcoins work?

First, you need to register for a bitcoin wallet. This is an app that lives on your computer or smartphone, and acts like a virtual bank for your bitcoin transactions.

Next, you need to mine bitcoins or trade for bitcoins. These bitcoins show up as value in your wallet. This value is also recorded in what is called the block chain, a publicly-available record of all bitcoins, all bitcoin owners, and all bitcoin transactions.

Once you have bitcoins in your wallet, you can begin spending them -- or you can save them, in the hopes that they will increase in value. Other cryptocurrencies like Ethereum and litecoin, have become popular alternatives to bitcoin as the cryptocurrency market has matured.

What is bitcoin mining?

Here's a short explanation of how bitcoin mining works, from The Telegraph: "You tell your computer to crunch through a set of difficult mathematical problems and success is rewarded with bitcoin."

The actual process is a bit more difficult. The mathematical problems, often called algorithms, generally involve more computing power than a single laptop can handle. Bitcoin miners form teams and combine their computers' processing resources to churn through these complicated algorithms. 

Why is bitcoin linked to solving algorithms? Simply put, you are receiving payment for your computer's labor. Of course, like many jobs, bitcoin mining requires a lot of work. That has prompted many people to turn away from bitcoin mining and acquire bitcoins through bitcoin trading.

What is bitcoin trading?

Bitcoin trading is the term for buying and selling bitcoins on the open market. You will probably be asked to buy bitcoins for slightly more than their current value, in the hopes that the bitcoins will continue to increase in value after you purchase them. 

If you had traded for some bitcoins at the beginning of 2013, the value would have jumped from about $13 per bitcoin in January of 2013 to $1,200 per bitcoin at the high value point in November 2013 but that number has been in steady decline. In January 2014, bitcoin value was hovering around $900 per bitcoin. In early spring 2014, the exchange rate for a single bitcoin is about $480—so it’s dropping but it is still a significant gain on your investment.

Is there any danger of using bitcoins?

As always, users need to watch out for scams and fake bitcoin apps. Make sure you have a fully-updated security software suite to prevent accidental viruses or malware that come through bitcoin and other apps.

Bitcoins also fluctuate more than other currencies; they are still technically an unstable currency, and users may lose money. The high-value point that bitcoins reached in November 2013, for example, was immediately followed by a significant drop.

It is helpful to look at bitcoin investment the same way you look at playing the stock market (as opposed to investing in a commodity like gold or silver) and invest your resources wisely. Make no mistake—investing in bitcoin is a gamble—a risky gamble. Do not plunk down thousands of dollars for a few bitcoins with the hope that they will suddenly soar in value. Sure they could but, because they aren’t backed by a steady currency or commodity, their value is not guaranteed or predictable and, even scarier—is subject to the whims of those who made it. Tread carefully!

If you are interested in learning more about bitcoins, open up a bitcoin wallet and try mining a few coins, or wait until the market drops a bit and then start trading. If you are very lucky, your initial payment will significantly increase in value over time.