Few phenomena have been so widely discussed yet remain so puzzling as the world of Bitcoins. Businesses galore are now asking themselves whether Bitcoin is something they need to take seriously, even though most have absolutely no idea what it is.
First, a primer.
Bitcoins are, in the words of the Bitcoin Project, open-source, peer-to-peer digital currency. For those accustomed to dollars and cents, almost none of that makes any sense at all. Boiling it down: Bitcoins are a synthetic currency that are kept in a "digital wallet" on your PC or mobile phone. Payments are sent from one wallet to another--similar to Paypal--and an in-depth cryptographic system verifies that transactions (such as purchases) are legitimate. These transactions are verified by other Bitcoin users (part of the P2P aspect of the currency), and as a reward, those transaction processors are eligible to receive newly minted Bitcoins. (These amount to free money, but they are exceedingly difficult to obtain. This has led to sophisticated Bitcoin mining operations sprouting up, as well as an entire industry based on supporting of those operations.)
The fever surrounding Bitcoins has created one of the most volatile investments you can find. A single Bitcoin was worth about $20 in February before climbing to a value of more than $230 by April 10. By April 17, they had dropped to $70. And as I write this on May 20, Bitcoins are trading for $122. Speculating on Bitcoins requires either incredible fortitude or a massive amount of blind faith.
Speculative swings aren't the only thing that make Bitcoin the wild west of the financial universe. Bitcoins have been stolen. Bitcoin trading exchanges have been shut down, and online digital wallet services hacked. The latest news involves the Department of Homeland Security raiding the world's largest Bitcoin exchange due to fears that Bitcoins are being used to fund illegal activities.
So, are you ready to sign up?
As crazy as it is, businesses galore are getting into the game, partly because the speculative nature of the currency means a $100 purchase could turn into $150 tomorrow, but also because of Bitcoin's less-tangible benefits. Processing fees are small to nothing, a contrast to the fees a business must pay when processing a credit card or even accepting a Paypal payment. Chargebacks don't exist because, by design, they can't. Once a Bitcoin has been handed over, it's permanent. And while sales involving Bitcoins are as taxable as those made using any other currency, in practical terms there is no paper trail for these sales, which some see as advantageous.
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