Bitcoin is a global form of digital currency. Unlike traditional currencies, which were frequently backed by gold and silver, bitcoin is based on distributed computing. While traditional currencies are printed by central banks, bitcoins are created or "mined" by distributed computer networks.
Another way bitcoin differs from traditional currencies is that it is decentralised, meaning that it is not controlled by any single institution. As a result, miners around the world create new units of the currency and confirm its transactions.
While it holds many advantages over traditional currencies, bitcoin comes with risks of its own, and every prospective user should be aware of these risks and how to manage them. Just like the cash in your wallet, the safety of your bitcoins depends upon your own vigilance.
One of the benefits of virtual currencies like bitcoin is that every transaction and individual bitcoin is tagged and traceable. This means that your money simply cannot disappear without a trace.
However, transactions issued with bitcoin cannot be reversed; they can only be refunded by the recipient. Bitcoin is not anonymous. All bitcoin transactions are stored publicly and permanently on the block chain, which means that anyone can see the balance and transactions of any bitcoin address. However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances.
For this reason, it's good practice to ensure that individual bitcoin addresses are only used once. Because bitcoin is still a relatively small market, the market price of bitcoins may go up or down in response to relatively insignificant changes in demand.
Highs And Lows
This means that bitcoin's price fluctuations can be quite volatile. Although it is becoming less experimental as usage grows, bitcoin is still a relatively new phenomenon that reaches into new territory. As such, its future cannot be predicted by anyone.
Finally, bitcoin users must pay close attention to the tax and revenue regulations provided for the digital currency by government agencies. Jurisdictions can potentially tax income, sales and capital gains, and this extends to bitcoins.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…