Bitcoin: Beyond the buzz

Understand the basics of this virtual currency

Published: April 02, 2015 06:00 AM

If you’re still wondering what’s the big deal about bitcoin, that’s understandable. There are many questions about how it works and whether it will ever really be embraced by consumers. Here are some of the basics:

What is bitcoin?

Started in 2009, bitcoin is a digital currency created and exchanged independent of banks or governments. It resides in a virtual wallet on your computer or smart phone, and some retailers accept it as payment. Bitcoins are a finite commodity: Only 21 million can be produced, making the currency inflation-proof.

Read about whether you should invest in bitcoin and if it could be the next investment bubble.

Do I need to be a computer geek to get bitcoin?

No. Consumers can obtain bitcoin, using dollars, through bitcoin exchanges such as Coinbase and Bitstamp, which also store the currency. (About 14 million bitcoins already exist.) You may also be able to invest in the currency one day. The Winklevoss Bitcoin Trust is currently seeking approval from the Securities and Exchange Commission to launch a bitcoin-based exchange-traded fund.

Who regulates bitcoin?

It doesn’t have any of the consumer protections that are available with debit and credit cards, and there isn’t an equivalent to the Federal Deposit Insurance Corporation, which protects money in banks and savings institutions. And there’s no remedy from a third party (such as a credit-card issuer) in the event of fraudulent transactions. The Consumer Financial Protection Bureau has warned consumers about the risks of bitcoin transactions and investments, and several states have proposed regulations.

Isn’t the value tanking?

Yes. Relative to the U.S. dollar, bitcoin fell in value by 57 percent in 2014. At the beginning of last year, one bitcoin was worth more than $700. By last February, it was worth only $236.

That sounds like a lousy investment. Anything good about bitcoin?

If there is, it’s that bitcoin’s promise—to make financial transactions fast and frictionless for consumers—could fill a need. At a bank, it can still take days for a check to clear. If bitcoin spurs the banking system to be more nimble, it might, at least indirectly, be the catalyst for a future consumer victory.

Editor's Note:

This article also appeared in the May 2015 issue of Consumer Reports magazine.

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