I've only owned Bitcoins for a couple of week, so I'm no expert. I can talk about my experience of buying them, though, and what I learned along the way.
Bit-wut?
According to Wikipedia:
"Bitcoin is a cryptocurrency where the creation and transfer of bitcoins is based on an open-source cryptographic protocol that is independent of any central authority."
Okay, fair enough. As opposed to gold-standard currencies - where their value is linked to the value of Gold - Bitcoins are linked to a computational protocol. Basically, a maths problem.
Mining more gold becomes more expensive over time, increasing the value of gold-standard currencies (in theory). Bitcoins, however, are 'mined', or generated, by running a processor-intensive cryptographic protocol. This protocol gets more difficult as more Bitcoins are mined, adding to the value of existing Bitcoins on the market. I suppose this emulates the concepts of rarity from something like the gold-standard.
The next part of Wikipedia's description of Bitcoins is the really interesting bit:
"Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution."
'Ello. With the worldwide financial crash in 2008, trust in banking institutions, as well as the bankers that ran them into the ground, evaporated. Could Bitcoins be a bank-independent currency system that cannot be contaminated by such practices as LIBOR fixing? Perhaps, but let's remember, financial systems come with, at least some, safeguards. In the UK we did have the seemingly ineffective Financial Services Authority. This has now been replaced by two separate organisations. The new Financial Conduct Authority provides some protection to consumers when it comes to dealings with financial institutions. Since Bitcoins are not recognised as an official currency in the UK, I assume that full protection cannot be provided to the consumer.
On the other hand, with the Bank of England interest rates at a measly 0.5%, and those of savings products, such as ISAs (tax-free savings) as low as 1.5%, the value of bank savings actually decreases over time when taking inflation into account.
The value of Bitcoins, on the other hand, has increased by 300% over the last six months.
Interested now?
I don't see Bitcoins as a long-term investment option, but it could be the precursor to a modern, distributed currency system. A future system that has no links to banks or traditional and exploitative financial institutions could help introduce new and exciting industries and income models. It could revolutionise how we understand wealth and, hopefully, drive a fairer way of handling money.
Up until a few weeks ago I had a small ISA that was losing value year-on-year. I decided that this would be my experimental savings fund. It wasn't generating any real interest value and, financially, I wasn't noticing its existence. I withdrew the lot and closed the account.
Buying BTCs
For me, the process of buying and handling Bitcoins (or BTCs) was a daunting one. I had read the instructions and tutorials on a number of exchange sites and was still more than a little concerned. I had chosen an UK-based exchange to make the bank transfers easier to handle, but I was still daunted by a process that seemed, at first, completely alien to me.
First of all, I had to buy some BTCs. You do this in the same way as any other online exchange: find a buyer; transfer the funds; get the goods.
I had selected a buyer based on their rating, their selling price and their willingness to accept a bank transfer. I had entered the amount I wanted to buy. I had clicked the start button after reading multiple warnings about ensuring all my details were to hand... and off I went.
The scary part was the timer that ticked away while I was managing the exchange. Some loud beeps from the website startled me every few minutes as they prompted me to begin the next stage of the purchasing process.
I logged-in to my bank website to transfer the money to the seller, being careful that I didn't mess up my two-factor authentication or mis-type the account details or amount.
Once I clicked my bank's send button I jumped back to the exchange site to confirm I'd sent the payment... then I waited.
The timer ticked down as I waited for the seller to accept the transfer. For them to see the money hit their account.
One of my cats was shouting for his dinner while his sister was climbing my leg. "Get down! I'm buying Bitcoins!" only elicited a slight pause in the activity, followed by a ferocious resurgence.
Another loud beep! The seller had received and recognised my money transfer, and had confirmed the exchange of BTCs into my online wallet.
I had bought my first Bitcoins.
Online wallets?
Yes, online wallet. A service provided by a number of exchanges or Bitcoin services sites that allows you to easily manage your Bitcoins. They make it easier to send BTCs to others, to accept payments and to manage your transactions.
As I understand it, a wallet - or a bitcoin address - is an encryption code that acts as a public key to your BTCs in the peer-to-peer networked data that makes up the currency's online repository. Your private key can then be used, hopefully only by you, to transfer BTCs to others or to exchange for other currencies.
The service I used to buy the BTCs does not provide a long-term wallet service, so I needed to transfer them out as soon as possible.
To do this, I set up an account with a suitable service, received a new address for my wallet and returned to the original exchange site to transfer the BTCs out. Simply entering the new address into the correct field and ensuring I had included the whole amount of BTCs in the transfer was all that was needed. The transfer went ahead and my BTCs were now in my new wallet.
To back up your BTCs, many services provide a way to export the data itself as a file. The most secure way, though, seems to be to backup to print. Yes, old school.
By exporting a QR encoded copy of both your public and private keys, along with the plain bitcoin address itself, you have a way of accessing your funds regardless of the state of the online wallet service. Since the data regarding your transactions are encoded with your private key and are maintained in a peer-to-peer network, the information should be resilient.
Please check that information first. Remember, I'm still working this out myself.
Using your Bitcoins
So, what can you use your Bitcoins for?
Many online shops of the geeky variety offer BTCs as a payment option. Using your bitcoin address, you can spend, spend, spend on those sites. They range from computer games to artwork, but it all depends on the seller's willingness to accept BTCs as a real-world currency. They have to be able to buy food and pay their mortgage, after all. The number of online shops that accept BTCs are increasing, but you'll find that the majority are ones that offer digital goods.
Some locations accept BTCs as an alternative to cash when using vending machines or certain point-of-sale systems. Locations that have internal cashless payment systems, like a number of large corporate offices, could probably accept BTCs when their users charge-up their cashless accounts.
You can also use BTCs as a sort of investment, in the way that I'm experimenting with. Watching the value increase over time and waiting for the right moment to sell is the same as how most commodity markets function. Buy low, sell high.
The creator of Bitcoins called it an 'experimental currency' and that's how I'm going to treat it. Not as a replacement for long-term savings, but as an interesting and exciting experiment that will help me understand, and perhaps prepare for, future distributed; peer-to-peer; internet-based currencies.