Although bitcoin is often referred to as a decentralised digital currency, think of it as an electronic asset. This sidesteps questions around which government backs it and who sets the interest rate, which are often a mental block in understanding bitcoin. As an electronic asset, you can buy bitcoins, own them, and send them to someone else. Currently there are around 15 million bitcoins that have been created, increasing by 12 bitcoins every 10 minutes or so. There is an agreed upon limit, of 21 million, the last of which should be created a little before the year 2140. Bitcoin transactions from account to account are recognised globally in a matter of seconds, and are usually considered settled within an hour. Bitcoins have a price, which can be in any currency, but is usually in USD. This price is set by normal supply and demand market forces in marketplaces with traders, just like with oil or gold. Bitcoin is just like any other international currency whose ‘home ground’ is the internet, as opposed to any geographical location. Put another way: if the internet were a country, bitcoin would be its currency. For the first time we have an entirely digital asset which can be controlled by the end user, without requiring an account with an institution.

Bitcoin payments.

Payments of bitcoins can be made from one person to another, irrespective of geographical location or jurisdiction. Payments are relatively fast – the initial notification is within seconds, and it ‘settles’ in about an hour. In situations where the normal financial system is inadequate, it can be a useful way of transferring value to anyone who has access to the internet.

Potential users.

Some communities are underserved by banks, due to the cost/benefit of the brick & mortar banking model, and regulatory cost; some international transfers are unreliable, or can take many days, with manual processes and faxes being used as part of the plumbing; some people may want to accept digital money for selling digital goods; there may be use cases where small payments, less than a penny, may be useful; these are all currently difficult with existing fee structures and payment options.

Price volatility.

Just like other currencies, bitcoin’s price fluctuates. Bitcoin’s price is more volatile than a lot of currencies, although the volatility is decreasing. If you account for your wealth in your local currency, then owning bitcoin could be seen as a bet on bitcoin’s future exchange rate price, otherwise know as speculation. You can see historical price volatility on the BNC website.

Conversion.

Just like other currencies, if you have one currency (say, Pound Sterling), and you want to convert it to bitcoin, you need to find someone to exchange it with. This necessarily has some friction and fees, either dressed up as commissions or built into the conversion price, know as the spread. With time, conversion is getting easier and cheaper as more exchanges are springing up in more countries.

Maintain cynicism.

You may hear of bitcoin being ‘fast’ and ‘free’ or ‘low cost’. While that is true when you are strictly in bitcoin, it’s worth thinking about the costs involved in the ‘on’ and ‘off’ ramps, getting from sovereign currencies into bitcoin and back. It’s worth noting that while bitcoin has spawned many other similar cryptocurrencies, such as litecoin and dogecoin, bitcoin is still the most widely used and traded.