Bitcoin is a crypto-currency using open-source software running in a peer-to-peer network to control the creation and transfer of digital money. Unlike fiat currencies around the world which are backed by countries and their governments, Bitcoin is a decentralized system without any single entity responsible for the currency. There is no entity which is held liable for activities surrounding Bitcoin, nor is there any regulation.
Bitcoin attracts retailers because it offers significantly lower transaction fees than those charged by credit card companies. As a recent example, in early January 2014, Zynga adopted the use of Bitcoin which adds to the momentum of its rise to $1000 USD per Bitcoin. Here is a company Zynga which offers intangible goods and services, now transacting with intangible Bitcoin assets. It will be interesting how this will be reported in GAAP financial filings.
Bitcoin exchanges exist to deal with the buying and selling of Bitcoins. For example, Mt. Gox is a Bitcoin exchange based in Japan. There are also local Bitcoin exchanges within countries to handle the buying and selling of Bitcoins in local currencies. Bitcoin ATMs exist to receive or dispense local currencies for Bitcoin value stored electronically in digital wallets (e.g. a digital wallet app on a smartphone). Physical Bitcoins are minted by companies who have set up to do that. Some ATMs even dispense Bitcoins.
Crackdown on Bitcoin related activities by governments around the world include:
- In October 2013, the New York U.S. Attorney seized 144,336 Bitcoins from the hardware owned by Ross Ulbricht, the alleged owner of Silk Road, an infamous online drug marketplace.
- In December 2013, China banned the inflow of money into Bitcoin exchanges in China.
- In January 2014, China's largest e-commerce group Alibaba banned Bitcoin transactions.
Concerns from a government perspective include:
- How to track and tax Bitcoin transactions?
- How to protect consumers against fraud?
- How to investigate money laundering?
Concerns from a consumer perspective included:
- Who to call if my Bitcoins disappear or if I am frauded?
With fiat money, I call the bank as a first step.
- How do I cancel a Bitcoin transaction if I have a dispute with a retailer?
With credit cards, I call the cc company.
Q: Besides paying for Bitcoins with fiat money, how does one get Bitcoins?
A: From Bitcoin Mining.
See pictures of Bitcoin Mining Rigs.