A lot of people are convinced that digital coins are going to “change” the world, and they’ve “flipped” at the prospect of investing in Bitcoin, the cyber currency that “coined” the idea in the first place. Now, we think the idea of minting this new currency is… “cool” as well, but before you lose your “heads”, you should remember to always watch your “tails”. Because no matter how “cash” a new technology is, you always have to ask first: is it safe?
Alright, enough of the puns.
What exactly is Bitcoin?
Bitcoin is a digital currency created in 2009, and is arguably the inventor of the whole digital currency craze. Unlike normal money, which is backed and valued by the government that prints it, Bitcoin is run independently and has nothing backing it, meaning that their value — or, what you can actually spend them on — is determined largely by the users. This means that Bitcoin can be worth anything from a few bucks to almost 20k each, as was the case in December 2017.
But what can you actually do with Bitcoin? Well, back when it was first created, not a whole lot. However, as time has gone on, more and more companies and individuals have accepted Bitcoin as a legitimate method of paying for their services. It’s entirely possible to buy a computer, book a flight, or even just order a pizza with Bitcoins alone.
Is Bitcoin safe?
Yes, we’re happy to say that Bitcoin is safe... mostly.
Reason #1: Bitcoin is encrypted and secure
And not just normal, run-of-the-mill encrypted. Bitcoin is encrypted and backed with a special system called blockchain. Blockchain uses volunteers — a whole lot of them — to work together to encrypt the transactions that happen on the Bitcoin system. And in doing so, they make sure that all personal information is kept hidden away from any spying eyes, and that even if hackers do manage to get into the system, there’s nothing of value to steal.
Reason #2: Bitcoin is public
“Wait, that doesn’t sound safer” you might be thinking, but by “public”, we mean all the transactions are transparent and available to the public even if the people involved are anonymous. That means no one can cheat, scam, or otherwise fraud the system. They’re also irreversible, so once you get your Bitcoins, or sell them, no one can go and demand their money back. With Bitcoin, it’s like having thousands of people watching your wallet to make sure no one tries to steal anything.
Reason #3: Bitcoin is decentralized
Bitcoin has servers all over the world, and over ten thousand nodes keeping track of all the transactions happening on the system. And that’s important, because it means if something was to happen to one of the servers or nodes, the others can pick up the slack. It also means trying to hack into one of the servers is pointless: there’s nothing there you could steal that the other nodes and servers couldn’t prevent, unless you happen to control 51% of the nodes. A not impossible but terribly unlikely situation.
And it’s far better than the alternative, because when you keep all your important stuff in one location, it invites trouble: just ask the folks over at Equifax.
You mentioned “Blockchain”... what’s that?
Ah, yes. Blockchain is the secret ingredient that makes Bitcoin possible. And it’s also the main tool that ensures the whole system is safe and sound.
Going into all the details of blockchain would be an article in its own right, so let’s keep it nice and simple here: blockchain is a public encryption method that both keeps transactions safe and ensures each one is unique.
Here’s a question — why don’t people just use ctrl-C to get more bitcoins? It’s because blockchain makes sure that each bitcoin is unique by putting them all in a universal ledger that keeps track of how many bitcoins are in each wallet. The system knows if a bitcoin is acquired through any means other than trading or mining, and if it is, it simply has no value and it won’t show up on the ledger.
But keeping all that information private and anonymous is important too. We mentioned above that blockchain encrypts all it’s transactions, but the reason we call it a “blockchain” is because each transaction, when it’s encrypted, is sent to join a “block” of other transactions. Once it joins this block, it becomes impossible to change or modify. That means that even if you access the blockchain, you couldn’t, say, “hack” someone into sending you more money: which is essential in ensuring that each bitcoin you have is unique and thus valuable.
Wait, earlier you said Bitcoin is “mostly” safe
...well, we mean… technically… it’s super volatile, and that’s not exactly safe.
Bitcoin isn’t anonymous?
Afraid not. While Bitcoin does disguise your personal information, it doesn’t disguise the address of your wallet. That means you’re not “anonymous”, you’re “pseudonymous”, and someone could, in theory, use clues and hints to track down your personal information.
Granted, this is not an easy thing to do, but it’s not impossible. Because all the ledgers are public, if someone knew how much you spent, when, and where you spent it, they could find your transaction on the ledger and trace it back to your wallet. Once they’ve done that, they could map your spending habits, gather data on your life, and maybe even blackmail you… if you spend your bitcoins on shady things, that is!
That’s why if you do want to stay private when using Bitcoin, you shouldn’t be forthcoming with information they could use to track your purchase.
But there’s another reason Bitcoins might not be “safe” for you…
Bitcoin is volatile?
Yep! One could argue that Bitcoin, while secure and encrypted, is not a “safe” way to store money simply because of how volatile it is. With no regulatory bodies, a $1000 Bitcoin can be worth as little as $100 in a matter of days. While Bitcoin has gone through phases of stability, so far it’s never lasted longer than a few months. And while that volitability can be exciting (after all, it could also gain value), it also means that you’re always at risk of taking some serious losses.
Plus, because this is such a new concept, it’s inevitable that things go wrong every once in a while. For example, one famous crypto exchange has been unable to access the money it owes its customers because the owner (and the only person who knew the password to the system) died unexpectedly. Sometimes security is a double-edged sword!
Can my Bitcoins be stolen?
Well, sure, of course!
Just because Bitcoins are broadly secure on a system level doesn’t mean hackers can’t steal coins from individuals!
Phishing is always dangerous to your wallet, no matter what kind of coins you keep in there. A fake website could trick you into sharing your login details with hackers, who could then drain your Bitcoin wallet dry.
Of course, there are always more conventional scams as well: like spoofing, where people pretend to sell something, take your payment, and then refuse to deliver what they offered.
There’s no shortage of malware out there that targets Bitcoins and Bitcoin wallets. If any of these nasty bugs manage to get into your system, hackers will quickly access — and steal — your precious coins.
It’s even possible to steal wallet keys from cold storage (which is where Bitcoins are kept when they’re not being used), although the method is still fairly experimental.
Sounds nasty, but there’s no reason to fear: with a good antivirus, like AVG AntiVirus FREE, you can stay safe from three of these four methods. You’ll just need to use common sense and use trustworthy vendors to avoid spoofing.
So should I try Bitcoin?
That’s your call, friend. There are lots of reasons you can trust Bitcoin, as we explored above, but there are plenty of reasons to be skeptical as well — after all, nothing is perfect. But if you do decide to invest, be ready for all kinds of highs and lows, and don’t be shy to diversify: there’s lots of cryptocurrencies out there that you could try, and most of them are fairly safe.
Especially if you show a little common “cents”.
...we’ll show ourselves out.