What is Bitcoin?

Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Transactions are made with no middle men – meaning, no banks! Bitcoin can be used to book hotels on Expedia, shop for furniture on Overstock and buy Xbox games. But much of the hype is about getting rich by trading it. The price of bitcoin skyrocketed into the thousands in 2017.

Why Bitcoins?
Bitcoins can be used to buy merchandise anonymously. In addition, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation. Small businesses may like them because there are no credit card fees. Some people just buy bitcoins as an investment, hoping that they’ll go up in value.

Acquiring Bitcoins
Buy on an Exchange
Many marketplaces called “bitcoin exchanges” allow people to buy or sell bitcoins using different currencies. Coinbase is a leading exchange, along with Bitstamp and Bitfinex. But security can be a concern: bitcoins worth tens of millions of dollars were stolen from Bitfinex when it was hacked in 2016.

Transfers
People can send bitcoins to each other using mobile apps or their computers. It’s similar to sending cash digitally.

Mining
People compete to “mine” bitcoins using computers to solve complex math puzzles. This is how bitcoins are created. Currently, a winner is rewarded with 12.5 bitcoins roughly every 10 minutes.

Owning Bitcoins
Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer. The wallet is a kind of virtual bank account that allows users to send or receive bitcoins, pay for goods or save their money. Unlike bank accounts, bitcoin wallets are not insured by the FDIC.
Wallet in cloud: Servers have been hacked. Companies have fled with clients’ Bitcoins.
Wallet on computer: You can accidentally delete them. Viruses could destroy them.

Anonymity
Though each bitcoin transaction is recorded in a public log, names of buyers and sellers are never revealed – only their wallet IDs. While that keeps bitcoin users’ transactions private, it also lets them buy or sell anything without easily tracing it back to them. That’s why it has become the currency of choice for people online buying drugs or other illicit activities.

Future in question
No one knows what will become of bitcoin. It is mostly unregulated, but some countries like Japan, China and Australia have begun weighing regulations. Governments are concerned about taxation and their lack of control over the currency.

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Advantages and Disadvantages of Credit

Like most things, there are advantages and disadvantages to credit cards. Knowing some of these can help you decide if you do or do not want to use credit cards.

Advantages

  • Purchase Power and Ease of Purchase - Credit cards can make it easier to buy things. If you don't like to carry large amounts of cash with you or if a company doesn't accept cash purchases (for example most airlines, hotels, and car rental agencies), putting purchases on a credit card can make buying things easier.
  • Protection of Purchases - Credit cards may also offer you additional protection if something you have bought is lost, damaged, or stolen. Both your credit card statement (and the credit card company) can vouch for the fact that you have made a purchase if the original receipt is lost or stolen. In addition, some credit card companies offer insurance on large purchases.
  • Building a Credit Line - Having a good credit history is often important, not only when applying for credit cards, but also when applying for things such as loans, rental applications, or even some jobs. Having a credit card and using it wisely (making payments on time and in full each month) will help you build a good credit history.
  • Emergencies - Credit cards can also be useful in times of emergency. While you should avoid spending outside your budget (or money you don't have!), sometimes emergencies (such as your car breaking down or flood or fire) may lead to a large purchase (like the need for a rental car or a motel room for several nights.)
  • Credit Card Benefits - In addition to the benefits listed above, some credit cards offer additional benefits, such as discounts from particular stores or companies, bonuses such as free airline miles or travel discounts, and special insurances (like travel or life insurance.) While most of these benefits are meant to encourage you to charge more money on your credit card (remember, credit card companies start making their money when you can't afford to pay off your charges!) the benefits are real and can be helpful as long as you remember your spending limits.

Disadvantages

  • Blowing Your Budget -- The biggest disadvantage of credit cards is that they encourage people to spend money that they don't have. Most credit cards do not require you to pay off your balance each month, so even if you only have $100, you may be able to spend up to $500 or $1,000 on your credit card. While this may seem like 'free money' at the time, you will have to pay it off -- and the longer you wait, the more money you will owe since credit card companies charge you interest each month on the money you have borrowed.
  • High Interest Rates and Increased Debt -- Credit card companies charge you an enormous amount of interest on each balance that you don't pay off at the end of each month. This is how they make their money and this is how most people in the United States get into debt (and even bankruptcy.) Consider this: If you have a $100 in savings, most banks will give you at the most 2.0 to 2.5% interest on your money over the course of the year. This means you earn $2.00 - $2.50 a year on your $100 savings. Most credit cards charge you up to 10 times that amount of interest on balances. This means that if you have $100 balance that you don't pay off, you will be charged 20-25% interest on that $100. This means that you owe almost $30 interest (plus the original $100) at the end of the year. A good way to look at this is in comparison to what you would earn in interest from a bank or owe in interest to a bank loan: Savings accounts may pay you around 2% interest; if you have a loan from a bank you may pay them around 10% interest (5 times as much as you earn off your savings); if you owe money to a credit card company, you may pay them around 20% interest (10 times as much as you earn off your savings.)
  • Credit Card Fraud - Like cash, sometimes credit cards can be stolen. They may be physically stolen (if you lose your wallet) or someone may steal your credit card number (from a receipt, over the phone, or from a Web site) and use your card to rack up debts. The good news is that, unlike cash, if you realize your credit card or number has been stolen and you report it to your credit card company immediately, you will not be charged for any purchases that someone else has made. Even if you don't realize your credit card number has been stolen (sometimes you might not know until you receive your monthly statement), most credit card companies don't charge you or only charge a small fee, like $25 or $50, even if the thief has charged thousands of dollars to your card. There are several things you can do to prevent credit card fraud:
    • If you lose your card or wallet, report it to your credit card company immediately.
    • Don't loan your credit card to anyone and only give out your credit card information to trusted companies or Web sites.
    • Check your statement closely at the end of each month to make sure all charges are yours.
    • You can find out more about protecting your personal information by visiting our Personal Safety course.

Credit cards can make life easier and be a great tool, but if they aren't used wisely they can become a huge financial burden. If you do decide to use credit cards, remember these simple rules:

  • Keep track of all your purchases.
  • Don't spend outside your budget.
  • Pay off your balance on all of your credit cards at the end of each month.
  • Don't loan your credit or give out your credit card information to anyone but reliable companies.

Learn more about how to apply for credit cards in the next section