Bitcoins: Fad or the Future of Currency?

It seems that every other day there's a new story about Bitcoins. Open up a newspaper and chances are there's a headline about it. As the evolution of currency, it is making waves in the global economy. But what are Bitcoins exactly? How do I use them? What does this mean for cash currency?

Bitcoins are a decentralized digital currency. Decentralized means that it is not controlled by an organization or government, which traditional cash currencies are. Users exchange money for Bitcoins at an online exchange, then use the Bitcoins to pay in online transactions. What makes Bitcoins unique is that it's public-key cryptographic security does not require any payment processors, which reduces costs, and is extremely secure.

Although Bitcoins have their advantages, its downfall is that it is highly volatile. The exchange rate for Bitcoins is constantly fluctuating because it is a relatively new currency and it's decentralized. When a currency is centralized, banks and governments buy and sell it in overnight transactions in order to control the exchange rate. Because Bitcoins have no governing body, there is no one to control it.

And if you were hoping to not have to pay taxes because you deal in Bitcoins - think again. Even though it's not an official currency, profits from using Bitcoins are still taxable because most governments consider anything to have value to be subject to taxes. So don't go asking your boss to be paid in Bitcoins anytime soon.

The emergence of Bitcoins has brought to light the opportunity that lies in digital currency. To be able to send funds anywhere in the world, for little to no costs, and with minimal risk is extremely advantageous in today's global marketplace.

Bitcoins' future as a currency is murky (one of its primary exchanges has filed for bankruptcy, and has faced a myriad of other problems as of late), but its digital payment protocol setup has laid the foundation for this industry to grow. The developers of Bitcoins were able to create an online payment process that is extremely secure and not susceptible to the same fraud/security risks that traditional methods, such as credit cards and PayPal, face.

Does this mean that the world will come to use only digital currency one day? It's a possibility. But in the meantime, we're going to be in a hybrid economy that uses both digital and fiat currencies and  it's only a matter of time before digital currencies become the norm.