Bitcoin – What Are They And What Are The Benefits And Risks

Bitcoin has been around for nearly five years. It was first mentioned in a published paper under the pseudonym “Satoshi Nakamoto” in 2008 and went fully operational the year after. It is a virtual currency meant to rival existing currencies used on a daily basis all around the world. Bitcoins rely on the acceptance of users in order to hold any value and there are intentional limits on the number of Bitcoins available in the world at any one time as a means to control inflation. In order to understand how Bitcoins work ,it is necessary to further evaluate the Bitcoin network and the associated benefits and risks..

 The Network: Where Are Bitcoins?

The answer to the question about where Bitcoins are located is simple yet complicated. Getting a Bitcoin is not as easy as driving to the ATM, unless your city is lucky enough to have one already installed. New York City may get its first Bitcoin ATM in 2014. While you can get physical Bitcoins from ATMs or other sources, the currency exists solely in a virtual network of computers all around the world.

Users download and install Bitcoin clients on their computers or smartphones and are able to generate a virtual account, much like the one used with PayPal. However, these accounts are anonymous and a user must share his or her “address,” an alphanumeric string of characters unique to that user, with another in order to facilitate a payment or money transfer. When someone wants to make a transfer they notify the network and give the details of the transaction (sender, recipient and value).

 Benefits & Risks of Bitcoins

Bitcoins solve many of the problems associated with current currencies but also introduce many new and immerging uncertainties. Here are a few of the benefits and risks associated with Bitcoins:


  • Low inflation risk: The Bitcoin network is designed to be finite. Only about 21 million Bitcoins will ever be released which controls inflation.
  • No Chargebacks: Bitcoin payments are irreversible, meaning that the cost of fraud is not pushed onto the shoulders of merchants like credit card chargebacks.
  • International Payments Made Easy: Since Bitcoins do not have any real physical location, it is easy to send them to anyone, anywhere with no limits or delays. In addition, transfers take about 10 minutes so you don’t need to worry about intermediate banks placing holds that can last for days.


  • Untraceable: The untraceable nature of a Bitcoin can be seen as a benefit, but also attracts crime and illegal activity.
  • Easy to Lose: There is no system in place to recover lost or stolen Bitcoins as there is with credit cards, for example. If your Bitcoin wallet is hacked, those Bitcoins are pretty much gone for good.
  • Not Yet Widely Accepted: There still are not a lot of places that accept Bitcoins. This is likely to change, but for now the use of Bitcoins is limited.

Identity Verification for Bitcoins

Although Know-Your-Customer (KYC) Rules are not currently a regulatory requirement for the Bitcoin market, many organizations are taking the lead and enabling KYC to identify legitimate customers. Bitcoin organizations implementing these KYC rules are not only gaining confidence that their customers are who they say they are, but also are protecting their business from fraud. There are several robust technology platforms that support Bitcoin businesses in implementing comprehensive identity verification and fraud prevention programs.

Written by Britni Zandbergen, Senior Director of Marketing at Idology.  Britni has years of experience in identity management as well as dynamic SaaS solutions.

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