Bitcoin — What is it?
First invented in 2009, Bitcoin is the original digital currency, and by far the best known. During its decade or so of existence, it’s racked up countless headlines for its breathtaking price swings. (It broke the $1,000 threshold at the start of 2017 before losing around half its value during 2018.)
The original aim of the founder (or founders), who called themselves Satoshi Nakamoto, was to form a new, decentralised electronic cash solution. He (or they) vanished after creating the idea and cultivating the tech and handing over the source code and domains to the rest of the Bitcoin community.
Each Bitcoin is essentially a computer file stored in a ‘digital wallet’ app on a PC or mobile device.
Bitcoin now has more computing power behind its security than ever, while its hash rate is at an all-time high.
Nakamoto’s protocol dictated that only 21 million Bitcoins could ever be mined, although no one knows exactly why this figure was chosen.
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How does it work?
As a decentralised digital currency, owners retain anonymity. Encryption keys connect buyers with sellers. And it’s not issued from the top down in the manner of conventional currency. Rather, it is ‘mined’ via powerful computers.
If you send someone else a Bitcoin, the network records the transaction and others made during a particular period of time in a block. Computers running special software (the ‘miners’) inscribe transactions in a huge digital ledger, collectively called the blockchain – a record which is openly accessible. This makes it possible to trace their history and prevent fraud.
Miners convert these blocks into coding sequences or hashes. Producing a hash takes serious computer power, and thousands of miners compete to do this at the same time.
Once generated, a new hash goes at the end of the blockchain. This is then updated and propagated publicly. The miner is then paid in Bitcoin for this.
More than 100,000 merchants now accept it, although few major ones still do. You can sell it or keep it in the hope its value will increase.
What decides the value of Bitcoin?
As with anything else, what people are prepared to pay for this digital currency determines its value, and it’s something which is completely open to interpretation.
A growing number of digital currency exchanges, including Coinmama, CEX, Kraken and Coinbase, allow you to buy, sell and store Bitcoin.
Getting started shouldn’t be any harder than setting up, say, a PayPal account. With Coinbase, for instance, you can deposit into a virtual wallet from a bank or PayPal account.
Once your account has funds, you can trade traditional currency for Bitcoin.
Bitcoin’s benefits explained
- Clearly, there is no bank or government control of Bitcoin funds
- Bitcoin can be spent anonymously since transactions are obscured via private and public encryption keys
- Because each transaction is recorded publicly, it’s hard to spend Bitcoins you don’t own, or to make fake ones or copy them
- There are no inherent transaction fees, although some exchanges will charge a buying or selling fee
- Most transactions can be confirmed within minutes
What about the downsides?
- While buying and selling Bitcoin is legal, miners and exchanges do occupy a grey area which is potentially vulnerable to regulation or law enforcement
- Bitcoin is risky and volatile, and its value can swing wildly from one day to another
- Because of the anonymity, you can never be quite sure who is selling or buying your Bitcoin
Given the many benefits of Bitcoin, the original cryptocurrency, clearly it needs to be taken seriously. But, given the associated and very real risks, we certainly wouldn’t recommend remortgaging your house to invest in it.