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What is Bitcoin?

Added on 25 December 2017 - 2:02 'Viewed 72 views times.
Bitcoins and dollar notesImage copyright Reuters Image caption Bitcoin’s value has been very volatile during its nine-year history

The value of digital currency Bitcoin is making headlines again.

Amid volatile trade in November and December, it hit a peak of more than $17,000 at one point – a staggering rise, given that it started the year at $1,000.

So what exactly is Bitcoin, and what’s behind the buying frenzy?

What is Bitcoin?

There are two key traits of Bitcoin: it is digital and it is seen as an alternative currency.

Unlike the notes or coins in your pocket, it largely exists online. Although there are some specialist ATMs which issue bitcoins, it may be best to think of them as being more like virtual tokens.

Others point to the growing prospect of Bitcoin crossing over into the financial mainstream.

“Speculation is a big part of this, but there are signs of growing use,” says Dr Hileman.

He says there were between three and six million people around the world actively using crypto-currency in April.

“Today it’s probably closer to 10 to 20 million, so it’s a very quickly growing user base,” he says. That’s the equivalent of a population the size of the Netherlands or Chile.

There has also been a boost by some large financial institutions, like the owner of the Chicago Mercantile Exchange, getting into the space, he adds.

How do people buy Bitcoin?

There are now thousands of different crypto-currencies, but Bitcoin is still the best-known. To receive a bitcoin a user must have a Bitcoin address – a string of 27 to 34 letters and numbers.

This acts as a kind of virtual postbox to and from which the bitcoins are sent.

There is no registry of the addresses, which enables some Bitcoin users to protect their anonymity. Bitcoin wallets store the addresses and are used to manage savings.

They operate like privately-run bank accounts – with the proviso that if the data is lost, so are the bitcoins owned. Increasingly, users are often asked for ID to open a wallet.

The rules underpinning Bitcoin say that only 21 million bitcoins can be created – and that figure is getting ever nearer. It is unclear what will happen to the value of bitcoins when that limit is reached.

Can they use bitcoins to buy things?

The anonymity afforded by digital currencies has attracted people wanting to make illegal purchases on the internet.

However, a small but growing number of recognised businesses now allow customers to buy goods and services with Bitcoin.

They range from multinational firms like Microsoft and travel booking site Expedia, through to small businesses using it as something of a novelty, such as a sushi restaurant in Cambridge or an art gallery in London.

China and South Korea have serious worries. They have banned any new virtual currency launches and have been shutting down exchanges on which they are traded.

The UK’s Financial Conduct Authority warned investors in September they could lose all their money if they buy digital currencies issued by firms, known as “initial coin offerings”.

But the underlying technology of Bitcoin is regarded by some major financial institutions as bullet-proof.

“That’s potentially why financial regulators [in Europe] are adopting largely a ‘wait and see’ approach,” says Mr Rice.

Is it all a bubble?

There is no shortage of financial journalists or experts saying Bitcoin’s surge is a bubble.

“There may be good reasons for buying bitcoin,” an article in The Economist said recently. “But the dominant reason at the moment is that it is rising in price.”

Image caption At the height of tulip mania, a single bulb sold for more than the value of a house

Bitcoin has doubled in value in the space of a month – which has led some to argue it is too volatile to be seen as a currency, and warned that a crash is inevitable.

However, Bitcoin has been “declared dead” a few times already, says Dr Hileman.

“It’s shown some resilience and bounced back from some near-death experiences,” he says.

At the same time, many would agree this is “very bubbly”, and he predicts we may see a “spectacular crash again in the not-too-distant future”.

“So hang on tight if you are a holder of these currencies,” he concludes.

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