Bitcoin – what's it all about?

We're sure you’ve all seen the hype in the newspapers over recent days and weeks regarding Bitcoin, but how many of us actually know what it is, understand it or have even heard of it until recently? Andrew Silk, Editor of Mature Times investigates.

Described as what is known as a cryptocurrency, Bitcoin is a digital currency that exists online. Unlike a traditional currency, which is regulated by the Central Bank of the country of issue, Bitcoin has no such restrictions and operates independently. It emerged out of the ashes of the last financial crisis as a way of bypassing traditional banks and payment systems, reputedly invented and launched in 2008 by Satoshi Nakamoto, a software developer whose true identity has never been revealed.

After developing the currency Nakamoto effectively disappeared, but before doing so he left the now infamous quote “It might make sense just to get some in case it catches on” – I’m sure he didn’t realise at the time just how prophetic those words would be!

Technology

Digital currencies use two types of technology, the cryptocurrency referred to above with the second type being what is known as a virtual currency. A cryptocurrency is a kind of digital token that uses encryption techniques to regulate the generation of units of currency and to verify the transfer of funds.

A virtual currency is a type of unregulated digital money which is issued and controlled by its developers and is generally only used by members of a specific virtual community. It is believed that there are approaching 750 different types of cryptocurrencies in existence, with Bitcoin being perhaps the most talked about.

So how does it work?

Bitcoins are created using encryption technology and around 3,600 new bitcoins are created every day with around 16.5 million of them now in existence. There is currently an upper limit of 21 million units, but that number is likely to increase each year. Each bitcoin has its own digital certificate which can be tracked and monitored by a network of computers around the world.

The bitcoins are then bought and sold by the holders of them on a virtual market – in essence they are traded like any other asset, the difference being there is nothing physical to sell.

What are they worth?

Like anything new, Bitcoins are currently going through a ‘bubble’ phase and as such their value is extremely volatile. For example, when launched it took five years for the value of one bitcoin to rise to $1,000, but now that same bitcoin is said to be worth around $15,500. However, by the time you read this article who knows what it will be worth!

And that is the problem – its volatility – but at the moment it is seeing unprecedented hype and therefore unprecedented price swings. At the beginning of December a bitcoin was worth around $9,800 – just a few weeks later some traders have been quoting prices of nearly $20,000. At current rates it is estimated that the value of all bitcoins in circulation is in excess of £200bn.

Will it last?

Bitcoins will last, the question is what will their value be going forward? It is a question that is hard to answer. However, we all know the saying, ‘if something appears too good to be true then it almost certainly is’ and I think it’s fair to say that applies in this case. Many commentators have likened the current frenzy for bitcoins to Tulip Mania in the 17th Century or to the great Californian gold rush in the 1850’s and we all know what happened in both of those cases!

Why is it so popular?

The main reasons appear to be that it is almost impossible to trace the owner of a bitcoin and that it can be traded globally. The fact that it is not regulated by any one authority means that it is very attractive to certain classes of people, those that for whatever reason may want to ‘hide’ some of their financial dealings. Add to this the anonymity and you can see why some people may be attracted to this market!