Bitcoin is a way to make payments online that is either a massive stride forward in technology or a tool to help drug traffickers and crooks stash their loot.
Whatever your view, Bitcoin has a foothold as a new investment class and does not look like it is disappearing any time soon.
But few people have an understanding of how the Bitcoin community works, so here are the answers to some of the most frequently asked questions about the virtual currency.
What is a Bitcoin?
Bitcoin only exist online, which is why they are called a virtual currency. Bitcoin is not minted or printed like traditional money and technically is not a currency, such as US dollars or the euro.
Bitcoin are stored in electronic wallets rather than bank vaults. These wallets are accessed through security provided by a ‘blockchain’.
These blockchains are the basis of owning Bitcoin. The blockchain is part of an online database that lists all Bitcoin transactions and underpins the security of the system.
How do you get a Bitcoin?
Bitcoins are ‘mined’, which means they are offered as a free reward to anyone who can solve some complex mathematical problems set by the software creators.
Successful miners win a block of Bitcoin.
That block is currently 25 Bitcoin, but the software limits the size of mined blocks at pre-set intervals.
One of these intervals is expected to pass around the end of June 2016. The software will then trigger a ‘halving’ that reduces the size of a mined Bitcoin block from 25 to 12.5 coins.
If you do not mine Bitcoin, then investors can buy them off traders or exchanges.
How much is a Bitcoin worth?
Bitcoin are valued much like other real currencies and commodities against supply and demand.
No ‘official’ exchange rate exists. According to leading currency exchange site XE.com, the most popular Bitcoin exchange rate is the XBT pairing with the US Dollar.
Today, the rate is one Bitcoin to $4,222, after its recent rally of over 300%.
Who controls Bitcoin?
Bitcoin is the wild frontier of currency and investment. No government, central bank or official body regulates Bitcoin, so Bitcoin is a true floating investment.
On the one hand, that freedom allows the market to set the value, but on the other Bitcoin is open to fraud and manipulation by unscrupulous exchanges, dealers and investors.
Governments have defied attempts to have Bitcoin declared a currency, so although users call Bitcoin a virtual currency, it only has an agreed monetary value within the blockchain.
Having Bitcoin declared an official currency would mean investors could trade without paying capital gains tax on their profits and would also give Bitcoin a reputational boost ahead of other virtual currencies.
Who are the people behind Bitcoin?
The Bitcoin software was supposedly coded by an engineer named Satoshi Nakamoto in 2009 as an electronic payment system based on proving ownership mathematically.
Nakamoto is widely believed to be an alias after extensive investigations to identify the engineer have failed to turn up a believable candidate. Some people believe Nakamoto represents a team of developers rather than an individual.
Bitcoin as an investment
Bitcoin comes with a lot risk for investors. The price is volatile and the means of acquisition and disposal are limited.
Over the years, because of the lack of regulation, many Bitcoin exchanges have proved to be fronts for fraudsters.
Investing in Bitcoin is considered the same as investing in other hedging commodities, such as gold.
Wealthy investors in Argentina, where inflation has raged at up to 60% have switched savings to Bitcoin to weather the financial storm.
More recently, the huge price spike in Bitcoin is said to have been triggered by Chinese investors moving to the digital currency. Their concern is capital controls imposed by the government and the risk of having their savings confiscated.
Regulators in the USA and Europe have repeatedly warned of the risks of investing in Bitcoin.
Bitcoin mining cap
A limit built into Bitcoin software gives investors some confidence in future prices. The software adjusts to ensure a steady flow of new Bitcoin so a sudden deluge does not hit the market and drag down prices.
The rate of production falls by 50% every time 210,000 blocks are generated with an eventual cap on mining of 21 million Bitcoin.
The software expects to reach this point around 2024 or 2025.
The algorithm that fixes the rate of supply was chosen to match the rate at which gold is mined, which is why Bitcoin is ‘mined’ rather than generated by the software.
The dark side of Bitcoin
Bitcoin has been the currency of choice of organised crime for some time.
The FBI has run operations against a web site called The Silk Road that allegedly trafficked drugs, weapons and laundered money for crooks by adopting Bitcoin as the payment method of choice.
The attraction was the anonymity of Bitcoin transactions.
Criminal investigators followed the online Bitcoin movements until the holders converted them to cash and then swooped on them.
Few retailers accept Bitcoin and estimates put the daily spend at fewer than 5,000 coins a day. The value of that spend depends on the Bitcoin exchange rate – somewhere between $1.1 and $5.5 million.
For most businesses, accepting Bitcoin is a PR opportunity as they can send out a press release to garner some publicity.
In reality, converting Bitcoin with a well-known bank is a difficult task.
Worldwide, banks have shunned dealing with Bitcoin spenders. In Australia, the National Australia Bank has closed all business accounts with a Bitcoin connection. HSBC has rejected approaches to hold accounts for a Bitcoin hedge fund.
Find out more about Bitcoin
Bitcoin wiki – maintained by the Bitcoin community
Investing in Bitcoin – an article in Investopedia
Latest Bitcoin exchange rates on XE.com