What is a Bitcoin and how does it work?

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Bitcoin is an online currency that you ‘mine’ using computer code. It’s not controlled by banks or governments and can only be spent in a limited range of outlets. But what is a Bitcoin and how does it work?

Q. What is a Bitcoin?

A. Bitcoin is an online form of currency that’s generated when people ‘mine’ an algorithm. The algorithm sets a limit on how many Bitcoins can be mined. Only around 21 million are ever likely to be mined and around seven million were mined in the first two years. The idea behind Bitcoin was launched in October 2008 by a programmer who used the name of Satoshi Nakamoto and it went live in 2009.

I talked to Adam Wyatt of Bullbear Analytics, a well-established market research firm for digital currency, based in the United States, when I first wrote about Bitcoin in 2014. He explained that Bitcoin is like the internet of money. “You can think of the Bitcoin protocol like TCP/IP and HTTP which are the underlying protocols that make the internet itself possible.  People built services on top of those protocols, such as Google, which allowed the entire ecosystem known as the world wide web to flourish.”

Q. Where do I get Bitcoin?

A. Bitcoin isn’t issued by a bank or government in the way pound sterling, the dollar and other currencies are. You can’t see them (there are no coins or notes to carry in your purse) and they’re not accepted in many outlets at the moment.

You can either mine them yourself (not easy for most people!) or buy them from a bitcoin trader or exchange platform. There are quite a few platforms around and more springing up all the time. Some are also disappearing. When I first wrote about Bitcoin in early 2014, MTGox was the biggest Bitcoin exchange platform, but it was bankrupt by March 2014. Once you’ve bought the Bitcoin, they’re transferred to your virtual wallet.

Q. How much is a Bitcoin worth?

A. The values have fluctuated dramatically. In February 2013 Bitcoin was trading at $20 each, but as I write this (November 30th 2017), one Bitcoin is worth around $9,400 – although it reached $11,000 the day before.

Q. What’s the attraction of Bitcoin?

A. One main advantage is that you can make payments without involving the banks and it’s not controlled by any government. That means payments aren’t traceable in the same way that making a payment with a debit or credit card or by something like a direct debit, is. At the moment, while it’s easy to make untraceable payments in the real world (simply by paying someone cash), it’s much harder to do that online.

Some people say that because of this anonymity Bitcoin has become the currency of choice for drug dealers and other criminals. But it’s being used by a far wider community

Q. How safe is Bitcoin?

A. Hmm. That’s difficult (for me) to answer. Several computers and sites storing or trading Bitcoin have been hacked and Bitcoin have been stolen but experts say that the actual system has been tested for safety and encryption extensively.

Q Is bitcoin here to stay?

A. Yes, definitely, according to the experts. The banking crisis and the rise of internet shopping has fuelled demand for a new form of currency. Although a number of experts are concerned about Bitcoin’s rapid rise in recent months and believe we’re in a Bitcoin bubble, many also reckon that it has a long-term future.

Q. Should I invest in bitcoin?

If you’re going to invest any money in Bitcoin you have to be prepared for some stomach churning ups and downs in value. It might seem like a one-way bet, but so have many investments that have turned out to be anything but. Bitcoin may have a long term future as a form of currency, but that doesn’t mean you should pile into it as an investment.

You should only invest what you’re prepared to lose and understand that – even if you can afford to buy Bitcoin – it may take some time to sell them if you want to cash them in.

Q. Are there other currencies similar to bitcoin that are available?

Some experts believe that Bitcoin will always be the dominant player because it has ‘first mover’ advantage with the infrastructure that’s been built up specifically for it.

However, other cryptocurrencies are likely to gain market share, not least because Bitcoin’s value has risen so much that it’s getting hard to work out how much of a fraction to use for low value transactions! Other crypto currencies include Ethereum, Dash, Litecoin, Peercoin, Ripple and Mastercoin.