What is all the noise around Bitcoin?

Bitcoin. A word we have all heard so often but a lot of us don’t actually know what it is. Yes, it’s a digital currency that could increase drastically and make us a lot of money. But how does that digital currency actually translate into money? And is it safe to buy? I have heard of friends of friends who have lost thousands – perhaps you have too. The word Bitcoin also often conjures up thoughts of the dark web and either very high returns or very high risk. Let’s drill down to what it is and what the hype is all about.

What is Bitcoin?

Bitcoin is a “cryptocurrency”, otherwise known as a virtual currency, an online currency or a digital currency. It is a type of currency that is wholly virtual. It can be used to make purchases online, however there are still many places that do not accept Bitcoin and unfortunately there are even some countries where its use is completely banned. Bitcoin is not physical. Any images of a Bitcoin that you might see are just for show and to help us understand what they are. Any physical Bitcoin would be worthless because it does not contain the all-important code. They are not printed but rather created and produced using free software. Bitcoin is electronically created and kept and each Bitcoin is essentially a computer file that is kept safe in an app called a digital wallet or stored remotely on specially created sites. People who own Bitcoins can send part of – or all – of a Bitcoin to someone else’s digital wallet.

Bitcoin is basically two components: Bitcoin as the “token” which is a piece of code representing ownership of what could be termed a digital concept. (Think of it like a virtual “IOU”.) The second component is Bitcoin as the “protocol” which is a network that maintains a register of the bitcoin “tokens”. Both of these components or concepts are referred to as Bitcoin. Each and every transaction is documented on the blockchain (a public list). This recording means that it is possible to prevent people from spending any Bitcoin that they do not own – nor are they able to copy any one Bitcoin – the history of the transactions is completely traceable.

How to get Bitcoin?

It is possible to get Bitcoin to own for yourself in three main ways:

• Purchasing Bitcoins using real currency
• Selling items and accepting Bitcoin as payment
• Create them with the use of a computer and correct code

Why are Bitcoins valuable?

Bitcoins are valuable due to the fact the people can exchange them for goods or services and sometimes also for cash. Many people also like that Bitcoin is not centrally controlled by any banks or governments and they can spend their currency as they wish, anonymously, and even though all transactions are publicly recorded, it would still be difficult for anyone to know who spent the Bitcoins unless the account number was openly divulged.

But what is all the noise around Bitcoin?

Bitcoin was the first cryptocurrency to be created. Because it enables people to make and receive payments without the need to pass through a bank, payment gateway or other centralised authority, it could be compelling for certain types of users. It is extremely popular but it does have some aspects that prevent it from becoming “the currency of the future”, this being due to a number of factors, including:

It’s erratic

The volatile nature of any cryptocurrency, including Bitcoin, can lead to high losses. It can of course lead to high gains too, however it is just not stable and is likely never going to be. With a single Bitcoin one day being worth $10,000 and the next day being worth $1, it’s just too unstable an option for the majority. So just like the stock market which can crash, so can the value of Bitcoin. It is also possible for a Bitcoin wallet to disappear and never be found which means all Bitcoins would just be lost. The sites where Bitcoins can be stored have also seen thefts. For these reasons, people who use Bitcoin need to have a serious appetite for risk.

Practical and technological shortcomings

Bitcoin’s technology is fairly new and therefore experiences various limitations. Similar to the explanation of its erratic and volatile nature above, a person’s virtual balance could be lost in seconds simply by way of a hacker or a computer crash! However, as the technology improves and grows, these shortcomings are being addressed and worked on all the time, so overall the technology could potentially develop and overcome these.

Regulatory controls

These are pretty much non-existent. The use of Bitcoin is anonymous, so even though it can be used for legitimate purchases, unfortunately it can also be used for all types of transactions, including those of an underhanded nature such as money laundering and tax evasion. This is why a number of governments have banned its use, including Ecuador, South Korea and Morocco. Here is an interesting link to the legality of Bitcoin by territory: https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country_or_territory

Complexity

It can be difficult to understand and grasp exactly what Bitcoin is. It’s not a physical thing, it’s virtual, it’s online, it can’t be seen or held, it is created with code. This could be really interesting but it could also be very confusing. And although it is popular, users with the technical ability to create it and understand it are still only a small percentage of the population.

In short, the hype around Bitcoin has faded in the past few months. Who knows if it will return? But Bitcoin’s trading volume has decreased and regulators in some countries are attempting to curb speculative activity around cryptocurrencies before, perhaps, banning their use altogether. Some social media sites, and even Google, have placed a ban on advertising anything related to the cryptocurrencies. There are just too many scams around that are promoting investment in cryptocurrency that actually turn out to be fraudulent and elaborate scams to entice people to invest their hard-earned cash.

So with all this in mind, it’s difficult to know where to invest and into which cryptocurrency. And just because Bitcoin is one of the better known ones, does not mean it’s a safer option. Bitcoin and other cryptocurrencies could take off again in the future when more people begin to understand it more fully, when the technology is more advanced to avoid hacks and possibly when its use and ownership becomes more transparent and its value stabilises. Let’s wait and see…