What's the deal with bitcoin?
Bitcoin is a digital cryptocurrency that was created by anonymous programmer Satoshi Nakamoto in 2008. Bitcoin has seen insane growth recently, and every Uber driver and their dog (some dogs are really into finance) is talking about investing in it.
Bitcoin utilises blockchain technology. Have I lost you already? Let me elaborate... the blockchain is essentially a public ledger - think of it as a big public book of IOUs from one bitcoin account holder to another. It's where all the transactions ever made in the currency are recorded and it keeps a record of which user owns what coins. Bitcoin miners get rewarded with new bitcoins for letting their computers authenticate transactions and solve mathematical algorithms to confirm blockchain ledgers.
This ledger means stolen bitcoins cannot be used as they cannot be verified by the chain. Because bitcoin transactions are irreversible, payments are secure and not susceptible to credit card fraud.
How do I get it?
Bitcoin mining was pretty easy when the network first began, but it is now out of the realm of your standard home computer. As a consequence of this, mining now consumes heaps of electricity, with recent news reports saying bitcoin mining consumes more electricity annually than the whole of Argentina.
You can buy and sell bitcoin and other cryptocurrencies from online exchanges like CoinSpot, CoinJar or SwyftX much like you would buy stocks on the ASX.
How do I use it?
You can store and send bitcoin from an encrypted digital wallet, which is run as a program on your computer or an app on your phone.
You can pay someone using bitcoin without needing a bank. Bitcoin is currently at record high prices, but a single bitcoin can be subdivided as far down as the eighth decimal place (0.00000001BTC) to buy smaller goods using just a fraction of the coin.
What makes it so interesting?
Aside from the skyrocketing price, bitcoin isn't regulated by a central bank and it could hold the answer to a safe and transferrable currency for people living in countries with unstable economies.
Countries like Venezuela, Sudan and Argentina have high inflation, and central banks often resort to printing more money, devaluing the existing currency, as an answer to this. In 2009 in Zimbabwe, the government was printing one hundred trillion dollar notes!
The supply of bitcoin is finite, modeled on the way many countries used to directly link their currency to gold. In bitcoin’s case, the total supply has been set at 21 million which defines how much currency will be created and at what rate, making inflation impossible.
Only 18% of people in the Middle East and North Africa have a bank account at a financial institution, and only 24% have an account in Sub-Saharan Africa. Bitcoin could enable those in areas of Africa with access to mobile phones to replace their barter system with a more stable means of exchange, avoiding corrupt banks, bribery and fluctuating currencies of their own countries.
Bitcoin could also massively disrupt the current financial system. Businesses can utilise bitcoin rather than paying to set up a merchant account with credit card companies, then other associated fees such as transaction, statement, interchange and customer service fees.
Should bitcoin attract even a small percentage of customers from existing payment processors like Visa, American Express and MasterCard and larger money transfer services, it could be a real game-changer to the way people move money around. There's one person that certainly agrees, and that's Elon Musk.
There are heaps of other cryptocurrencies that have come along since bitcoin. The list is constantly growing but includes the likes of ethereum, Zcash, litecoin, monero, ripple, stellar, dash, EOS and dogecoin (a personal favourite, because... dogs).
Will the price continue to go gangbusters? Pfffft, I have no idea. It could be the future. It could destroy our economy. I guess we'll just have to wait and see.