Cryptocurrencies like Bitcoin, considered to be technological miracles, have posted massive gains in the past few months and created a phenomenon that even seasoned investors did not see coming. But what exactly are these virtual ‘currencies’ and are they a secure investment? This article on The Telegraph has the answers:
Few technologies have the ability to stir passionate online debate and baffle the vast majority of the population as bitcoin. The virtual currency has been a constant source of interest and confusion since it thrust itself into the mainstream more than five years ago.
But interest in bitcoin is now greater than ever. Its value has soared to above $4,000, a new high point, turning some people who hoarded vast amounts early on into millionaires.
But why? Is bitcoin the future of currency? Is it currency at all? What is it for? And should I buy some? Read on to have your questions answered.
What is bitcoin?
Bitcoin is a digital currency created in 2009 that uses decentralised technology for secure payments and storing money that doesn’t require banks or people’s names. It was announced on an email circular as a way to liberate money in a similar way to how the internet made information free.
How does it work?
Bitcoin works on a public ledger called blockchain, which holds a decentralised record of all transactions that is updated and held by all users of the network.
To create bitcoins, users must generate blocks on the network. Each block is created cryptographically by harnessing users’ computer power and is then added to the blockchain, letting users earn by keeping the network running.
A limit for how many bitcoins can be created is built into the system so the value can’t be diluted. The maximum amount is just under 21 million bitcoin. There are currently 15 million in circulation, each of which was worth more than $4,000 ($3,080) at the time of writing.
What affects its price?
The price of a bitcoin has jumped up and down since it first entered the mainstream consciousness in 2013. That year prices rose by almost 10,000 per cent before the collapse of Mt Gox, the biggest online bitcoin exchange, sent it crashing.
Prices slowly crept up after that but have since surged again. This is largely put down to regulators appearing to warm to bitcoin and the rise of initial coin offerings – a way for projects to raise money by selling cryptographic tokens similar to bitcoins. Many sceptics believe we are in the middle of a new bitcoin bubble while advocates say we are just beginning to see the rise of bitcoin.
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