Coins that aren’t really coins, miners who don’t dig or drill – but use more real power than many countries – and made-up words like cryptocurrency and blockchain; it’s enough to do your head in.
That’s Bitcoin, utterly confusing and a little bit scary; but then paper money was met with more than a little skepticism by 17th century Europeans used to trading in gold and silver.
Put simply, Bitcoin is digital money – and on 11 December each one was worth about $US13000. It could be worth much more – or much less – as you read this.
That’s the first thing you really need to know about Bitcoin, it is hideously volatile.
While the average value has skyrocketed over the past year it has also experienced one-day falls of more than 40% several times in the same period. Even the CEO of Coinbase—whose core business is Bitcoin— has reminded investors of the risks associated with trading digital currency and urged them to invest responsibly.
Is this another Tulip Mania?
Some commentators are drawing parallels between the Bitcoin craze and Tulip mania – a 17th century speculative bubble that drove the value of tulip bulbs in the Netherlands to spectacular heights.
According to the Rijksmuseum – the Museum of the Netherlands – people put their homes up as collateral for a few tulip bulbs during the three year craze. It didn’t end well.
“The market crashed suddenly in February 1637; prices plummeted and many investors were left penniless.”
There is no Bank of Bitcoin
Bitcoin is a de-centralised currency; is not issued, controlled or backed by any bank or government. Instead, balances are kept in “wallets” using public and private “keys” generated and encrypted using complicated mathematical algorithms.
Investopedia describes the public key as comparable to your bank account number – it serves as the address which is published to the world. Others can pay Bitcoins to your public key. The private key meanwhile acts much like your ATM PIN – it is meant to be a guarded secret, and only used to authorise Bitcoin trades and payments.
All transactions are continuously recorded in a public ledger, known as the blockchain. Copies of this digital record book are stored on computers all around the world so any attempt to tamper with it becomes immediately apparent. It is a complete and un-hackable public record of every transaction that has ever been made on the Bitcoin network.
Owners and traders of Bitcoin can and do have a great deal of confidence in the blockchain to prevent double-spending and ensure transactions are secure.
But storing your Bitcoin safely is a whole other thing.
Can you store Bitcoin safely?
Whether your Bitcoin is located in an exchange account or personal wallet, there is a chance it could be stolen. Many instances of processing errors or malicious hacking have been documented over the past several years, including a recent $70 million heist from cryptocurrency marketplace NiceHash.
Security is clearly an issue, but wealth in whatever form can be stolen and there are steps you can take to make stealing your Bitcoin as difficult as possible.
Enabling 2-Factor-Authentication when using an online service like a Bitcoin exchange is a good idea and there are a number of high-security Bitcoin wallets where you can store your coins – online or off. You can even create a “paper wallet” and keep your Bitcoin horde far away from the digital reach of hackers.
But don’t lose it. If you misplace your Bitcoin, there’s no getting it back.