Key questions you need answered about bitcoin
Bitcoin has dominated the financial pages over the past few weeks – here’s everything you need to know about it, and so called cryptocurrencies
Cryptocurrencies, the best known of which is bitcoin, have again dominated the financial pages over the past few weeks, especially following the mainland Chinese government’s crackdown on initial coin offerings.These are crowdsourced fundraising schemes that use virtual currencies to secure transactions.
While regulators are concerned with the risks associated with bitcoin and other cryptocurrencies, blockchain – the digital ledger technology underpinning all of these virtual money – is now being tested and deployed outside the financial services industry, with the goal of disrupting staid processes in sectors like trade, property and education.
Who invented bitcoin?
In October 2008, a white paper called Bitcoin: A Peer-to-Peer Electronic Cash System was published by a person or persons using the name Satoshi Nakamoto, who is credited with creating the original software standard, the initial blockchain network and first units of the cryptocurrency.
The real identity of Nakamoto remains unknown today, despite wide speculation and various efforts to expose persons thought to be the bitcoin inventor. There have also been no attempt made by Nakamoto to publicly claim credit for bitcoin.
Is bitcoin really a currency?
Compared with regular money, backed by governments and issued as legal tender when needed, bitcoin is not under any central authority and its supply has a fixed, mathematical ceiling.
It is the native cryptocurrency in the digital asset and payment system developed by Nakamoto that is used by a growing number of businesses.
Users are able to transact directly without the need for a regulator. Its built-in safeguards ensure that all transactions are non-reversible and there can be no double spending.
Each bitcoin is represented by a long, unique string of digits stored on a computer or on a smartphone’s digital wallet.
The volatility of bitcoin prices, which has jumped more than five times in the last year, have made this cryptocurrency a valuable asset for certain investors.
The existing network of users, however, are dealing with a limited supply of 21 million bitcoin, according to the protocol created by Nakamoto. At the current rate of so-called bitcoin mining, that cap is expected to be reached in 2140.
Can anyone can use bitcoin?
There are a number of ways to obtain this cryptocurrency. You can exchange these with cash or you can mine for new bitcoin, which is sort of like a 21st century mechanism to pan for gold.
A resource-intensive process, mining entails special software and computer hardware to solve mathematical problems that verify real-time bitcoin transactions.
Miners are issued a certain amount of bitcoin, as well as transaction fees, for their work in adding transaction records to the blockchain – the digital ledger that confirms transactions have taken place to the rest of the network.
The barrier to entry is much higher at present since each miner must make a hefty investment in hi-tech computing resources, power consumption, time and fees paid to join a group or pool of miners who can solve math problems more efficiently.
Why is bitcoin so popular, and why are regulators concerned?
Bitcoin runs on blockchain technology as a decentralised database, which is automatically updated across the network of computers running on the bitcoin network each time a transaction is made. This means that all information is publicly accessible, and since there is no single location where bitcoin information is stored, hackers cannot tamper or infiltrate the database.
This decentralised, unregulated system means that anyone who owns bitcoin can make payments with it or transfer their money easily across borders, and in an anonymous manner.
The advantages of this are obvious – users, such as small merchants who wish to sell to multiple countries, can save on international bank transfer fees and get paid immediately after a transaction has been made rather than waiting for a bank to process a fund transfer, easing international trade.
Its flip side, which concerns governments, is that anonymity means bitcoin is often the preferred choice of payment for illegal activities on the so-called Dark Web – the “hidden” internet where users can obtain illegal drugs, fake identification, stolen credit card data and even funding for terrorist activities.
Why is China’s stance on bitcoin and other cryptocurrencies watched so closely?
Chinese miners dominate the creation of new bitcoin in the network, with nearly 70 per cent of all new bitcoin mined on the mainland. While the ban on exchange platforms has not yet extended to mining operations, the future prospects for Chinese bitcoin mines are uncertain. Running such operations are costly, and an outright ban would wipe out the investments of many miners.
Additionally, 93 per cent of bitcoin traded over the last two years happened on three mainland Chinese exchanges – OkCoin, Huobi and BTCC, according to data tracked by Bitcoinity.
Previously, these Chinese exchanges gained massive market share by not charging any trading fees, choosing instead to make revenue via margin trading services that enable users to take out loans to trade bitcoin. However, margin trading services were halted in January this year after China’s central bank imposed restrictions and issued a statement saying that margin financing caused “abnormal market volatility” and did not have anti-money-laundering controls.
Trading volumes on the mainland exchanges plunged once trading fees were implemented, with users looking for alternative exchange platforms.
What is the difference between bitcoin and other cryptocurrencies, such as Ethereum or Litecoin?
Bitcoin’s meteoric rise has inspired a wave of other cryptocurrencies, collectively called altcoins.
The most popular cryptocurrency after bitcoin is Ethereum, which also runs on a decentralised software platform. The main difference between the Ethereum and bitcoin are its additional features – computer applications can be run on the Ethereum network, allowing for applications like smart contracts and data storage.
Ethereum also issues its own currency, called ether. The value of ether has risen over 2,000 per cent over the past 12 months, from about US$13 per token to around US$267 today.
Litecoin is another cryptocurrency that was launched following bitcoin. Like Ethereum and bitcoin, it is also decentralised and is akin to a global, open-source payment network.
Advocates of Litecoin say that it is a more efficient cryptocurrency than bitcoin, since it is faster at generating blocks – files of data permanently recorded into the network – and therefore, provides quicker payment confirmations.