8 things you need to know about bitcoin

As its price keeps rising, here’s a brief look at bitcoin.

Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive bitcoins in exchange. The coins also can be bought and sold on exchanges with US dollars and other currencies.

Bitcoin was trading at more than US$11,000 on Wednesday before dipping to around US$9,800 later in the day, according to coindesk, a website that monitors the price. That’s about a tenfold increase from the start of the year, when it was worth less than US$1,000.

The value of bitcoins can swing sharply, though. A bitcoin’s value plunged by 22 per cent against the dollar in just three days earlier this month.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with libertarians as well as tech enthusiasts, speculators - and criminals.

Yes, to a point. Transactions and accounts can be traced, but the account owners aren’t necessarily known. However, investigators might be able to track down the owners when bitcoins are converted to regular currency.

Some businesses have jumped on the bitcoin bandwagon amid a flurry of media coverage. Overstock.com accepts payments in bitcoin, for example. The US exchange operator CME Group said in October that it plans to open a futures market for the currency before the end of the year, if it can get approval from regulators. Still, its popularity is low compared with cash and cards, and many individuals and businesses won’t accept bitcoins for payments.

Some high-profile banking executives have spoken against bitcoin, with J. P. Morgan Chase CEO Jamie Dimon calling it a “fraud”.

That said, J. P. Morgan is starting to use the underlying technology behind bitcoin, known as blockchain, as a potential way for banks to more accurately track trading and assets.

There are basically two reasons why an individual would want to buy bitcoin: to use it as a form of payment, or as an investment to store value.

Bitcoin’s usage among mainstream merchants is limited. Microsoft accepts it as a form of payment on its Xbox and Windows Store platforms. Overstock.com accepts it. But don’t expect to spend it at ParknShop or Taobao. Yet.

The virtual currency is a matter of debate among investors. Some, like Dimon and billionaire Mark Cuban, are strongly against it, while others are enthusiastic about it. Wall Street, America’s financial centre, is starting to build products around it. The more grounded investors see bitcoin as a highly speculative, highly risky investment that a person should not put all their money into, not unlike gold, commodities or traditional currencies.

All gifs via GIPHY

The bitcoin network works by harnessing individuals’ greed for the collective good. A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction.

The blockchain prevents rogues from spending the same bitcoin twice, and the miners are rewarded for their efforts by being gifted with the occasional bitcoin. As long as miners keep the blockchain secure, counterfeiting shouldn’t be an issue.

It’s a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But supporters say that doesn’t matter: The currency obeys its own internal logic.

An Australian entrepreneur last year stepped forward and claimed to be the founder of bitcoin, only to say days later that he did not “have the courage” to publish proof that he is.