Bitcoin for dummies: Adrian Weckler’s guide to Bitcoin
Thanks to its 1,200pc rise over the last six weeks, there’s something of a Bitcoin mania afoot.
Last week, two people I know came up and asked: “Should I buy some of this stuff?” After about 30 seconds, it became clear that they didn’t really know what Bitcoin was or how to actually buy it.
Guessing that these people aren’t alone, I think it’s worth a quick recap. So here are some of the questions you may have about Bitcoin but are too embarrassed to ask.
1. What is Bitcoin?
The five-second version is that it’s a digital currency that can’t be copied and pasted and is based on relatively sound, secure technology (called Blockchain).
2. It really can’t be hacked?
The underlying Blockchain technology is considered very secure, so much so that institutions such as banks are now trying to adopt some of its parts in their own financial systems. That said, some of the repositories where Bitcoin is held have been hacked in the past, so it hasn’t been completely flawless from a security perspective.
3. Why has it shot up so quickly in value?
Three reasons. (i) A core group of people have deep confidence in Bitcoin (and other cryptocurrencies such as Ethereum, Litecoin or Ripple) as a genuinely long-term alternative to existing currency systems. Some of these individuals are key players in commerce and tech.
(ii) Despite the vagaries and difficulties involved in buying and selling it, it’s cheaper and arguably more secure than cash transactions.
(iii) Because it’s outside most regulatory oversight, cyber criminals have adopted it wholesale.
4. Will it continue rising in value?
Honestly, I don’t know. Neither does anyone else. However, a couple of recent developments have widened its investment appeal.
The biggest is probably the opening of a futures market in Bitcoin at Chicago’s Futures Exchange.
This essentially puts Bitcoin in a similar investment bracket to any other asset, such as pork bellies or orange juice. It means that ordinary investors can now buy into Bitcoin without going near a ‘digital wallet’ of their own.
One of Germany’s markets, the Frankfurt-based Deutsche Boerse, is reportedly mulling a similar move.
5. With its value rising so fast, it sounds like a bubble…
Yes it does. And that’s the conclusion that a great many financial commentators have come to. On the other hand, many of the same commentators have dismissed Bitcoin from its 2009 start.
6. Is it too late to invest in it?
No – although it’s probably too late to get rich quick by ‘mining’ it (the process where you throw computing power to ‘unlock’ Bitcoin) from your home PC. If that’s something you were considering doing, bear in mind you’ll be competing with industrial mining operations that have access to servers and electricity costs that are far, far cheaper than is available in Ireland.
7. Who owns it?
The official answer is no-one. It was developed by a person (or persons) known as Satoshi Nakamoto. But the identity of this person (or persons) has never been authenticated. He/she/they may be dead. Or they may be a malicious organisation.
But one recent report claims that 40pc of all Bitcoin is owned by around 1,000 individuals, many of whom are Chinese ‘miners’ using cheap (or free) electricity. That suggests the Chinese government may have a significant influence on the currency.
8. If it’s a currency, what can I buy with it?
Very little. A few online stores, such as Overstock, Expedia and some parts of Microsoft.com, take it when you’re shopping. Almost no-one you regularly ship with in Ireland does. This is a basic problem with Bitcoin. It was set up as an alternative currency or trading unit. It has now being treated as something much closer to a standalone asset such as ‘gold’ – something to be invested on purely speculative terms.
9. Is this just a tech joke gone too far?
No. The technology underpinning Bitcoin is being looked at as a model for all sorts of systems, both inside and outside finance and technology. While there are still many in the banking and financial regulatory community who deride Bitcoin as a “scam” and compare to tulip-mania, the fundamentals behind cryptocurrencies don’t look to be in jeopardy of collapsing anytime soon.
Finally, may I beg your indulgence for a selfish plug on our behalf? This weekend, we have launched a new podcast.
The Big Tech Show With Adrian Weckler is what it sounds like – a new tech podcast that looks at some of the big issues crossing from the tech sector into broader society and business life. On the first episode, which is now live at independent.ie/podcasts (or iTunes or Soundcloud), I’m joined by former RTE, Storyful and Twitter boss Mark Little to talk about the future of news and the control that social media firms currently hold over media.
Next week, the show has an exclusive interview with one of Ireland’s most successful young tech entrepreneurs who, while not yet 35, has raised €100m for his online venture.
In the New Year, we have a number of special broadcasts lined up highlighting the best of Irish startups and ideas they have for changing things around us. Each episode will also review the most interesting new technology products and services that come our way.
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