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Bitcoin investors need protection

Bitcoin investors need protection

"Bitcoin is different to any currency you’ve used before, so it's very important to understand some key points. Unlike government issued money that can be inflated at will, the supply of Bitcoin is mathematically limited to 21m Bitcoins and that can never be changed."

This is how the Bitcoin website describes the cryptocurrency, which is the fastest appreciating this year in trading against every major conventional currency. 

Bitcoin was invented in 2009 by someone who calls himself Satoshi Nakamoto, a Japanese man born in April 1975. 

Like Banksy, the anonymous England-based graffiti artist, his true identity remains unknown while the impact of his creation has been significant. 

At the time of writing, $4,000 (£2,961) will buy one Bitcoin and there are presently $66bn (£48.86bn) of Bitcoins in virtual circulation. 

Lightly traded, Bitcoin is also volatile – a year ago, $500 (£370) bought 1BT, before it rose to $2800 (£2,072)/1BT in June, and then fell back to $1900 (£1,406)/1BT in July, before regaining its upward momentum. 

Demand

As a measure of its rapid appreciation, a sum of $1,000 (£740) invested in Bitcoins in 2010 would be worth $55m (£40.7m) today. 

That makes the Bitcoin holding of Nakamoto, whoever he may be, worth in excess of $4bn (£2.96bn). 

Key Points

  • Bitcoin was conceived as a purely "peer-to-peer version of electronic cash".
  • Digital security is provided through hashes.
  • The main concern of governments involves its use in criminal acts.

How is Bitcoin used?

There are no Bitcoins in physical circulation. As a virtual currency, cryptography is used to control their number. Hence it is referred to as a cryptocurrency, or digital asset. 

Nakamoto summarised his original vision in a 2009 abstract, Bitcoin: A Peer-to-Peer Electronic Cash System, which states ‘a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.’

Traditionally, governments have enjoyed a monopoly in issuing currencies via their central banks, but blockchain technology has changed that. 

The first distributed blockchain, conceptualised by Nakamoto in 2008, was implemented the following year as a core component of Bitcoin, where it serves as the decentralised ledger for all transactions. 

There are estimated to be up to 10 million holders of Bitcoin worldwide, of which more than half keep it as an investment. Those who transact send Bitcoins to each other over the Bitcoin network, which collates every transaction made during a specified time period into a list, called a block. 

In essence, the blockchain – a long list of blocks – creates the trust necessary for transactions to take place between strangers online. This is maintained by miners whose computers crunch transactions, before confirming and writing them into a general ledger. 

To provide further transparency between holders of Bitcoin, the blockchain can be used to explore every transaction between any Bitcoin addresses anywhere on the network, at any time. Every new block of transactions is added to the blockchain, creating a detailed archive, which is continuously updated for every participant.

Security

Digital security is provided through hashes: an algorithm-created sequence of letters and numbers, which is stored along with the block and date-stamped at the end of the blockchain. 

Each hash is unique containing additional security data linking it to the hash of the previous block in the chain. This confirms that this block – and every subsequent block – is legitimate. If it has been interfered with, everyone knows.