Money spinner: everything you need to know about the Bitcoin revolution

Bitcoin continues its dizzying ascent. Last week the digital currency broke $10,000; today it has hit $14,000. The market value is approaching $250 billion, twice the market cap of investment banking giant Goldman Sachs. Its boss, Lloyd Blankfein, will be grimacing — he’s been rather sceptical about it.

The craze continues and legends are made, among them the Winklevoss twins, who lost out on Facebook but have finally made their billion out of a well-timed Bitcoin investment. Stock markets are launching futures markets on it. Environment-changing levels of electricity are being used to mine it. And yet, what is this currency that you can’t even hold? Why are people buying it and what is its use? Has the world gone mad? Here’s a decoding of the crypto-jargon.

Bitcoin, WTF

A Bitcoin unit is a digital currency — essentially just a piece of code. It allows you to move money without being traced, because all transactions are anonymous. To get one you need a Bitcoin wallet, which is a secure digital space to hold your 1s and 0s. Some of the big players in the field are blockchain.info or Bitcoin Wallet for Android.

They are bought at an online “exchange”, where you can swap real-world currencies (like pounds and dollars) for virtual currencies. It’s not just Bitcoin on offer — a whole host of other “crypto” currencies are getting in on the act. Often described as “altcoins”, the big names include Ethereum, Litecoin and Ripple.

Crypto-cashing in

You buy Bitcoin for three reasons. In tangible terms, a Bitcoin is a piece of currency with which you can buy real-world goods. For example, Expedia accepts Bitcoin as payment, and Microsoft is taking Bitcoins for purchases in its Windows and Xbox stores. However, it’s unlikely that Pret will take it anytime soon — each transaction costs from $4 and can take many minutes, even hours to process, so it’s only really worth it for higher-value goods.

The second reason you’d buy it is as an investment. You are speculating that the value of Bitcoin is going to rise.

You can also use Bitcoin to buy other crypto-currencies, which perform different functions — more on that later.

It’s boom time

You have to think of Bitcoin in two ways. It is not just the coin in your pocket, is also the whole mint. You are buying a share in the whole system of how this currency works, an idea that you think will gain value over time as it becomes more useful. So you hoard it and wait. There are only 21 million Bitcoins, 18 million of which have been “mined” (more on mining later), so it is a finite resource. Currently more than 80 per cent of it is held as speculation, rather than used for transactions.

Billion dollar babies

At the moment some very lucky people. A recent article in Forbes mentions a “Mr Smith” who bought 20,000 Bitcoins in 2010 when they were valued at 15 cents apiece. With a current price of over $14,000, Mr Smith is now a multi-millionaire on the back of a $3,000 investment. He plans to sell the last of his stock when the price reaches $150,000 and his investment has increased a millionfold.

Bitcoin’s “creator” is known as Satoshi Nakamoto. They have never been identified, but the world’s most elusive billionaire is sitting on a fortune.

Other winners include the Winklevoss twins. The early backers of the currency invested $11 million of their settlement with Facebook (they claimed Mark Zuckerberg stole their idea) in 2013. They are now worth over $1 billion.

New kids on the blockchain

If Bitcoin were to have a motto it would be “In Block we trust”. Blockchain is the invention that makes Bitcoin possible. When the idea of an internet-based currency was first floated, the fear was “double spending”, when users would pay with the same coin twice before either parties were aware of the other transaction. This isn’t good news for a currency that wants to be regarded as viable. Blockchain stops this from happening.

When something is bought with Bitcoin, the exchange is noted in the ledger — the blockchain. “Miners” head out into the internet with their digital pickaxes to solve various codes (known as the hash), to confirm that a Bitcoin transaction has taken place. As there are trillions of combinations, Bitcoin miners’ computers have to run all the possible variations. Once a set of transactions has been verified, a “block” is completed and you move onto the next set.

Make mine a Bitcoin

There is a finite number of Bitcoins. Once the obvious deposits are gone, it becomes harder to mine the rest. Miners work competitively. The one who solves the code first gets rewarded with Bitcoins.

At first, solving the cryptic codes was doable on your laptop. But now fewer coins are being issued and the hash is getting more complex, requiring supercomputers to sort through trillions of calculations.

The boom in Bitcoin’s value has made mining an international industry. In Inner Mongolia factories are using the excess capacity from coal-fired power stations for vast Bitcoin mining operations. In Russia there is talk of using Siberia’s hydroelectric stations to power Bitcoin miners, while Venezuelans are taking advantage of the country’s subsidised electricity to mine Bitcoins and bypass the hyper-inflation on their local currency, the bolivar.

Even in the UK, Bitcoin’s surge in price means it will cost you less in electricity than the value of the Bitcoins you stand to mine — as long as the price holds…

Coining the competition

Bitcoin is the first and perhaps the gold standard among a host of crypto-currencies. Others include Ethereum, Ripple or Litecoin. Ethereum has proven to be the top choice for Venezuelans — it’s cheaper to mine and still has a good store of value. Ripple is much less clunky than Bitcoin and can be used to process cross-border transactions quicker and cheaper and can be swapped for dollars and euros, rather than routing through Bitcoin. Others attempt to form a social function, such as Australia’s Power Ledger, for swapping renewable energy credits, or Salt, which provides credit.

The future is golden

Governments are getting in on the act. President Maduro of Venezuela called for a state-backed crypto-currency to get around Western sanctions. In October, Vladimir Putin endorsed the creation of the crypto-rouble.

So is the Bitcoin the currency of the future? Or are we the 21st-century equivalent of Dutch burghers paying over the odds for tulip bulbs? It’s the Blockchain technology that underpins it — and the companies that form from them — that will be the trend to watch. Even Alibaba billionaire Jack Ma says he doesn’t understand Bitcoin — but his firms are investing in Blockchain start-ups nonetheless.