When the richest person in the world supports a virtual currency called Bitcoin, you know it's big business. Elon Musk has told users on social media that he thinks the virtual currency, Bitcoin, is a "good thing". His comments led to the value of Bitcoin rising significantly102.
So much so that a unique Bitcoin of about € 4,000 in March last year, less than a year later, has become worth at least 10 times as much and has now risen to more than € 42,500.
Now that there is a lot of talk about this cryptocurrency worldwide, even the Bank of Singapore has suggested that the (now 12-year-old) currency could replace gold as a store of value.
Last October, however, a head of another bank, the Bank of England, warned about Bitcoin's unpredictability, saying it makes him “very nervous”.
With all the daily chatter about these cryptos, you are probably wondering: what is Bitcoin and how does it all work? Here's everything you need to know.
What is Bitcoin?
Bitcoin, often described as a cryptocurrency, a virtual currency, or a digital currency, is a type of money that is completely virtual.
It's like an online version of cash. You can use it to buy products and services, but not many shops accept Bitcoin yet and some countries have even banned it altogether.
However, some companies are starting to believe more and more in this digital currency and go along with the popularity of the crypto coin, such as car manufacturer Tesla which bought more than € 1.25 billion worth of Bitcoins at the beginning of last week.
In October last year, the online payment service PayPal announced it came up with it news that it allows its customers to buy and sell popular crypto coins such as Bitcoin.
How does Bitcoin work?
Each Bitcoin is basically a computer file that is stored in a 'digital wallet' app on a smartphone or computer.
People can send Bitcoins (or part of it) to your digital wallet and you can send Bitcoins to other people.
Every transaction is recorded in a public list called the blockchain.
This makes it possible to completely trace the history of Bitcoins to prevent people from spending coins they don't own, making copies or being able to reverse transactions.
How do people get Bitcoins?
In principle, there are 3 methods by which you can get Bitcoins:
- You can buy Bitcoins with "real" money
- You can provide products or services and make people pay you in Bitcoins
- They can be made with computers (called “mining”)
How are new Bitcoins made?
In order for the Bitcoin system to work, people can deploy their computers to perform processing transactions on the blockchain for anyone.
The computers are used to calculate incredibly difficult sums. Every now and then they are rewarded with a Bitcoin that the owner can keep.
People set up powerful computers to try and get Bitcoins because of this. This is called "mining", comparable to traditional gold mining.
But the calculations and calculations are made more and more difficult to prevent too many Bitcoins from being generated, because there is a maximum ceiling set by the inventor of the Bitcoin cryptocurrency (aka Satoshi Nakamoto) of 21 million Bitcoins.
If you are now with the mines started, it could take decades before you could potentially be rewarded with a single Bitcoin. The bill for electricity for the use of your computer (s) could then be more than the value of the Bitcoin that you receive at that time.
Why are Bitcoins valuable?
In addition to traditional money, there are many other things that we consider valuable, such as gold and diamonds. The Aztecs even used cocoa beans for money!
Bitcoins are valuable because people are willing to exchange them for real goods and services, and even cash.
Why do people want Bitcoins?
Some people like the fact that Bitcoin is not controlled by the government or banks.
People can also spend their Bitcoins fairly anonymously. Although all transactions are recorded, in principle nobody knows which 'account number' belonged to you, unless you have told them so.
In an online chat with users on social media in January 2021, the world's richest man, Elon Musk, said he was a strong supporter of Bitcoin. He went so far as to change his Twitter bio to “#bitcoin”.
He has repeatedly expressed his support for online currencies in recent years, causing major changes in their values because of his own personal wealth and influence. The fact that this richest man in the world expressed his support alone caused the value of the Bitcoin to rise significantly.
But is it safe?
Every transaction is publicly recorded on the blockchain, so it is very difficult to copy, counterfeit Bitcoins or spend with value you don't own.
On the other hand, it is possible to lose your Bitcoin wallet (wallet) or accidentally delete Bitcoins (for example from your computer or app) and thereby lose them forever. There have also been regular thefts or hacks of websites where you can store your Bitcoins remotely.
The value of Bitcoins has gone up and down over the years since it was created in 2009 and some people think because of this fluctuation that it is not safe to turn your 'real' money into Bitcoins.
So, this concern was voiced in October 2020 by The Bank of England head Andrew Bailey. He said he became "very nervous" about people using Bitcoin for payments, noting that investors should realize that the price is extremely volatile (with many swings).
By this he meant that the value can drop significantly at any time and that investors can then lose a lot of money.
The best advice is, of course, to always find out what you would like to invest in, to do this only with money that you can spare and to invest to go for risk spreading. When in doubt, the most likely applies here too: don't!
Sources ao BBC (link), CNBC (link), Fortune (link), InvestoPedia (link)
