When the richest person in the world backs 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 caused the value of Bitcoin to rise 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.
With this cryptocurrency being talked about globally, even the Bank of Singapore has suggested that the (now 12-year-old) currency could replace gold as a store of value.
However, last October, a head of another bank, namely the Bank of England, warned of 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 stores accept Bitcoin yet and some countries have even banned it altogether.
However, some companies are starting to believe in this digital currency more and more and are following the popularity of the crypto currency, such as car manufacturer Tesla, which bought more than € 1.25 billion in Bitcoins at the beginning of last week.
In October last year, the online payment service PayPal announced the news that it allows its customers to buy and sell popular cryptocurrencies 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 them) 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 fully trace the history of Bitcoins to prevent people from spending coins they do not own, making copies or undoing transactions.
How do people get Bitcoins?
Basically 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 created?
In order for the Bitcoin system to work, people can deploy their computers to perform processing transactions on the blockchain for everyone.
The computers are used to calculate incredibly difficult sums. Occasionally they are rewarded with a Bitcoin that the owner can keep.
This is why people set up powerful computers to try and get Bitcoins. This is called “mining”, similar 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 creator of the Bitcoin cryptocurrency (alias Satoshi Nakamoto) of 21 million Bitcoins.
If you're with it now mines started, it could be decades before you could potentially be rewarded with a single Bitcoin. The electricity bill for the use of your computer(s) could then simply be more than the value of the Bitcoin 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 as 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, no one will in principle know which 'account number' belonged to you unless you have told them.
In an online chat with social media users in January 2021, the world's richest man, Elon Musk, said he was a big supporter of Bitcoin. He even went so far as to change his Twitter bio to “#bitcoin”.
He has repeatedly expressed his support for online currencies in recent years and caused major changes in their values due to his own personal wealth and influence. The fact that this richest man in the world expressed his support caused the value of Bitcoin to rise significantly.
But is it safe?
Every transaction is publicly recorded on the blockchain, so it is very difficult to copy, counterfeit or spend Bitcoins with value that you do not own.
On the other hand, it is possible to lose your Bitcoin wallet (wallet) or delete Bitcoins by mistake (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 this swing is not safe to turn your "real" money into Bitcoins.
This concern was thus raised in October 2020 by the head of The Bank of England, Andrew Bailey. He said he became "very nervous" about people using Bitcoin for payments, pointing out that investors should realize that the price is extremely volatile (with a lot of swings).
By this he meant that the value could fall significantly at any time and investors could lose a lot of money.
The best advice is, of course, to always immerse yourself in what you would like to invest in, only to do this with money that you can spare and with to invest to spread the risk. When in doubt, the rule here is also: don't do it!
Sources including BBC (link), CNBC (link), fortune (link), InvestoPedia (link)
