Bitcoin explained: Its history, why is it so valuable, and will the bubble burst?

With one bitcoin worth $10,000, 2017 has seen this cryptocurrency go stratospheric. But what exactly is it?

Bitcoin has been around since 2009, but cryptocurrencies – as in, a digital currency that operates outside of a central bank – have suddenly shot up in value, leaving many wondering if a solid investment could reap thousands. Recently, Bjork encouraged fans to buy her ‘Utopia’ album with Bitcoin, Litecoin, Dashcoin or AudioCoin. This looks far from being a digital fad, and many who invested several years ago are on the brink of being millionaires. So here’s a quick guide to the currency, why it’s all the rage, and whether the bitcoin bubble will burst.

What is Bitcoin?

Bitcoin first went online in 2009 as open-source technology, invented by a mysterious, anonymous individual going by the pseudonym Satoshi Nakamoto.

It’s a digital currency, used to pay for items online without any additional bank charges, or government control. Companies and people can buy or sell items using bitcoin as payment. In 2017, these companies include Microsoft, Virgin Airlines, WordPress and Subway.

Hard, real-life currencies such as the Pound sterling or US dollar are managed by a central bank (in this case the Bank of England and US Federal Reserve), which steadies rates and manages supply and demand. Bitcoin has no overall regulation, but it relies on the activity of “miners”. This is the complicated part. The currency’s quantity can only be increased if it is “mined” – a process which involves computers collecting pending bitcoin transactions and turning them into a complex mathematical equation. The first miner to solve this puzzle then chains together a “block” of transactions (called a “blockchain”), and they are then rewarded with newly-created bitcoin.

A maximum 21 million bitcoins can be created. As of June 1 2017, there were 16,366,275 in circulation. It is expected to hit 21 million by 2140.

How much is Bitcoin worth?

Bitcoin

At the time of writing, 1 bitcoin is currently the equivalent of £7418.32, or $9,858.69. Its price can be followed here.

It first entered mainstream circulation in 2009, and its price only began to rise significantly in April 2013 ($153). It rose to just under $1000 in late 2013, before experiencing a dip and a steady up-down pattern, hovering between the $500-1000 mark for the next four years.

In 2017, Bitcoin’s situation changed significantly. On January 3, its price rose above $1000 for the first time. Its price had doubled by May, and again by August. By November, it was worth close to ten times its value in January 2017. It surpassed $11,000 for the first time on November 29 2017.

What explains bitcoin’s meteoric rise? Regulators are imposing fewer restrictions on the cryptocurrency. NASDAQ, the world’s second largest stock exchange, has outlined plans to enable bitcoin futures – which would allow market traders to bet on the rise and fall of its price. Major financial institutions are beginning to view bitcoin as a legitimate currency, and not as some Ponzi scheme, and this is contributing to the spike in price.

A quick history of its peak price in the last six years:

Dec 2011 – $2.00
Dec 2012 – $3.00
Dec 2013 – $800
Dec 2014 – $300
Nov 2015 – $500
Nov 2016 – $700
Nov 2017 – $11,000

2017 is the year bitcoin went stratospheric.

Why is Bitcoin controversial?

Many are comparing bitcoin’s rise to the transition from gold to paper money. Banks and institutions simply aren’t used to it, which is why they remain so suspicious. Remember, it was also invented by an unknown who goes under an alias, and the cryptocurrency is hard to trace.

Plus, bitcoin has been subject to high-profile hacks, putting its credibility – and the security of its owners – under threat. On November 21, cryptocurrency Tether reported a $31m theft, which led to bitcoin’s prices temporarily plummeting. It remains a risky investment.

Bitcoin also has an association with the black market and the dark web. In the past, it could be used to buy illegal drugs on Silk Road, a service that could be used anonymously on the private Tor browser. It’s also been used for everything from fake IDs to sex workers, and has links to money laundering.

How do I get Bitcoin?

Bitcoin users first need to choose a wallet – essentially a digital bank account that can be protected, secured and backed up with private keys. Blockchain.info is one of the more popular and easy options.

Once you have a wallet, you’re able to buy bitcoins. You don’t need to invest thousands of pounds to get one single bitcoin. Instead, you can buy a fraction of one bitcoin. For example, £50 would currently get you 0.01 bitcoin.

To invest, you need to go via a broker. Like a standard currency exchange, brokers charge difference rates for bitcoin. The website Bittybot compares brokers, with price guides and reliability ratings. It’s also worth noting that international bank transfers might delay the process of purchasing bitcoin.

Or, you could mine bitcoin. But this requires purchasing high-tech hardware, and involves seriously high electricity bills. For those with infinite funds and patience, this is a handy guide on how to mine.

Do other cryptocurrencies exist?

Ethereum, Bitcoin

Bitcoin is the most well known and universally recognised cryptocurrency – only outlawed in a handful of countries. However, if bitcoin is on the rise, who’s to say that other, less well known digital currencies won’t do the same? Some are easier to mine, some are subject severe yo-yo dips in value, and others have only been in the public domain for a few months.

Around 700 alternatives exist, the most well known being:

Ethereum (ETH), currently valued around $500

Litecoin (LTC), which offers faster transactions and is valued at around $85

Zcash, currently valued at around $300

Dash, currently valued at $775

Ripple, currently valued at $0.24

Will Bitcoin crash?

This is the big question. Yes, anyone who invested thousands when bitcoin was first established will now be millionaires, and its worth has gone up 600% in 2017. But that doesn’t mean it will continue to rise.

Bitcoin has been the subject of high-profile calls for regulation, most notably from Russian president Vladimir Putin, who said cryptocurrencies bear “serious risks”. Governments are under increasing pressure to delegitimise a currency with links to tax evasion, fraud and the black market. China recently banned bitcoin exchanges, whereas Japan enshrined the currency as legal tender. There are no signs, however, that it will become a more recognised currency than standard digital payments or cold, hard cash.

There’s also the chance that alternatives, such as Etherum, could become more widely accepted than bitcoin.

Its price has wildly fluctuated in 2017, experiencing dips as much as $2,000 in the space of a day. Any investment poses serious risk.