Bitcoin is a digital cryptocurrency which was created by Satoshi Nakamoto in 2008. The value of one bitcoin has seen insane growth over the last year – fluctuating wildly between $1,000-$19,000 dollars.
Bitcoin miners get rewarded with new bitcoins for letting their computers authenticate transactions and solve mathematical algorithms to confirm blockchain ledgers. The blockchain is essentially a public ledger – think of it as a big public book of IOUs from one bitcoin account holder to another- where all the transactions ever made in the currency are recorded and it keeps a record of which user owns what coins.
Bitcoin mining was extremely easy when the network first began, but it is now out of the realm of your standard home computer.
You can buy and sell bitcoin and other cryptocurrencies from online exchanges like Poloniex and Coinbase much like you would buy stocks on the ASX.
You can store and send bitcoin from an encrypted digital wallet, which is run as a program on your computer or an app on your phone.
You can pay someone using bitcoin without needing a bank. Bitcoin is currently at record high prices, but a single bitcoin can be subdivided as far down as the eighth decimal place (0.00000001BTC) to buy smaller goods using just a fraction of the coin.
What makes bitcoin so interesting?
Aside from the skyrocketing price, which has everyone wanting to become a currency trader all of a sudden, because bitcoin isn't regulated by a central bank it could hold the answer to a safe and transferrable currency for people living in countries with unstable economies.
Countries like Venezuela, South Sudan and Argentina have high inflation, and central banks often resort to printing more money – devaluing the existing currency – as an answer to this. By 2009 in Zimbabwe, the government was printing one hundred trillion dollar notes!
The supply of bitcoin is finite, modelled on the way many countries used to directly link their currency to gold. In bitcoin's case, the total supply has been set at 21 million which defines how much currency will be created and at what rate, making inflation impossible.
Only 18 percent of people in the Middle East and North Africa have a bank account at a financial institution, and only 24 percent have an account in Sub-Saharan Africa. Bitcoin could enable people in these areas who have access to mobile phones to replace their barter system with a more stable means of exchange, avoiding corrupt banks, bribery and fluctuating currencies of their own countries.
The blockchain ledger means stolen bitcoins cannot be used as they cannot be verified by the chain. Because bitcoin transactions are irreversible, payments are secure and not susceptible to credit card fraud.
Bitcoin could also massively disrupt the current financial system. Small businesses can utilise bitcoin rather than paying to set up a merchant account with each credit card company, avoiding associated fees such as transaction, statement, interchange and customer service fees.
Should bitcoin attract even a small percentage of customers from existing payment processors like Visa, American Express and MasterCard and transfer services such as Western Union, it could be a real game changer to the way people move money around.
There are hundreds of other cryptocurrencies that have come along since bitcoin. Ethereum lets you create contracts that transfer currency around. Zcash uses strong mathematics to make it impossible to follow money trails. Monero creates false trails to confuse would-be thieves and Ripple is working with banks like Westpac to make cross-country money exchanges easier and faster.
Will the price of bitcoin continue to go gangbusters? I have no idea. Bitcoin is pure speculation, and if you've read my post titled 'Should you buy shares?', you'll know that I am definitely not a speculator. For a sceptics point of view, check out 'Why Bitcoin is Stupid' by American personal finance blogger Mr Money Moustache. I'm with him.