Bitcoin is the world’s most successful cryptocurrency – a payment unit which does not need a centralised system or middleman and lends unparalleled anonymity to the user.
NEW DELHI: Bitcoin made headlines on Wednesday, blasting past $11,000 to hit a record high for the sixth day in a row, stoking concerns that a rapidly swelling bubble could be set to burst in spectacular fashion. But what is a bitcoin, why is it so hot right now and why are people worried that it might explode? Here’s a quick run-down about the largest and best-known cryptocurrency.
WHAT IS BITCOIN?
Created in 2009 by an unknown person using the alias Satoshi Nakamoto, Bitcoin is billed as the currency for the future. It is an alternative to dollar, stocks and gold. It works off blockchain technology through thousands of computers across the world on the principle of demand and supply and is not regulated by any government or financial institution. This lends two of its biggest appeals – its decentralised nature (no middleman) and the anonymity it grants.
HOW MANY ARE THERE?
Bitcoin’s supply is limited to 21 million – a number that is expected to be reached around the year 2140. So far, around 16.7 million bitcoins have been released into the system, with 12.5 new ones released roughly every 10 minutes via a process called “mining”, in which a global network of computers competes to solve complex algorithms in reward for the new bitcoins.
Sceptics say it is a classic speculative bubble with no relation to real financial market activity or the economy – most famously JPMorgan boss Jamie Dimon, who labelled it a “fraud”. In one of the most high-profile scandals, major Tokyo-based Bitcoin exchange MtGox collapsed in 2014 after admitting that 850,000 coins — worth around $480 million at the time — had disappeared from its vaults. Bitcoin’s use on the underground Silk Road website, where users could use it to buy drugs and guns, also raised suspicions about the virtual money.
BITS OF BITCOIN
Bitcoin’s smallest unit is a Satoshi, named after the elusive creator of the cryptocurrency. One Satoshi is one hundred-millionth of a bitcoin, making it worth around $0.0001 at current exchange rates.
Bitcoin has performed better than every central-bank-issued currency in every year since 2011 except for 2014, when it performed worse than any traditional currency. So far in 2017, it is up around 1000 percent. If you had bought $1,000 of bitcoin at the start of 2013 and had never sold any of it, you would now be sitting on $80 million. Many people consider bitcoin to be more of a speculative instrument than a currency, because of its volatility, increasingly high transaction fees, and the fact that relatively few merchants accept it.
More than 980,000 bitcoins have been stolen from exchanges, either by hackers or insiders. That’s a total of more than $10 billion at current exchange rates. Few have been recovered.
Despite many attempts to find the creator of bitcoin, and a number of claims, we still do not know who Satoshi Nakamoto is, or was. Australian computer scientist and entrepreneur Craig Wright convinced some prominent members of the bitcoin community that he was Nakamoto in May 2016, but he then refused to provide the evidence that most of the community said was necessary. It is not clear whether Satoshi Nakamoto, assumed to be a pseudonym, was a name used by a group of developers or by one individual. Nor is it clear that Nakamoto is still alive – the late computer scientist Hal Finney’s name is sometimes put forward. Developer Nick Szabo has denied claims that he is Nakamoto, as has tech entrepreneur Elon Musk more recently.
INFLATED CHINESE TRADING
Until earlier this year, it was thought that Chinese exchanges accounted for around 90 percent of trading volume. But it has become clear that some exchanges inflated their volumes through so-called wash trades, repeatedly trading nominal amounts of bitcoin back and forth between accounts. Since the Chinese authorities imposed transaction fees, Chinese trading volumes have fallen sharply, and now represent less than 20 percent, according to data from website Bitcoinity.
These mining computers require a vast amount of energy to run. A recent estimate by tech news site Motherboard put the energy cost of a single bitcoin transaction at 215 kilowatt-hours, assuming that there are around 300,000 bitcoin transactions per day. That’s almost enough energy as the average American household consumes in a whole week.
The total value of all bitcoins released into the system so far has now reached as high as $190 billion. That makes its total value – sometimes dubbed its “market cap” – greater than that of Disney, and bigger than the market cap of BlackRock and Goldman Sachs combined.
Bitcoin is far from the only cryptocurrency. There are now well over 1,000 rivals, according to trade website Coinmarketcap.
It is already possible to short bitcoin on a number of retail platforms and exchanges, via contracts for difference (CFDs), leveraged-up margin trading or by borrowing bitcoin from exchanges without leverage. But a number of big financial institutions – including CME Group, CBOE and Nasdaq – have recently announced that they will offer bitcoin futures, which will open up the possibility of shorting the cryptocurrency to the mainstream professional investment universe.
(With inputs from Reuters)