What is a Bitcoin?

While it’s value fluctuates wildly a Bitcoin is currently worth an impressive $965 (R10,449)*. But is it a sustainable or even a safe investment? Angelique Ruzicka finds out.

In 2010 a Florida programmer Laszlo Hanyecz probably thought he was being clever when he used 10,000 Bitcoins he’d ‘mined’ on his computer to pay for two pizzas. How he must regret that transaction today if he doesn’t have any Bitcoins because the cryptocurreny’s value has certainly shot up in price . According to Stefan Tanase, a Bitcoin enthusiast and senior security researcher at Kaspersky Lab, based in Romania, the Bitcoin is worth around $965 (R10, 449.49)*, which means that Bitcoins sold in 2010 for two pizzas would be worth over $9million (R97 million) today.

But before you withdraw your life’s savings and invest in Bitcoins, it’s essential to know a bit more about them. A Bitcoin is a ‘cryptocurrency’ (a digital medium of exchange) that you can either save or use to buy and sell goods through merchants that accept them. Bitcoins are certainly not the only virtual currency – Amazon, for instance, has launched Amazon Coins which you can use to make purchases with on its website.

The Bitcoin system was introduced in 2008 by someone by the name of Satoshi Nakamoto and this is where it gets mysterious as not much is known about this person (if it is in fact a person). The Bitcoin is not the first cryptocurrency – Bit Gold and Digicash were its predecessors but these never took off. However, the Bitcoin is the cryptocurrency that many are talking about. “When it started, people who adopted it were the geeks but what’s interesting is that mainstream adoption is happening too. People are crazy about it,” says Tanase.

How do you get a Bitcoin?

Bitcoins can be generated by a very complicated computer process referred to as ‘mining’. Unless you are a computer geek with the time to mine this virtual currency the easier way of getting hold of a Bitcoin is by buying it from exchanges such as United Kingdom based Bitstamp and Vancouver based start-up exchange called CoinDesk. But be careful which exchange you choose to deal with. One of the most famous exchange is Japan’s Mt.Gox, but it has just filed for bankruptcy and there’s concern about whether customers will get their Bitcoins back.

Storage

You can keep your Bitcoins on your computer (although this is by no means the safest way to keep them) alternatively you can store them on a ‘digital wallet’. But beware – there are lots of scammers and fraudsters out there who may claim to be able to store your Bitcoins safely on your behalf. According to Kaspersky Lab, Bitcoins should not be kept in online stock exchange services or banks that are new and untrustworthy. “Keep in mind that most of these services are anonymous; owners are only known by nicknames so most likely, you will not be able to get a refund of your money if something bad happens,” says the company.

Storing a Bitcoin has its risks and even reputable companies have been targeted by hackers. Kaspersky Lab advises Bitcoin investors to store their coins in an open-source “offline” wallet like Electrum or Armory. “These encrypt your wallet with a strong password and protect it, ensuring that only you have access to your crypto-currency,” says Kaspersky Lab.

For additional security it’s essential that you make passphrases for your Bitcoin wallets and online storages as complex as possible by using open source password generating software. Kaspersky adds: “Once you have your Bitcoins in an ‘offline’ wallet, secured by a strong password, make sure your PC is protected with a good, solid antivirus and that is has the latest software updates installed. If you have a huge amount of Bitcoins you should keep them in a wallet on a PC that is not connected to the Internet at all.”

What are the risks of owning Bitcoins?

The major risk is that if you lose your bitcoins – that’s it! They aren’t backed by any institution like a central bank. There’s no regulation so no one to compensate you if things go awry. “It’s quite a high risk investment and if anything goes wrong there’s no one to help you,”  says Tanase.

Then there’s the price of a Bitcoin – it fluctuates wildly. So this is not an investment for the faint hearted or for those of you who would rather know for certain what your savings are going to do. But there are claims that the value of a Bitcoin could go up even more. Cameron Winklevoss, who is known as one of the twins who accused Mark Zuckerberg of stealing the idea of Facebook, is an investor in Bitcoins and claims that the price of a single Bitcoin could rise to $40,000 (R436,000).

Storage is always risky too and not all exchanges or digital wallets are immune to hackers. Hackers have, for instance, successfully used viruses to access some Chinese Bitcoin exchanges and emptied out the Bitcoins stored there. “When it comes to storage don’t keep it all in the same wallet or on one computer. Ideally, keep it on an offline wallet,” advises Tanase.

Fraudsters will be after your Bitcoins. “Trust no one,” says Tanase. “Bitcoins are for enthusiasts but there are a lot of scammers and con-artists. Common sense dictates that you shouldn’t invest all your savings in one investment – the same goes for Bitcoins.”

Another danger is that Bitcoins could be replaced by another cryptocurrency. However, if Bitcoins continue to increase in popularity, governments may try to regulate them in some way or some may even ban them altogether.

What are the advantages of Bitcoins?

This currency is not accepted in every high street store (yet) but there are a lot of merchants that do let you make purchases with them. According to reports, you can use your Bitcoins to pay for a trip to space with Virgin Galactic, and there are a number of shops in America and pubs in the United Kingdom that accept them too. Online merchants more commonly accept Bitcoins. You could, for instance, rent a designer dress from girlmeetsdress.com or takeaway.com in the UK will deliver pizza in exchange for some Bitcoins.

Bitcoins are an international currency so there’s no need to exchange them for another currency and more stores all over the world are starting to accept them. Ultimately, Bitcoins are easy to use, quick when it comes to making payments and you don’t pay tax on them. “Because this currency isn’t regulated you can’t pay tax,” explains Tanase.

Are Bitcoins here to stay?

Whether Bitcoins will stand the test of time is hard to tell and some think this currency could become so powerful that it will bring down governments or even society as we know it. Few are willing to predict what will happen with Bitcoins though. “This all depends on the strength of the algorithm. But with every day that passes where no one is able to threaten the system confidence is increased,” says Tanase.

*Correct as at 22 January 2014



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