You have no doubt heard of the terms Bitcoin, blockchain and digital/cryptocurrencies. We are going to explain and explore some of these terms in this article.
Please note: We are not endorsing or advising on how to buy or trade any cryptocurrencies nor are we recommending investments in any cryptocurrencies. We are providing general information only.
In this article, we refer to Bitcoin several times but in most cases it can be interpreted generically, to be referring to cryptocurrencies in general.
Bitcoin, created in 2009, was the first decentralised cryptocurrency. Since then, numerous other cryptocurrencies have been created and are often referred to as altcoins, being alternatives to Bitcoin. There are now many cryptocurrencies; over 1300 already (look at Cryptocurrencies.net to get an idea) and even Hollywood celebrities are endorsing some of them.
Bitcoin (BTC) is currently the most dominant digital currency. It is traded on cryptocurrency exchanges, such as Bitfinex www.bitfinex.com, and can be used as a form of payment for suppliers who accept it. Its market value is denominated in other major currencies like US Dollars. It has had a stellar but volatile price growth, particularly in the latter half of 2017, going from $1,000 USD to almost $20,000 USD in under 12 months. But then it dropped below $7K USD in early February 2018 and has fluctuated significantly since then.
The Blockchain technology
Every Bitcoin is unique because it cannot be copied or replicated due to the design of the underlying blockchain technology. The blockchain is a type of distributed ledger or decentralised database of transactions that is universally shared amongst all participants (miners) in the network. Miners can be anyone with internet access and suitable hardware and software.
Blockchain is a way of recording the verified transactions without a financial intermediary like a bank. Rather than have one central database, it is a network of replicated databases that are syncronised across the internet. New transactions are grouped together in a block that is cryptographically protected and sent out to the whole network. The miners then compete to validate the transactions by solving a series of complex mathematical puzzles, requiring significant computing power. The first miner to solve the problem and validate the transaction receives Bitcoin rewards. The validated transactions are then added to a chain in chronological order, linked to other blocks and every database in the network is updated to remain identical. This enables each miner to prove who owns what at any given time.
Bitcoin exchanges act as intermediaries to convert regular currencies, e.g. $USD / $AU, to Bitcoin (and vice versa) and facilitate the opening of Bitcoin digital wallets. (See below for more on wallets.)
Once the wallet is set up, the owner can transfer regular currency to the exchange and then start trading Bitcoins. However, each Bitcoin exchange has different fees and comes with its own pros and cons. There are plenty of exchanges and they should be researched.
Is Bitcoin safe?
In terms of being a safe investment? You can’t see or touch cryptocurrencies. It is unlikely that you could find a café that will accept them as payment for a coffee. The only way to make money is to sell them at a higher price to someone else. We can only advise potential traders to do extensive research and look at the Bitcoin price charts before converting hard currency into Bitcoin purchases.
However, proponents of blockchain technology claim that it is tamper-proof and that its data is not subject to manipulation. Bitcoin is stored, in a blockchain. To access the blockchain and make transactions, traders need a digital wallet (a special software program). The wallet has two unique identifiers (keys); one public and one private. The public key is like a bank account number and is given to other traders so that transactions can be made between the two.
The private key, as its name implies, is a secret code that enables the trader to access their wallet to transfer stored Bitcoins into someone else’s wallet. If anyone else aside from the wallet owner has access to the private key then funds can be transferred out of the wallet without authority of the wallet’s “owner”.
For convenience, wallets can be stored in the online exchanges but secure digital wallets can be created without using an exchange. A “paper wallet” can also be used by simply writing down the private key on a piece of paper. Only the private key is required to access Bitcoin “accounts” online so a paper wallet effectively takes the account offline and further from the reach of hackers. The downside of this is that losing the private key means losing access to the Bitcoins permanently.
Is Bitcoin hackable?
To date, there has not been any publicised hacks of the Bitcoin blockchain network. To hack it, the majority of the computers connected to the Bitcoin network would need to be hacked at the same time making it a very difficult thing to do. However, great sums of online money are involved and the rewards for hacking success are astronomical. So it is almost certain that a lot of effort is already being exerted to find a way to break in.
But to make transactions, traders must use online exchanges and digital wallets. There has been several high profile incidents of these being hacked and the Bitcoins stolen.
Cryptocurrencies are gaining profile but it is an infant industry with an uncertain future. At the same time, the underlying blockchain technology is developing at tremendous rate and has many potential uses besides facilitating the transfer of money.
We do not endorse trading or investing in cryptocurrencies. This article provides general information only.