A new currency is taking the world by storm and has seen its value surge more than 1000 per cent from about $15 to nearly $170 since the beginning of 2013.
Bitcoin is a decentralised, anonymous, digital-only currency that's lately got a lot of public attention and sparked a trading frenzy.
Not managed like a typical currency, Bitcoin belongs to no particular country, is not minted on plastic, paper or metal and under the control of no central bank.
And yet it has reportedly enabled a US citizen to buy Porsche Cayman last month!
How Bitcoin works
Bitcoin was originally developed in 2008 by a computer developer using the pseudonym "Satoshi Nakamoto", who published a paper describing how it could work.
The goal of creating Bitcoin was to have an alternative currency that could not be devalued by governments or central banks.
A report compiled by Business Insider says just after a year of being introduced, they started being traded and mined.
The online currency now totals $1.8 billion and is accepted by various merchants and services internationally.
Bitcoin generation is based on a highly complex computer algorithm, programmed to generate a fixed number of Bitcoins per unit of computing time.
They can be bought with money and can also be "mined".
The Motley Fool Australia explains that obtaining Bitcoins is similar to opening an account through a bank. “All a user has to do is visit Bitinstant and convert a local currency into the virtual money. The currency is traded just like any other, with the most popular exchange being Mt.Gox.”
In order to trade via a bank transfer you need to “link” your bank accounts using the login details associated with said bank account.
Business Insider reports that by 2140, the total number of Bitcoins in circulation will be capped at 21 million.
In other words, the Bitcoin system is self-sustaining, coded to prevent inflation, and encrypted to prevent anyone from disrupting its code.
The Cyprus effect: Are Bitcoins safe?
Even since the Cyprus crisis, the value of Bitcoins has soared due to a spike in fear about the risk in government-run currencies. Forbes magazine writer Peter Cohan observes that the genesis of that fear was Cyprus’s policy of accepting few-questions-asked cash and charging companies an ultra-low 10 per cent tax.
“Cash flooded Cyprus from around Europe — a third came from Russian oligarchs. And those deposits turned into loans. According to the Times, a bank would give a a £20,000 loan and a £5,000 credit card to a depositor with a monthly salary of £400. Much of this money went into real estate that soared in price,” Cohan notes.
“And while the 2010 Euro-recession took much of the wind out of Cyprus’s real estate market, it was the purchase of Greek government bonds by Cypriot banks that caused its banking system to collapse. By comparison, Bitcoins look like a currency with relatively low risk”.
However, Cohan also notes that Bitcoin is not a zero-risk currency as it remains vulnerable to networks of bots — home computers that get hijacked by hackers. “The BBC reports that ZeroAccess, a leading botnet, has directed millions of infected PCs to mine Bitcoins to tap into their soaring value.”
Some are praising Bitcoins as the next gold, but is it really safe? The jury is out on that.
According to Alan Safahi, the CEO of Bitcoin processor Zip Zap, “There is a little bit of a bubble. I’m not happy about prices going up as fast as they have.”
Motley Fool advises it would be wise not to fall for that argument. “Give it some time before you go rushing to exchange your hard-earned money for some Bitcoins,” the Fool writes.