So.. What are Bitcoins?

It sounds like something from a Tolkien novel, but what exactly is this strange new currency and what role does it have to play in the real (rather than the virtual) world?

Described as “the currency of the internet”, Bitcoin – the name given to the technology and software system that allows users to exchange “bitcoins” – is peer-to-peer technology, enabling the transfer of funds with no central banking system or authority. The system is also labelled a “crypto-currency”, a concept first envisaged by Wei Dai in 1998 and developed into the Bitcoin project by Satoshi Nakamoto in 2009. (Nakamoto has since left the project.)

Essentially computer software (an app), users have a Bitcoin wallet, from which they send and receive bitcoins, paying for products or services just as people have done with many different currencies for hundreds of years. Bitcoins can also be “mined”, a decentralised process that generates more money through the processing of transactions – basically a reward system for those assisting in the expansion of Bitcoin.

Only 21 million bitcoins will ever be created, but this isn’t as limiting as it sounds as bitcoins can be divided up to 8 decimal places (0.000 000 01 BTC). The exchange rate, however, has generated much speculation, and is something to beware. Due to the relatively small size of the market, Bitcoin is still a very volatile currency. For example, in January 2013 the rate stood at $US17 for 1 BTC. By April 2013 this had leapt to $US220, before immediately falling sharply to $US70!

In moves that suggest Bitcoin isn’t going away anytime soon, manufacturers have been producing Bitcoin ATMs, with the British Virgin Islands-based Lamassu citing plans to finish shipping to 25 different countries in the coming months. The currency is also now being accepted at Overstock.com, the home brands website, and there is talk of Amazon looking to accept it for payments in the near future.

So, should we all be jumping on the Bitcoin bandwagon? The short answer is no. The system is largely in place for ease of movement of global transactions and to eliminate transaction risk, despite its more recent movements towards retail. However, if you feel you’d like to partake of this new trend, that is an investment decision that is entirely up to you.

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