Bitcoin: some key questions

Tax matter: The IRS has requested information from blockchain firm Coinbase Inc. Blockchain is a database of Bitcoin (pictured) transactions.

Bitcoin: some key questions

Hong Kong: The value of bitcoin surged above US$1,100 on Thursday as the digital unit continues a dizzying rise that made it the best-performing currency of 2016.

Analysts have suggested a host of reasons for its appreciation, from global uncertainty and a strengthening dollar to demonetisation in India and capital controls in China.

Here are some key facts about bitcoin:

What is it?

Bitcoin is a virtual currency that is created from computer code. Unlike a real-world currency such as the US dollar or the euro, it has no central bank and is not backed by any government.

Instead, its community of users control and regulate it. Advocates say this makes it an efficient alternative to traditional currencies because it is not subject to the whims of a state that may wish to devalue its money to inflate away debt.

Just like other currencies, bitcoins can be exchanged for goods and services - or for other currencies - provided the other party is willing to accept them.       
Where does it come from?

Bitcoin was launched in 2009 as a bit of encrypted software written by someone using the Japanese-sounding name Satoshi Nakamoto.

Last year secretive Australian entrepreneur Craig Wright said he was the creator, but some have raised doubts over his claim.

Other digital currencies followed but bitcoin was by far the most popular.

Transactions happen when heavily encrypted codes are passed across a computer network. The network as a whole monitors and verifies the transaction in a process that is intended to ensure no single bitcoin can be spent in more than one place simultaneously.

Users can “mine” bitcoins - bring new ones into being - by having their computers run complicated and increasingly difficult processes.

However, the model is limited and only 21 million units will ever be created.

What’s it worth?

Like any other currency, it fluctuates. But unlike most real-world analogues, bitcoin’s value has swung wildly in a short period.

When the unit first came into existence it was worth a few US cents. Its price topped out at US$1,165.89 on the Bitcoin Price Index, an average of major exchanges, in 2013.

At around 0430 GMT on Thursday, a single bitcoin was worth about US$1,140 on the BPI.

There are presently more than 16 million units in circulation. Some economists point to the fact that because it is limited its price will increase over the long run, making it less useful as a currency and more a vehicle to store value, like gold.

But detractors point to bitcoin’s volatility, security issues and other weaknesses as flaws that will eventually undermine it.

Why has its value risen in recent months? 

Analysts have suggested a number of reasons, including investors buying bitcoins as a hedge against currencies that are weakening against the US dollar.

Other reasons include the currency turning into a virtual safe haven at a time of global economic uncertainty sparked by factors such as Donald Trump’s US election victory, as well as country-specific issues such as the chaotic withdrawal of high-value notes in India, and Chinese controls on the purchase of foreign currency.

The currency may also have been strengthened by the rise of digital payments and the dwindling supply of new bitcoins.

What’s the future?

Some commentators say that like many technological developments, the first iteration of a product will encounter difficulties, possibly terminal ones. But the trail it blazes might smooth the way for the next crypto currency.

Problems include an apparent vulnerability to theft when bitcoins are stored in digital wallets.

A major Hong Kong-based bitcoin exchange suspended trading last year after US$65 million in the virtual unit was reportedly stolen by hackers.

The virtual currency movement also faces legitimacy issues because of the way it allows for anonymous transactions - the very thing that libertarian adopters like about it.

Detractors say bitcoin’s use on the underground Silk Road website, where users could buy drugs and guns with it, is proof that it is a bad thing.

If bitcoin does become more widely accepted, experts say, it could lead to more government regulations, which would negate the very attraction of the bitcoin concept. - AFP