What is Bitcoin?: Q&A

What is Bitcoin?

Bitcoin is a 'virtual' currency that exists in cyberspace - or as its founders put it, it's "pretty much like cash for the internet".

It's been around since 2008 and the coins are bought and sold online with real money stored in a 'digital wallet' and can be exchanged for goods and services - but unlike 'real' currencies, it's not backed by a government or central bank.

There is only ever going to a fixed number of virtual coins in circulation - although exactly how many isn't known as they are generated by a very complicated computer process.

Individuals can trade Bitcoins with each other online or they can do it through a third-party or 'exchange'. The price depends on demand, which can be tracked openly on a variety of Bitcoin exchanges, with some of the biggest in China.

By the end of August 2013, the value of all Bitcoins in circulation topped US$ 1.5 billion, with millions of dollars worth of Bitcoins being exchanged every day.

In November 2013, the value of one Bitcoin hit more than $1,200 (£733) for the first time. At the time of writing (mid-December, 2013), the price was hovering around $590 on the Bitcoin exchange mtgox.com. It had fallen from above $830 just days before, after the Chinese government said the biggest Chinese Bitcoin exchange - BTC China - could no longer accept yuan-based deposits.

Why do people want to use it?

For a variety of reasons. Some small businesses like to accept payment in Bitcoins because they get paid straight away, instead of having to wait for funds to clear via Paypal or other online payment methods.

Some consumers (and businesses) like them because there's no tax to pay on transactions. While some people see Bitcoin as something of a safe haven, similar to gold. Charlotte Watson, chief investment officer at Attivo Group, says the effect of quantitative easing, which has seen gold's price sink, has put a lot of people off the precious metal as a safe haven and they're looking for alternatives.

Tim Johnson, managing director of printer supplies company Inkfactory.com - which has started accepting Bitcoins as payment in the past few months - agrees and says lots of people see it as a store of wealth. "We have clients in southern Europe - Spain, Cyprus and Greece - who don't see Bitcoins as a currency but merely as a way to keep their money out of the banks and where they know they can get access to it."

Johnson says his company started taking Bitcoins for two reasons. "We like to be early adopters of new technology. Earlier this year we became the first company to use a 3D printer to make inkjet cartridges," he explains. But he says the other reason is to do with PR and branding. "If people really start to use Bitcoins to pay for lots of things online and they see that we've been doing it for a while, they'll be more likely to come to us to spend their Bitcoins."

Unlike 'real world' currencies, which are controlled by governments, Bitcoins aren't subject to laws that aim to tackle money laundering. They can be bought and sold anonymously without trace - meaning they've become very popular with criminals.

Why's everyone talking about it?

There are two main reasons - both of which made international news headlines. Most recently, James Howells from Newport, South Wales, was forced to scour a landfill site after he accidentally threw away his computer hard drive that contained 7,500 Bitcoins - now valued at more than £4 million.

Back in October, the FBI shut down a website called The Silk Road. It was an online black market awash with drug deals that were being paid for exclusively with Bitcoins. Some people referred to it as the 'Amazon' for drugs, and up to £1.25 million worth of deals were allegedly taking place every month.

So is it safe to use?

There are certainly risks associated with Bitcoin. The price fluctuates wildly, as the prices stated above from mtgox.com reveal, and speculators are thought to account for between 80 and 90% of the market - according to Watson.

Some commentators say they expect prices to go significantly higher. Cameron Winklevoss - one of the twins who accused Mark Zuckerberg of stealing their idea for Facebook and an investor in Bitcoins - recently said the price of a single Bitcoin could hit $40,000.

But while such claims may be hard to swallow, there is some cause to believe they could rise higher. Johnson explains: "The technology is relatively new and people are only just working out the possibilities. Its potential applications are not yet very well understood. As a serial entrepreneur and technology geek, that makes me excited."

But as Charlotte Watson points out, the price of a Bitcoin was $14 at the start of the year, hit a high of $1,000 in November, and is now considerably lower. "It's extremely volatile," she says. "It looks like a bubble."

There are various other concerns about the safety of Bitcoins. There's no form of regulation and hackers have been targeting the virtual currency with users of some of the big Chinese Bitcoin exchanges falling victim to computer viruses that steal their details and empty their Bitcoin accounts.  

Tim Johnson adds that if you lose your computer's hard drive and don't have a backup, your Bitcoins are gone for good - something James Howells learnt the hard way. The same happens if you lose your password or die without leaving it to your next of kin.

Where can I spend my Bitcoins?

You can't use them on the websites of big high street stores such as Amazon or eBay, but there's a very long and varied list of small shops, restaurants and even investments that accept Bitcoins as payment.

The weird and wonderful places you can spend your Bitcoins at include:

  • Burger Bear, a street food burger vendor in east London. The first burger it sold for Bitcoins (BTC) in early December cost 0.0131 BTC, which was worth around £7.50 at the time.
  • The Pembury Tavern in Hackney, London, allows customers to pay for food and drink in the cyber currency.
  • You can rent yourself a designer dress at girlmeetsdress.com using Bitcoins.
  • Richard Branson has said you can spend your Bitcoins on a trip into space with Virgin Galactic.

Are Bitcoins here to stay?

Tim Johnson says: "Regardless of what the future holds for Bitcoin specifically, I'm certain that crypto-currencies are here to stay, and one day will almost certainly become the norm for online transactions."

With Amazon having launched its own cyber currency - Amazon Coins - and JPMorgan filing a patent application for its own online payment system, he may well be right.

More about