In just five years, digital currency bitcoin has captured the imagination as a ubiquitous, democratic alternative to the centralised model that governs our ability to spend money. But should you cash-in your hard-earned and jump on the bitcoin bandwagon to participate in this new world order? Or is it just another flash-in-the-pan? Mahesh Sharma investigates just what can be done with bitcoins.
What is bitcoin and why is it called a "cryptocurrency"?
Bitcoin is the brainchild of the mysterious web developer Satoshi Nakamoto, who, in 2009, proposed a payments system for the 21st century. It is a digital person-to-person payments system governed not by a central bank but a public ledger system which records and openly displays all transactions. The unit of value, "bitcoin," is secured using public-key cryptography - similar to the protections used to ensure that emails can only be opened by their intended recipient -hence, "cryptocurrency."
Can anyone buy or trade in bitcoins? How complicated is it?
Like regular cash, anybody can acquire bitcoins - either via exchanging them for goods and services, buying them directly from a friend or acquaintance, or using your bank account to buy them directly from an exchange. The only prerequisite is a bitcoin wallet, which can be installed as an application on your phone or accessed from a computer's web browser. The wallet is your window to the world of bitcoin.
How much is it worth? And what determines its ‘‘price’’?
Like any commodity, bitcoin is worth as much as people are willing to pay for it. At the moment that's about $690 - a huge increase on the negligible value at its inception but down from its frothy $1000-plus valuation at its peak earlier this year. Still in its early days, the currency's value is largely driven by hype - it experienced soaring highs when central banks around the world seriously considered bitcoin as an official currency; and rapidly declined when Mt Gox, the world's biggest bitcoin exchange, went bust. However, as the currency makes its way into mainstream circulation, such as to purchase everyday goods and services, observers hope the fluctuations will stabilise.
What do I need to be able to use it to pay for goods?
Apart from being used to buy and store your bitcoin, the wallet is also a way for you to pay for goods and services. To make a payment, you can use the app to scan a QR code generated as part of the transaction. By scanning this barcode, the appropriate amount of bitcoin will be deducted from your account and transferred to the recipient. Of course, you need to have bitcoin in the first place.
What are bitcoins mainly used for? Are they starting to seep into everyday transactions by people on the street? Could I buy a car with bitcoins?
Yes, bitcoins are seeping into everyday transactions, and yes, you can buy a car with bitcoins. Melbourne-based all-terrain-vehicle manufacturer Tomcar last November began accepting bitcoin as payment for its homegrown jeep and ute, which go for more than $20,000. While there are dozens of shops in cities around the country, such as cafes and fast-food outlets, which allow you to pay for goods with bitcoin, it still makes up only a small percentage ( less than 5 per cent) of the participating businesses' transactions. It is still overwhelmingly used, and hoarded, as an investment. The official website warns: "it should be seen like a high-risk asset."
What are the benefits of bitcoins? Do they have the same fees as credit cards and PayPal?
It depends on who you speak to. Some users rave about the ability to buy and sell foreign currency for the advertised exchange rates. While it has been no-fees, some industry participants, such as bitcoin miners and wallet developers, impose their own, but at around 1 per cent this is significantly smaller than traditional channels such as credit card or foreign exchange. The payments are inherently anonymous - though it's possible to trace a transaction via the wallet used to submit or receive payment - which is why it was such a popular payment method for the now-defunct online black market Silk Road. The biggest benefit at this stage is the cool or geek factor.
So if this is a digital currency, how secure or safe is it? Can I lose money?
According to the bitcoin foundation, the currency is very dangerous. It's "volatile," "irreversible," and "experimental". While the transactions themselves are protected by the robust cryptography standard which safeguards email, users themselves are vulnerable to being duped out of their bitcoin. Even Melbourne-based Sam Lee, co-founder of arbitrage fund Bitcoins Reserve, lost $70,000 worth of bitcoin (about 100 units) to hackers that convinced colleagues to urgently transfer the funds.
Is it legal (did someone say Ponzi)? If I accept payment, can the ATO come for me?
While central banks around the world have toyed with the possibility, bitcoin is still not a legal currency. Like trading in cash, the onus is on the proprietor to declare their earnings but most bitcoin point-of-sale systems come with the ability to generate invoices.
What is bitcoin mining?
While money may not grow on trees, bitcoin is conjured out of the wholly-digital "blockchain". The blockchain is the computer file, or public ledger, that records all bitcoin transactions. As there is no central authority to maintain or process the blockchain, this responsibility is left to the community. These "miners" have developed increasingly powerful computers to verify transactions and add them to the blockchain. For their efforts they're rewarded with bitcoin. Mining bitcoin has evolved into an increasingly brutal arms race, and unless you have the best equipment, the amount earned may not even pay electricity costs required to run the infrastructure. The reward will be removed when an arbitrary limit of 21 million bitcoin is reached in 2140.
In short: we still support long speculative positions in the market, stop-loss at $550.
