What are Bitcoins and should you invest ter them, Moneywise

Published by Kate Bevan on 11 February 2014.

Last updated on 13 February 2014

Visitors to the Brooklyn Café te Glasgow are used to paying for their coffees and teas with contant and plastic but now they’re being suggested another way of paying: by Bitcoin.

But what is a Bitcoin? How would you pay for your sandwich with a Bitcoin? How do you acquire Bitcoins? And if you’re an investor looking for fresh ways to use your metselspecie, is Bitcoin something you should consider spil an investment voertuig?

Bitcoin wasgoed invented ter 2009 but only indeed embarked to show up on the radar ter the past duo of years spil the existence of the Silk Road webstek (which drove its growth) began to attract attention beyond the ‘nerdosphere’.

Silk Road, which wasgoed shut down last year by the FBI, wasgoed an online marketplace on the ‘darkweb’ that sold, among other things, guns and drugs, Bitcoin wasgoed the only way of paying for goods, spil it suggested a secure means of payment combined with anonymity.

Bitcoin is a ‘cryptocurrency’ – a virtual currency that uses cryptography for security. Cryptocurrencies don’t exist ter any physical sense – you can’t carry coins or notes te your pocket – and they are not linked to any single country, government or economy.

Bitcoins are produced by powerful computers that ‘mine’ the coins. A coin is produced when the mining pc solves a mathematical problem set by the Bitcoin software. That software wasgoed developed te 2009 by a mysterious developer or group of developers – nobody indeed knows – called Satoshi Nakamoto.

It’s an ingenious algorithm that makes it progressively tighter to mine Bitcoins spil time goes on, and the software ensures there will never be more than 21 million Bitcoins ter existence. At the time of writing, there are around 12.Two million coins and the rate at which they are produced will slow spil they get more and more difficult to mine until the year 2140, when production will zekering.

Bitcoin transactions are recorded te a public computerised ledger called the ‘blockchain’, which is maintained by the miners. Anybody can see the blockchain via websites such spil blockchain.informatie, albeit the blockchain doesn’t expose who has carried out the transaction, and it’s this combination of transparency and privacy that appeals so much to many of its users.

Buying Bitcoins

Anyone can use Bitcoins to pay for goods and services online – there are slew of outlets other than underground illegal marketplaces that will take them, both online and ter the real world. Users can buy Bitcoins te a number of ways, such spil via one of the trading exchanges like Mt. Gox (mtgox.com) or via canap transfers and even by using SMS and mobile phone apps.

Your Bitcoins are held te a ‘digital wallet’, either on your own machine or via an online provider, and transferred to the wallet of your payee. When a customer lodged his £42 bill at the Brooklyn Café te Glasgow te January, he used his mobile to scan a code ter the café that initiated the transaction – which ended swifter than a payment by credit card, according to café manager Jonny McDonald: “Our credit card machine takes around 45 seconds to process a payment, whereas a Bitcoin transaction takes just Ten seconds.”

Setting up a digital wallet and an account with an exchange isn’t particularly difficult but it’s spil well to make sure the laptop you keep it on is very secure and backed up: if you lose your wallet – either by someone stealing it via malware on your pc or a pc failure – it is gone forever and you cannot get your Bitcoins back, spil the unfortunate James Howells discovered at the end of last year.

He had stashed 7,500 Bitcoins te his digital wallet back te 2009 when they were worth only pennies, and zometeen eliminated the hard drive containing the wallet from his laptop and waterput it te a drawer, only to throw it away ter a clear-out. He had forgotten about that hard drive until Bitcoin kasstuk the headlines when Silk Road wasgoed shut down, and realised that the cryptocurrency had risen dramatically te value – it wasgoed around $1,200 at that time, making the contents of his wallet worth around $9 million (£5.Five million).

Looking for the hard drive that held the wallet, he soon discovered that he’d thrown away the drive and it wasgoed most likely buried te a landfill te Newport, Wales. He wasgoed pictured mournfully standing ter vuurlijn of the landfill, telling: “I’m at the point where either I laugh about it or sob about it. I think I’m resigned to never being able to find it.”

Bitcoin is by no means the only cryptocurrency: there are dozens, known spil altcoins, and anyone can create one – even on behalf of a dog. Some, like Litecoin and Peercoin, are forks of Bitcoin: they use the same software protocol but differ te other ways: Peercoin has a more efficient mining process, for example.

Others are ‘statement’ cryptocurrencies, such spil the Dogecoin, which uses the Doge internet meme spil its mascot, and Coinye, a ‘crytpocurrency for the masses’ that has no connection with the rapper, Kanye Westelijk.

Why do people want to use Bitcoin?

Some puny businesses like to accept payment te Bitcoins because they get paid straightaway, 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 others see Bitcoin spil something of a safe toevluchthaven, similar to gold. Charlotte Watson, chief investment officer at Attivo Group, says the effect of quantitative easing, which has seen gold’s price bury, has waterput a loterijlot of people off the precious metal spil a safe toevluchthaven and they’re looking for alternatives.

Tim Johnson, managing director of printer supplies company Inkfactory.com – which has commenced accepting Bitcoins spil payment ter the past few months – agrees and says lots of people see it spil a store of wealth. “Wij have clients ter southern Europe – Spain, Cyprus and Greece – who don’t see Bitcoins spil a currency but merely spil a way to keep their money out of the banks and where they know they can get access to it.”

Johnson says his company embarked taking Bitcoins for two reasons.”Wij like to be early adopters of fresh technology. Earlier this year, wij became the very 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 indeed begin to use Bitcoins to pay for lots of things online and they see wij’ve bot doing it for a while, they’ll be more likely to come to us to spend their Bitcoins.”

Unlike ‘real world’ currencies, which are managed 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.

Investment potential

The big question for many with Bitcoin and other cryptocurrencies is can they be used spil investment vehicles – and, more pertinently, is that a good idea?

Certainly, there has bot some high-profile enthusiasm for Bitcoin spil an investment voertuig. Last year, the Winklevoss twins, Cameron and Tyler, who are best known for their legal scrap with Facebook founder Mark Zuckerberg, announced they were floating the Winklevoss Bitcoin Trust, “designed for investors seeking a cost-effective and convenient means to build up exposure to Bitcoins with minimal credit risk”, according to their filing with the US Securities and Exchange Commission.

However, the Winklevii, spil the twins are known, “are famous for being number two,” says Steve Ruffley, the chief market strategist at InterTrader, the spreadbetting rock hard. Ruffley is unequivocal about the idea of investing ter Bitcoin: “It’s a categorical no,” he says.

It wasgoed Bitcoin’s meteoric rise ter value – it peaked at around $1,200 last year before falling back – that encouraged buyers to pile ter, hoping to capitalise on its evidently inexorable upwards trajectory. However, spil Ruffley points out, by the time that had happened, the best days were already overheen for speculators: “Once you see a trend, you’ve already missed it,” he says.

Bitcoin had a fillip towards the end of last year when an FBI letterteken exposed during a US Senate committee hearing that the law enforcement agency believes that cryptocurrencies offerande “legitimate financial services”, only to suffer a suck ter December when China banned the use of Bitcoin te the country.

Those events underline the fact Bitcoin is utterly vulnerable to real-world events, and exemplify why many observers believe that the cryptocurrency is more like a speculative asset than a real currency.

Others are more enthusiastic about Bitcoin spil an investment voertuig, and products exist for those keen to overlook advice of sceptics such spil Ruffley: the Bitcoin Investment Trust, launched by SecondMarket, the online marketplace that specialises ter illiquid assets, has, unsurprisingly, done well for its investors thus far, while eToro, the social investment network, has recently launched a product that gives its members exposure to Bitcoin.

Giles Russell, operations manager at CipherTrade, says: “The ordinary consumer should certainly be investigating cryptocurrencies but should do so with caution.” He points out: “Spil with any high-risk investment there is high risk, not only from the exchange rate ripping off but also ter regards to legal matters ter their respective countries. Cryptocurrencies should either be viewed spil a very long-term strategy, or very high risk, and the consumer should not invest more than they can afford to lose.”

He adds: “I’m one of the few people who makes his entire living via crypto-sources. It is possible to make money but you have to be very careful.”

Paul Plewman, a director at Sable International FX, sounds another note of caution: “The truth is, wij’re still te the early days and while investors are looking on with rente, no one is fairly sure what the future holds for the market.”

However, you could note those comments are from people with a vested rente ter encouraging people to invest ter Bitcoin and other altcoin currencies via their products. Steve Ruffley remains deeply unconvinced. He points out nobody should invest te anything they don’t understand, adding: “I understand how to trade the Standard &, Poor’s, I don’t understand Bitcoin. I don’t trade Bitcoin for the same reason I don’t trade the Nikkei – I don’t understand it. I wouldn’t know how to control the risk.”

A key reason to be wary of using Bitcoin spil an investment voertuig is the lack of regulation, albeit the US Treasury te December warned businesses that dealt with Bitcoin they face the possibility of having to obey with money-laundering rules. Also ter December, the European Banking Authority warned consumers there are no regulations that protect consumers te Europe, and added that it is assessing further “all relevant aspects associated with virtual currencies te order to identify whether virtual currencies can and should be regulated and supervised”.

Libertarians insist regulation will kill Bitcoin but consumers might be more willing to leap te if regulation does come to pass. Until then, perhaps the words of Steve Ruffley should stadionring ter the ears of anyone considering a punt: “You’re off your head. The risks so outweigh the benefits that I don’t see it spil a viable investment for anybody. There are so many other ways to make your money work for you.”

Where can I spend my Bitcoins?

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

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

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