The bitcoin is having a bit of a moment

The bitcoin is currently having a bit of a moment. It's value has been soaring for the last couple of years, to the extent that that it has just exceeded the value of an ounce of gold. As of 2nd March 2017, it sits at US $1,263.49, compared to about $200 in early 2015. They are even talking about offering a bitcoin-based RTF, which would make it even easier to invest in, and probably bolster its value still further.

So it is with a certain amount of shame that I admit that I don't really know what a bitcoin is. Yes, I have read about it from time to time over the years since it was "invented" in 2009, but I've never really known what it is. I was further confused by a picture of a roll of actual physical gold-coloured coins - I thought it was a purely conceptual digital thing with no physical existence. Fat lot I know!

So, with reference to Wikipedia (of course), here's what a bitcoin actually is.

Bitcoin is a payent system and a cryptocurrency. Now, that didn't help me much either, but apparently a cryptocurrency is a digital asset used as a medium of exchange, which uses some form of cryptography to secure transactions and to control the creation of additional units of the currency. Bitcoin was the first major secure digital currency, and it remains the largest and most widely used, although there are now apparently several others including Etherium, Ripple, Litecoin, Monero, Zcash, etc.

It was first developed by a mysterious and semi-mythical figure called Satoshi Nakamoto, about whom almost nothing is known except that he is Japanese and "born around 1975". Several individuals, including an Australian man, have claimed to be Satoshi, which is almost certainly a pseudonym, and may even refer to a group of several programmers.

Bitcoin is a peer-to-peer system (meaning that there is no centralized administration), and transactions take place directly, without any intermediary. These transactions are verified by "network nodes" and recorded in a vast public online ledger called the "blockchain", which is essentially a distributed database that does not involve any trusted central authority. (Here is the best explanation I have yet seen of how a blockchain works). New bitcoins can be digitally created or "mined" using special software that solves mathematical problems within a distributed computer network.

Like other currencies, bitcoins can be used to purchase items electronically (it is fast, secure, transparent, and transaction fees are minimal), and a growing number of merchants will accept them nowadays. There are also bitcoin exchanges, both online and offline, and even bitcoin ATMs where cash can be exchanged for bitcoins.

Strictly speaking, bitcoin is purely digital and it is not physically minted or printed like other currencies. However, there are a few companies producing physical bitcoins, which can serve as physical placeholders for the digital currency, but these are really just collectibles, conversation pieces or "geek gifts".

Despite the recent prive surge, the value of bitcoin has historically been notoriously volatile - an estimated 7 times more volatile than gold, and 18 times more than the US dollar - and there have been several bubbles and bursts throughout its short history. This is largely due to insufficient liquidity (it is a very new currency after all), and to the fact that there is no central stabilization mechanism for the currency.

Also, the algorithm that governs the production of bitcoins effectively caps the supply at about 21 million. There are about 16.7 million of them in existence today, and their value will undoubtedly continue to spike the closer we get to full supply, a built-in value increase mechanism.

The lack of central oversight has apparently made bitcoins popular for criminal activities, including dark web drug transactions, Ponzi schemes, weapons sales, and even child pornography and murder-for-hire networks. The use of bitcoins is not entirely legal in some countries, and has even been specifically banned in some countries, including Bangladesh, Bolivia and Ecuador.

So, do I know what a bitcoin is now? Well, sort of...

UPDATE

Eight months later, and people are openly talking about the bitcoin phenomenon as a classic bubble, similar to the dot com phenomenon of the late 1990s or the Dutch tulip bubble of the 17th century (and we all know how those ended). The phrase "the emperor has no clothes" is a common refrain in these articles, and it is difficult to see it any other way.

The price of a bitcoin has risen over 300% in the last 6 months alone, and its value now sits at $6,587. "Initial coin offerings" or ICOs, as a method of raising venture capital for early stage companies, are rife (over 200 this year alone), and apparently unrelated to the prospects of the offering company. Companies are seeing their share valuation increase by 30% just by virtue of adding  the word "blockchain" to their name. There are salutary stories of people who have trashed old laptops containing thousands of bitcoins, now worth millions of dollars, with no way to retrieve them.

But the value of bitcoin is based in nothing more than the expectation that its price will continue to increase. There is nothing tangible behind it, no bar of gold, no promise from a central bank, not even a tulip. And if that's not a recipe for a bubble, I don't know what is.

According to one professor who specializes in the field: "It will burst ... I couldn't tell you when. That's the thing about bubbles." Another high-profile early adopter warns of an "absolute flood of scams and money grabs". Some commentators suggest that we may be around the equivalent of 1996 in the dot com craze, still quite a long way from the end, but there is no real way to be sure.

Well, don't say you weren't warned.

UPDATE UPDATE

Bitcoin steamed past the $10,000 mark at the end of November 2017. Where will it all end? Place your bets now (if you dare).

UPDATE UPDATE UPDATE

Juts a couple of weeks later, on 16th December 2017, we are at over $19,000, following a 10% rise in just over 24 hours.

UPDATE UPDATE UPDATE UPDATE

Just a few days after this, on December 22nd 2017, bitcoin's value fell precipitous from over $20,000 to just $11,000, before recovering a bit to $13,000. This may not be the bubble definitively bursting, but it gives a very clear idea of just how unstable the edifice is. Exchanges were suspended, and a lot of investors suddenly started wondering what on earth they were doing.

UPDATE UPDATE UPDATE UPDATE UPDATE
Another few days later, and bitcoin was back above $16,000. Redemption? Perhaps, from an investment speculation point of view. But no-one is going to take bitcoin seriously as a reliable means of exchange until its volatility can be kept in check. And that means regulation, which appears to be against the very spirit of bitcoin.