Bitcoin’s price has soared over the past 12 months, but many people are still baffled by what exactly it is - so let us explain!

Bitcoin is a virtual currency known as “cryptocurrency”. It has enabled people to move money around the world at speed without central oversight, enabling a dizzying array of new applications. Anyone can own and use Bitcoin, and it’s straightforward to get started.

What's the history of Bitcoin? 

Bitcoin was first outlined in a white paper, uploaded in 2008 to the P2P Foundation’s website by an anonymous author known only as “Satoshi Nakamoto”. It detailed a virtual currency, with a decentralized structure that meant it didn’t need a central bank. It’s made possible using the blockchain, a public ledger that records every transaction and ensures that hackers can’t run away with people’s cryptocurrency.

From an outsider’s perspective, it may seem like a lot of hype. After rallying from the $1,100 mark 12 months ago to a price of $19,898 on December 17 when Bitcoin dominated press headlines, the cryptocurrency has quietly slid to a price of $7,466. If you see Bitcoin as playing a big role in future finance, though, it’s severely undervalued: the total market cap is at $126.6 billion, around 45 percent of the total cryptocurrency market but a small fraction of the $74 trillion global economy.

Is Bitcoin secure? 

Part of what makes Bitcoin so revolutionary is blockchain, which solves a big computing problem around how to trust digital data. In short, everyone in the network has the same public ledger on their computer. When a Bitcoin is spent, a “miner” uses their computer to solve a complex maths problem and add the changes onto the public ledger. If the other miners agree, the change is made.

If the network can’t agree that a new block is valid, it’s rejected to protect against hacking. This method of consensus has got developers excited, as blockchain could also store identity information, votes and other secure information that could be subject to attacks.

How do you earn Bitcoin?

The miner gets rewarded for their computing power with some Bitcoin, and this is how new coins enter the network. The reward for creating a block and adding it onto the chain halves at regular intervals. The maximum number of Bitcoins is designed to be 21 million, but thanks to the halving process miners aren’t expected to reach that figure until the year 2140.

Actually using Bitcoin is simple. People use a “wallet” to store Bitcoin, a method of storing private keys that reference coins. These can be software-based or hardware-based, but the important part is it’s secure. People then use exchanges to buy and sell their coins using real-world currencies or other cryptocurrencies. Services like Coinbase and Abra combine an exchange with a wallet, allowing users to buy Bitcoin, store it and sell it all through one app.

How do you trade Bitcoin? 

To send and receive Bitcoin, people use addresses. Much like how people use e-mail addresses to send digital messages across the world, Bitcoin addresses are how people send friends and businesses cryptocurrency coins regardless of time or location. While it’s normally an indecipherable string of letters and numbers, some wallets offer a QR code to allow a user to scan with their smartphone.

Note that you can send any value of Bitcoin you want. Unlike currencies like Pound Sterling which are divisible by 100 into pennies and nothing more, people trade Bitcoin in any size all the time. If you see a £6 jumper online and you want to buy it with Bitcoin, it doesn’t matter if the price of a single coin is £3 or £30,000 – you can send an amount equivalent to £6 at any moment.

What impact has Bitcoin had? 

Because of these benefits, Bitcoin has enabled new business models. New York City-based Dumbo Moving Company made headlines in December 2017 when it started accepting cryptocurrency for jobs. Working in an international city, the firm used to receive a lot of orders from clients wishing to pay with an overseas credit card.

Unlike credit cards susceptible to back orders and fraud, Bitcoin is a universal cryptocurrency that works the same for everyone in the world. It’s also similar to cash, in that exchanging the coin gives the recipient peace of mind that the transaction can’t be reversed.

A number of companies have started accepting Bitcoin as a form of payment. Microsoft accepts payments in its online store, while Wikipedia takes donations in the cryptocurrency. Small businesses on Etsy and Instagram have also been known to accept Bitcoin as a secure international payment method that doesn’t require any setup. Point-of-sale company Square has also rolled out support.

What are the disadvantages of Bitcoin? 

Bitcoin also faces some challenges, though. That miner solving complex maths problems is following what’s called “proof-of-work”, and it’s a process that’s attracted criticism for using too much power and rewarding people for setting up giant computing farms.

Researcher Alex de Vries found in December 2017 that Bitcoin used around 32.26 terawatt-hours of energy annually, more than Serbia. Other cryptocurrencies use methods like “proof-of-stake”, which incentivises people based on their stake in a network, but these methods raise other issues.

The cryptocurrency also struggles with speed. While a regular credit card network can process around 50,000 transactions per second globally, Bitcoin can only process around seven. Developers are looking at ways to speed this up, with one proposed solution called the Lightning Network potentially enabling billions of transfers per second.

While Bitcoin has dominated the cryptocurrency space for most of the last decade, it’s a diversifying market. More than half the market’s value is tied up in so-called “altcoins” like Ethereum, Ripple, Bitcoin Cash and Litecoin. These tout varying changes that make them ideal for different uses: Ethereum, for example, has good support for “smart contracts” that move money around automatically when certain conditions are met.

For now, though, Bitcoin’s widespread usage and market dominance make it ideal for exchanging cryptocurrency with the broadest number of people.

Liked this? Check out our guide to the best VPNs around