The Beginner's Guide to the Bitcoin Boom: What is Cryptocurrency?

The Beginner’s Guide to the Bitcoin Boom: What is Cryptocurrency?
November 2, 2017 Toohey Reid

Described as the money of the future, Bitcoin is a revolutionary new way of spending money over the internet. But, like anything that involves money, Bitcoin has its pros and its cons. We take a look at exactly what Bitcoin is and if it’s a viable investment option.

How did Bitcoin originate?

Bitcoin was created in 2009 as a response to the financial crisis of 2007/2008 by a 34 year old man called Satoshi Nakamoto from Japan. Whether Nakamoto is a real or fictitious person is still not known, but the sophisticated mathematical equations he published to launch bitcoin were something the technology community immediately picked up on.

What is Bitcoin?

Think of Bitcoin as being like digital currency (cryptocurrency) that has no physical representation i.e no notes and no coins. But its value is still determined by the currency market, like normal money. You can’t get out Bitcoins from an ATM like you would cash; it’s acquired from the internet and spent via an encrypted internet transaction. It’s kind of like digital gold as it has a fluctuating value, but unlike gold, it’s highly divisible up to eight decimal places.

A currency without devaluation, inflation and foreign fees.

An advantage of Bitcoin is that, unlike normal currencies, it operates with no central authority or banks; nobody owns or controls Bitcoin. So because it’s not issued by a central bank it’s immune from devaluations and inflation. It’s also very safe, with all transactions being recorded in the Blockchain via a peer-to-peer encrypted system. Unlike systems such as PayPal, Bitcoin transactions are harder to trace, and you can send money to anyone, anywhere in the world, without foreign currency fees.

So, what is it worth?

The first Bitcoin transaction was on 22 May 2010 when a guy in London ordered a pizza for a guy in the US using Bitcoin, it cost 10,000 Bitcoin at the time, equating to roughly USD$25 back then. From this moment on, Bitcoin started rising in value and now is firmly ensconced in the world’s financial terminology and on the global currency market. Today, the value of Bitcoin has risen considerably, the same pizza at today’s Bitcoin exchange rate of BTC1=AUD$3,384.12 would cost $33,841,212.99!

How do I get Bitcoin?

If you’re wondering how you use Bitcoin, it’s pretty simple. Bitcoins are kept in exchanges all over the world. Firstly, you download a Bitcoin Wallet onto your Smartphone, recommends using BreadWallet if starting out, and then you buy Bitcoins using a credit card or cash from an exchange (check out the best Bitcoin exchanges). Bitcoins are then transferred to your wallet from the exchange. As 1 Bitcoin these days is quite expensive, it’s possible to buy fractions of a Bitcoin depending on how much AUD you want to spend.

How do I spend Bitcoin?

Once you have Bitcoins (or fractions of Bitcoins) in your wallet you can spend it how you like. The catch is, the place where you spend them has to accept Bitcoins. Luckily, more and more retailers are cottoning on to the benefits of Bitcoin, one being that Bitcoins have smaller processing fees (unlike a credit card) and can’t be frozen so there are no issues with funds not going through. The amount of vendors accepting Bitcoin is growing all the time in Australia, Melbourne has the most at 52, with Sydney at 34 and Brisbane at 15.

Should I invest in Bitcoin?

You may have heard stories about a few people who bought small amounts of Bitcoin early on, forgot about it, then sold it later for exorbitant amounts. So is buying Bitcoin a good investment? Bitcoin makes a good investment if it fits the risk profile of your portfolio. To date, Bitcoin rates have been quite volatile (on 30 July this site had the 30 day volatility at 6.53%, for comparison gold is 1.2%), so if you’re more cautious then it might be beyond your consideration.

The risks in investing.

Some more fundamental risks of Bitcoin is that because it is global decentralised money i.e money whose value can’t be manipulated by a central authority, you don’t have the assurance of governmental backing if a country’s economy goes down the tubes. Hackers are also an issue that haven’t been fully resolved. But if you keep your Bitcoin in a wallet on a Smartphone or computer rather than storing it in an exchange, you can mitigate that risk. Overall, as an investment there is no guarantee that Bitcoin will make you a lot of money unless you buy and sell at the right rate, at the right time. But for digital payments that safeguard your identity and avoid foreign transaction fees, Bitcoin is fast becoming a convenient new option. Want to learn more about investing and financial strategies for growth? Chat to one of our expert accountants today!

General Advice Disclaimer

General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.