Bitcoin. Depending on who you listen to, it's set to totally disrupt the world's financial markets, or it's a pyramid scheme waiting to take us all down. Either way, it's hard to go past the eye-watering returns it's produced over the last 12 months – we all know someone who's now swimming in a tub of early-investor bitcoin-driven cash, right?
But if you're thinking about throwing your hard-earned money into the bitcoin void, it's smart to know a bit about where it's going. Here are five things you need to know about this world-changing – and hugely volatile – cryptocurrency.
1. It's been a wild ride
Once upon a time, bitcoin was something that nerds talked about – until it wasn't. Its meteoric rise over the last 12 months has made it a daily conversation staple, even among people who normally spend their time bitching about the price of Sydney real estate instead. Here's what happened: In December 2016, bitcoin was trading at around $900. A year later, it hit a peak of nearly $20,000. Great news, right? Fast forward to January 2018, only a month after its record highs, and bitcoin bottomed out, dropping to below $10,000. While it's recovered somewhat (today, it's trading at about $14,000), the currency's peaks and troughs have always been volatile, based partly on its finite supply (there will only ever be 21 million bitcoins released) – but that seems to be part of the appeal.
2. Bitcoin's the icing, blockchain's the cake
If you're going to invest in bitcoin, you should probably know a little bit about blockchain, the technology that underpins bitcoin. Essentially, blockchain is a digital ledger that records bitcoin transactions via a decentralised computer network. When a bitcoin transaction is made, blockchain provides a report to the network about the results, adding the new block of encrypted, verified data to the existing chain of information contained within the ledger (clear as mud? Read this beginner's guide to blockchain). The lure of blockchain is that it's been designed to be incorruptible – information can't be removed or erased from the chain after it's added, and blockchain has a built-in consensus protocol that basically prevents dodgy bastards from coming in and hacking the system. In short, it solves problems of trust, reputation and transparency – three key areas of risk when it comes to online transactions. What's more, blockchain can do much more than just verify bitcoin transactions – in future, it has the potential to deliver smart contracts, prevent voter fraud, issue passports and record land registries, to name a few.
3. An environmental nightmare
Despite being a virtual currency, bitcoin is having a huge impact on the real-world environment thanks to bitcoin 'mining', or the process of acquiring bitcoin without purchasing it online. Because bitcoin is a deregulated currency, it's not tied to any particular financial system or bank. Instead, bitcoin miners use specialised software to audit previous bitcoin transactions, receiving bitcoins in exchange for their work. The problem is, this process uses huge amounts of energy – far, far more than the processing of more traditional payment transactions – and its energy needs are only going to increase. The good news? The green revolution is right around the corner – a range of alt coins that have been designed to be kinder to the environment are already in circulation (think EverGreenCoin, Solar Coin and EcoBit), with more set to come.
4. Bitcoin is just the tip of the iceberg.
It was the first to make a big splash, and its crazy gains have made it the most high profile of the bunch, but bitcoin is just one of more than 1500 cryptocurrencies on the market right now. You've probably heard of some of the big ones – Ethereum, Ripple, Litecoin, to name a few – and the cool thing is, all of these cryptocurrencies have different purposes and functions. While Bitcoin can be used for financial transactions, Ethereum can be used to execute smart contracts, while Ripple (XRP) acts as a common currency, reducing the conversion fees involved in transferring money from one location to another. So, before you pour your life savings into the crypto market, do some research and find out more about what you're investing in, and its potential for application.
5. Bitcoin will make you rich. Or it won't.
If the frenzy around cryptocurrency has taught us anything, it's that very few people are really immune to a good get-rich-quick opportunity. But, while bitcoin has been a kingmaker, its future – and that of all cryptocurrencies – remains uncertain. Some commentators believe that the recent market crash is a sign that cryptocurrencies are over before they've even begun (Warren Buffett, everyone's favourite billionaire, told CNBC that he believes, "almost with certainty, that they will come to a bad ending"), while others (like the Winklevoss twins, whose $11 million investment in bitcoin made them temporary billionaires) are playing the long game. The conclusion? Nobody really knows where bitcoin's going, or how it's going to end, so caveat emptor and all that.
Get ready for the future. Explore the world of blockchain with a free online course from UTS Open.