Fiona Batchelor explains what Bitcoin really is and considers whether its bubble might be about to burst
In the last few months, the value of Bitcoin has been dramatically fluctuating. Recently, the world has turned it’s attention to the significant decline in its price.
Plummeting from a value of approximately £15,000 in November to less than £5000 at the time of writing this article, economists and governments worldwide have expressed concern over the possible implications of the situation.
So what exactly is this ‘cryptocurrency’ that has been a common occurrence in recent headlines? How does it work, and is it worth the hype?
Bitcoin is one of many ‘cryptocurrencies’, a currency which relies on the blockchain. The best way to imagine a blockchain is a continuous sequence of blocks, lined up one after the other.
It is a distributed database, meaning sections of the chain are split between all those who are part of the database. These figures, each containing a part of the blockchain, are the Bitcoin miners.
Each block contains information regarding a transaction that has been made with Bitcoin: who the payment is for, who is receiving it, and what the value is. This you can imagine as being in the centre of the block.
At the top and bottom of the block is an encrypted code, a hash. An example of a hash is ‘4de1288a19eb872ff87eef6a7cba96f6’, generated using an algorithm.
The hash at the bottom of the block has to match the hash at the top of the previous one, and so on and so forth. This means the order of the blocks is essential and impossible to forge or alter.
The evidence that this transaction occurred will exist in the blockchain forever, and if you tried to remove it, the hashes would no longer match up.
When someone wants to make a new transaction using Bitcoin, a new block of information is created, which goes to the top of the blockchain.
In order to verify it as a genuine transaction, it needs to have the correct series of hashes from the new block all the way to the start of the chain. The computing power required to check this information is enormous.
Thousands of transactions are made per day, and over time millions of blocks have been generated.
The people who verify the new transactions, allowing the new block to join the chain, are Bitcoin miners. The miners are part of the blockchain database, and use highly powerful computers to prove that the new information is genuine.
When they successfully ‘solve’ a block, it is added to the chain forever, and they receive a reward in Bitcoin (approximately 12.5 Bitcoin, for which the value can vary).
The miners can have a huge income depending on how much computing power they dedicate to mine Bitcoin.
Miners can become millionaires by verifying new blocks, and numerous companies have emerged that allow this on an industrial scale, generating vast amounts of Bitcoin.
So miners can make a lot of money from Bitcoin, but why is this such a popular technology to use amongst the public?
One reason is the irremovable evidence that a transaction has taken place. In terms of security, it’s easy to see how this is desirable. It’s impossible to argue that you haven’t been paid, or that you’ve been given an incorrect amount.
Because the encrypted hashes require verification, it prevents people from falsifying payments or manipulating the amount of currency involved.
However, for some of the same reasons that make it so secure, Bitcoin is infamously associated with criminals. It is hugely appealing to those who would prefer their exchange of money to go under the radar.
A large proportion of Bitcoin users are those conducting illegal activity. Though there is indisputable evidence of their transaction, there are no names involved, and no reference for the transactions; only an ID of the Bitcoin ‘wallet’.
While concern about the Bitcoin bubble bursting is rife, it is still worth a lot of money. This increased worth is in part due to the fact Bitcoin is the first cryptocurrency of its kind, and the hype and publicity surrounding it have added to its value.
But the recent dramatic fluctuations shows its instability and could perhaps show Bitcoin may well just be a fad.
Other cryptocurrencies, such as Ethereum, have genuine value and possible important uses. Ethereum blocks store contracts, rather than transactions.
Rather than being exploited for secretive criminal exchanges, this could have worthwhile applications in insurance, mortgages, and healthcare. For example, in medical research, to enable verification and sharing of patient data while protecting identity.
Although the value of Bitcoin seems ever-changing, it is only a starting point. As cryptocurrency evolves, it is not unlikely that its popularity continues to rise. In the future, this is might be how all our transactions occur.