A panic sell-offs have caused the value of the virtual currency Bitcoin to crash a few times in recent years. E.g. in April 2013, the value of Bitcoin dropped by over 50% from its high of £169.00 to just £84.00 in just a few hours. Today, as we know bitcoind is valued in the £000s.
What is a Bitcoin?
It is a virtual currency launched in 2009 by a computer whizz kid known as Satoshi Nakamoto. Not much is known about the developer.
Bitcoins are created when a complex maths solution or problem is solved to create a unique string of code, creating virtual value. Sound bizarre, sound high risk? Of course it is.
It is a 'blockchain' technology where each 'bitcoin' is a totally unique string of code. This unique code is stored in a public register or repository accessible by all but each 'coin' can only be accessed with the right encryption key to unlock it. This makes it unique and allows users to verify transactions or sendf messages or even money in a secure, unique way - this is where the value comes in as there is a limited supply of crypto currency given the computing power required to fund more unique strings of code. That said, when computers get more powerful, more crypto currency will be produced.
But is a virtual currency that bizarre? What is the pound or the dollar?
What is your pound other than a piece of paper? A promise by the Bank of England to pay the bearer on demand one pound.
A pound of what?
The origins of the pound are thought to be from Anglo Saxon England, where small silver coins known as 'sterlings' were used to be exchanged i.e. buying goods and services.
There were, it is thought, 240 silver pennies 'sterlings' that weighed one pound in weight.
Do you remember the old UK currency, 12 pennies make a shilling, 20 shillings make a pound. The maths are there, 12 x 20 = 240 pennies make a pound. 240 silver sterling pennies weigh a pound.
In theory, you should be able to walk into the Bank of England, present them with your £10.00 note and ask for its weight that is promised to you by the Bank of England in 10 pounds of silver.
The reality is we do not have enough silver or gold to be able to do this.
The £ is therefore a virtual currency as is the $, € and ¥.
It is the reason when there are periods of economic instability, as we have seen over the last few years, that direct ownership of precious metals such as Gold and Silver increase as all our virtual currencies are at risk.
Bitcoin is no different to all our main ‘virtual currencies’ it is just not backed by sovereign banks. Investment growth and returns can be made with Bitcoin, but volatility in prices at over 50% rises and falls in just a few days, which has occurred regularly, leaves us to categorise Bitcoin as a high risk investment.