• What is bitcoin, and why is it suddenly worth so much?



    If you’ve heard about bitcoin lately, chances are it is because on May 24, this form of currency hit an all-time trading high of $2,791.69 to one. This meant that anyone sitting on an amount of bitcoin must have either had a sudden windfall of a few thousand dollars or had even become a dollar billionaire.

    Now, before anyone scrambles to buy this bitcoin, or attempts to mine it themselves, it would help to understand what it is, and why it is suddenly worth as much as it is.

    Most people might have heard about it before, usually in a film or a TV show, where a titular villain might have used the bitcoin to execute an untraceable, anonymous transaction. There is some truth to that. Bitcoin has been used to pay for transactions on the dark web and was recently abused by hackers using a ransomware named “WannaCry” to facilitate untraceable transactions, though it is considered a somewhat legitimate currency.

    What is it?

    By definition, bitcoin is a cryptocurrency, a medium of exchange that uses cryptography to secure the transaction and control its creation. It is considered the largest decentralized alternative currency around, and therefore, has no innate legal framework. Because of this, its value is dictated entirely by the market.

    There are several ways you can get this digital currency. One is to buy it, another is to “mine” it. “Mining” bitcoins essentially involves using a dedicated computer in order to process transactions, the very heart of the bitcoin network. The “blockchain” database of transaction from which bitcoins are mined are also very hard to tamper with, ensuring security from unwanted access.

    The bitcoins acquired – whether through purchase or mining – are stored in a digital wallet, which can be saved on hard drives, phones, or via online servers.

    It’s a bit of a misnomer because the wallets don’t actually store the bitcoin, they store the digital credentials for bitcoin assets, and allows whoever holds them to access or spend it. Like an ordinary wallet, if you lose the storage system the information is hosted on, it’s gone for good.

    Is it legal?

    The short answer is “yes.” Bitcoin is a legal form of payment and currency, but it varies, or it changes, depending on the country. In the Philippines, the Bangko Sentral ng Pilipinas (BSP) issued a statement in 2014 regarding the risks of bitcoin trade, and as of BSP Circular 944 issued in February 2017, virtual currencies and their exchanges are legal and regulated by the agency.

    What fiction tends to embellish is that bitcoin is completely anonymous. Owing to the peer-to-peer nature of every transaction that goes through the bitcoin network, every transaction is public and while people won’t necessarily know who owns a wallet, they will know what’s in it.

    As it is, there are countries that do not consider the use of bitcoin as legal, more so because of their strict laws on money laundering, such as Bangladesh.

    Why is it suddenly worth so much?

    In spite of the problems that tend to be associated with the use of bitcoin, the larger rally it enjoyed in the market this year was due to the fact that it’s gotten noticed by larger investment companies. Another factor is the virtual currency act in Japan, which legalizes the use of cryptocurrency like bitcoin to pay for goods and services. Other bitcoin alternatives such as Ripple and Ethereum have seen similar spikes in value recently and increased its value by more than 28 (!!!) times since the beginning of this year.

    One of the reasons for the volatility in pricing seen in bitcoin is because of the lack of scaling, meaning that there was originally no way to increase bitcoin capacity in the market, something that was put in place by bitcoin’s original creator/creators.

    Cryptocurrency companies and major players in the bitcoin mining community recently came up with a solution to this, signing a solution that would “hard fork” the currency, creating a standard for it and stabilizing the trading.

    However, bitcoin remains well out of reach for mainstream adoption. According to a Forbes report, part of the surge is because more people are using the cryptocurrency in spite of the wild swings in prices for it. As an example, anyone who had bought the bitcoin at P4,600 in 2010 could be sitting on upward of P3 billion in 2017. The report goes on to state that while economies that see highs and lows of that nature are not stable, bitcoin has an advantage in that almost nobody has all their assets in it.

    Final thoughts

    Further regulation can eventually make bitcoin and other cryptocurrencies viable forms of investment. Most investors’ option at the moment is to buy, rather than to mine bitcoin, as mining takes too long for returns to develop and mining difficulty increases over time.

    For now, bitcoin is still a wilder aspect of international finance, but remains something that should be observed by business owners and investors alike.

    Miggy Castañeda writes about personal finance for MoneyMax.ph, a financial comparison website aiming to help Filipinos save money through diligent comparisons of financial products.


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