Bitcoin explained: What is it? Why has its price risen so much? Will it ever take over from traditional currencies?

Courtney Goldsmith
Follow Courtney
Utah Software Engineer Mints Physical Bitcoins
Bitcoin is the world's first digital currency (Source: Getty)

Bitcoin has rocked headlines this year as its price jumped more than 100 per cent to reach all-time highs of over $3,000 - but what actually is it?

As the cryptocurrency breaks into the mainstream market, we take you back to basics.

What is bitcoin and where did it come from?

Bitcoin is a digital currency, or cryptocurrency, which is created and held electronically. It became the first decentralised digital currency in 2009 thanks to an unknown software developer (or potentially a group of programmers) under the name of Satoshi Nakamoto. It runs on blockchain technology, which acts as a public ledger, permanently recording every bitcoin transaction.

How do I use it?

Bitcoin can be used to buy things electronically just like pounds or euros, but there are still relatively few merchants who accept bitcoin payment. Accessing bitcoin can be another hurdle as the process is not consumer friendly and banks in the UK are particularly suspicious of serving bitcoin companies. Traditionally, people go to a cryptocurrency exchange to download a bitcoin wallet, however, new services like bitcoin ATMs and bitcoin debit cards are starting to pop up to make the process easier.

Why did the price rise so much recently?

Bitcoin is still riding on a high from back in April when Japan made a landmark decision to legalise it as an official method of payment. This was a major step in pushing bitcoin away from the fringes of society and towards the mainstream. Asia is the key driver of the cryptocurrency boom, but Europe is not far behind. Adam Davies, a consultant at Altus, said deep analysis of the blockchain shows a clear up-take of bitcoin as an investment vehicle in Europe, particularly in the UK. More and more countries are getting regulators to look at bitcoin and investing in blockchain, which legitimises the cryptocurrency.

Read more: This analyst thinks bitcoin could hit $10,000

Is this expected to last?

This depends on who you ask. Generally speaking, bitcoin analysts say growth will continue as awareness of the digital currency spreads. However, it is still a highly volatile, high risk asset. Mati Greenspan, senior market analyst at eToro said bitcoin “could easily crash to $100 a coin or easily surge to $10,000 a coin or go anywhere in between”.

Davies has some solid predictions for the cryptocurrency. He expects a sudden drop of about 20 to 40 per cent in the fourth quarter followed by a quick recovery. He then sees bitcoin reaching between $5,000 and $7,000 in mid-2018 and breaking the $10,000 barrier by 2019. Analysts say the price is a function of the extent to which people think its technology will be useful in the future, but they have mixed opinions about when bitcoin’s volatility will even out, ranging from the next few years to no time soon.

Does the UK have a position on bitcoin?

While the UK is certainly an earlier adopter of bitcoin and interest is rising, cryptocurrencies are yet to catch on like they have in Japan. UK regulators have been quiet on bitcoin, but analysts say that’s because the market is still so small here. Recently, bitcoin got some bad press after it was used as a way to collect money in a global ransomware attack.

What other cryptocurrencies are doing well?

Ethereum’s ether is the second most popular cryptocurrency, and it has recently seen huge growth as well. However, where bitcoin uses blockchain technology to take the currency out of one person's control, ethereum is a way to decentralise servers, or internet third parties. Its aim is to be a “world computer”. Without getting into the nitty gritty, ether tokens are used as a form of money to fuel ethereum.

Will cryptocurrencies ever take over from more traditional payment methods?

Davies predicts cryptocurrencies will take over from cash one day, but they might look a little different. He compared digital currencies to other technologies like the internet and email that started out as fringe ideas before becoming widely adopted. Davies said we could be about five years away from bitcoin becoming mainstream enough to be used alongside physical currencies.

Read more: As the bitcoin rally continues, are we witnessing a bubble?

Related articles