Mao Lal | Bitcoin: What is it, where can you use it and is it worth investing?

Bitcoin is a digital currency created in 2009 by a mysterious figure using the alias Satoshi Nakamoto. It can be used to buy or sell items from people and companies that accept bitcoin as payment, but it differs in several key ways from traditional currencies.

Bitcoin has no central bank and isn’t linked to or regulated by any state. The supply of the cryptocurrency is decentralized – it can only be increased by a process known as “mining”. For each bitcoin transaction, a computer owned by a bitcoin “miner” must solve a difficult mathematical problem. The miner then receives a fraction of a bitcoin as a reward.

Why is bitcoin’s value soaring?

Like all assets or currencies, bitcoin's price is determined by the amount that people are willing to pay for it. Whether that is the “right” valuation, and whether bitcoin is truly worth that amount or not, is largely down to opinion.

JPMorgan boss Jamie Dimon recently labeled bitcoin a fraud and said its astronomic rise in value is a text-book financial bubble comparable to the Dutch “tulip mania” of the 17th century, which saw speculators push up the price of one bulb to ten times the annual salary of a skilled worker – before quickly losing almost all of that value.

Where can you spend Bitcoin?

The number of companies accepting bitcoin payments has increased over the last few years. Microsoft and travel website Expedia both take bitcoin, and Icelandic singer Bjork is also accepting bitcoin payments for her latest album. Retailers in Japan can now accept bitcoin payments thanks to a new law passed last year, and small businesses can accept bitcoin payments through simple plugins that add to WordPress websites.

The currency has also found favor in countries experiencing political turmoil like Zimbabwe and Venezuela.

What is Bitcoin's connection to the dark web?

Bitcoin has a reputation for being used by criminals, particularly people selling drugs on the dark web. On marketplaces such as the now-defunct Silk Road and its more modern imitators, cryptocurrencies such as bitcoin have been the only method of payment, largely because they are theoretically untraceable.

Transactions can be tracked, giving a higher level of security than handing over money to the average street dealer, but identities (generally) can’t. Bitcoin is still used to buy drugs online, but its use has spread far beyond that.

Could bitcoin’s rapid rise be a bubble?

Hundreds of articles speculating on how high bitcoin could go now seem to be published each week. Hedge fund manager Mike Novogratz told CNBC it could quadruple to $40,000 by the end of 2018. A piece on the investing website Motley Fool in May questioned whether it could go to $1m.

But according to Rauchs, the current frenzy is bitcoin’s fifth bubble. “After all of the previous four it crashed and remained low for some time before bouncing back,” he says.

“It has been going crazy... and that is not backed by any fundamentals. It’s really a self-fulfilling prophecy, driven by fear of missing out.”

This is partly down to the economic environment, Rauchs says. “We’ve had low or even negative interest rates for some time and stock and bond markets are already at all-time highs, while bitcoin is giving these incredible returns.”