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

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Bitcoin had an incredible 2017 after increasing in value more 20 times from below $1,000 dollars to a peak of just under $20,000.

Such phenomenal returns have caused many to ask how they can get in on the action while others suggest it’s a dangerous bubble waiting to burst.

So what exactly is bitcoin and why is it attracting so much attention?

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.

Most obviously, bitcoin doesn’t exist as a physical currency. There are no actual coins or notes. It exists only online.

“Real-world” currencies, like the dollar, are managed by a central bank such as the US Federal Reserve or the Bank of England, which manages the money supply to keep prices steady. They can print more money or withdraw some from circulation if they think it’s needed, as well as using other monetary policy controls such as adjusting interest rates.

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.

A record of each transaction, using anonymized strings of numbers to identify it, is stored on a huge public ledger known as a blockchain. This acts to ensure the integrity of the currency.

“The system can act as a payment network that has no downtime, it’s operating 24/7, it doesn’t care where and to whom you send money,” says Michael Rauchs, a cryptocurrency and blockchain expert at the Judge Business School at the University of Cambridge.

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.

Speculation has fuelled bitcoin’s rapid ascent in recent weeks, Rauchs says, but there have been signs that the cryptocurrency is moving from the fringes of the internet to the mainstream. He points to more than 100 hedge funds specializing in cryptocurrencies that have started recently, triggering the current price surge.

CME Group, which owns the Chicago Mercantile Exchange, where trillions of dollars of derivatives contracts for global commodities are traded each year, now offers bitcoin futures. Some analysts say this is a sign that bigger financial players are now ready to enter the market.