An idiot’s guide to Bitcoin – should you buy and will it make you rich?

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This week Bitcoin mania gripped the world as its price hit astronomical levels but to many people the digital currency remains a mystery.

Some investors as well as leading financial analysts have warned about an imminent Bitcoin bubble, while those investors who got in on Bitcoin early are already reporting incredible returns.

But what is Bitcoin, should you invest and can it make you rich?

We take a look at the world’s most popular cryptocurrency

What is Bitcoin?

Launched in 2009, Bitcoin was the first and remains the most popular of what are known as cryptocurrencies.

These are forms of digital currency that are not tied to any bank, financial institution or government.

Bitcoins are essentially unique lines of computer code which can be exchanged for goods or services.

Much like cash, it lets users send and receive money anonymously and like other online payment platforms is done so over the internet.

Due to the anonymity Bitcoin affords users, the currency has become popular with libertarians, tech enthusiasts, speculators and also criminals.

How was Bitcoin created?

Bitcoin was created by a mystery developer who goes by the pseudonym of Satoshi Nakamoto.

No one, or at least very few people, know who Nakamoto really is.

Last year, Australian Craig Wright told the BBC that he was the creator of Bitcoin, although he later denied the claims.

More recently online rumours circulated online that Tesla founder Elon Musk was Nakamoto, although he also denied the claims.

How does Bitcoin work?

When Nakamoto created Bitcoin he described the digital currency as a “peer to peer version of electronic cash”.

He said that it would allow “online payments to be sent directly from one party to another without going through a financial institution”.

He added that Bitcoin is a bank free currency that uses a technology called “blockchain” to record transactions.

Explaining how Bitcoin works Nakamoto said it uses “cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party’.

Payments are recorded onto the blockchain by users, known as miners, who offer their computer power

In return, these miners are given newly created bitcoins in a process which is known as mining.

How to buy Bitcoin?

The most common way to buy Bitcoin is through an exchange that will exchange Bitcoins for regular currency.

You can also buy them direct from individuals or accept them as payment for goods or services or at a Bitcoin ATM, where cash can be deposited for Bitcoins.

To buy and sell Bitcoins you’ll need a Bitcoin wallet to store your digital currency. Wallets can be used on a computer or a smartphone and can be stored securely online.

What determines the value of Bitcoin?

Like anything the value of Bitcoin is essentially determined by supply and demand.

New Bitcoins are created at a rate of around 25 new coins every 10 minutes. But the amount of Bitcoins will eventually dry up as they have been designed to ensure that no more than 21 million are created. Currently there are around 16 million Bitcoins in use.

As Bitcoin goes more mainstream expect their value to increase further still as people rush to buy the remaining Bitcoins.

Should you buy Bitcoin?

If you’re thinking of buying Bitcoin or any other digital currency, as with any investment you should do your research and only invest what you can afford to lose.

Many so called financial experts have warned that Bitcoin is nothing but a craze and bubble about to burst.

While it has been heralded as the future of finance by others, particularly by those who have already made a fortune through trading Bitcoin.

The truth is that no one knows for sure what will happen to Bitcoin long term.

Bitcoin is notorious for being particularly volatile and its price can shoot up and then plummet very quickly.

But no more and more financial institutions are getting on board with Bitcoin and even the popular listings site Craigslist recently added the option to pay in Bitcoin. Amazon has been long rumoured to add a Bitcoin payment option – and if/when it does, expect its value to sky rocket.

Away from the actually investing in Bitcoin the other risk to users from hackers.

Investors and even whole exchange are frequently targeted by hackers who steal the wallets of the digital cash online.

Recently a crypto-currency exchange in Slovenia was targeted by hackers who stole tens of millions of dollars worth of Bitcoin.

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