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Bitcoin: Know the risks before you buy
'Bitcoin is right now the riskiest investment you can make.' Here are the risks you should consider before you buy.

5 Feb 2018
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Bitcoin risks
As bitcoin hit a record high of $19,000 a coin in December, the cofounder of the Bitcoin.com website warned that bitcoin was "the riskiest investment you can make".

Here are some of the things you should consider before you jump on board.

What is bitcoin?
A cryptocurrency is a digital form of money that you can use to pay for some transactions online. Bitcoin is the most popular of the so-called "cryptocurrencies".

As with "real" currencies (like the US dollar), you can own one, 10, or millions of bitcoins. Unlike real currencies, cryptocurrencies only exist online and are not backed by any government or central bank.

Cryptocurrencies depend on complex computer software to verify, validate and secure transactions between people exchanging this virtual money online.

Created in 2009. The software running bitcoin was first released in 2009, together with the website Bitcoin.org, by a programmer self-identified as Satoshi Nakamoto. He announced bitcoin as "a Peer-to-Peer Electronic Cash System".

Taxes. In the US, the government tax collection agency (IRS) defines virtual currencies, including bitcoin, as taxable property (not as a currency). Belarus, by contrast, acknowledges bitcoin as a legal currency in the country and offers cryptocurrency companies a tax break.

How does it work?
Blockchain: The financial system to validate bitcoin transactions is known as the blockchain, and depends on a decentralised network of computers connected over the internet.

Like peer-to-peer (P2P) networks where unidentified people upload and download music and films, the blockchain depends on a growing community of people and institutions online.

Those peers run bitcoin software to verify bitcoin transactions, independent of any bank or treasury.

Every time people exchange bitcoin online, the whole network gets updated with the new information, creating new "blocks", i.e. long chains of data for computers to solve.

Mining farms: As with printing new bank notes, new bitcoins are created by solving "blocks" of mathematical equations that are created each time bitcoins are exchanged online.

Bitcoin software can crunch all those equations automatically, but it requires a lot of computing power to do so. For this, large data centres known as "mining farms", have been set up, with many of the largest farms located in Russia and China.
Blockchain.info counts 16m bitcoins in circulation, while there can only be up to 21m bitcoins. This limit is set in the Bitcoin algorithm.