Bitcoin: Know the risks before you buy

Even though Bitcoin hit a record high of about $19,200 for each coin on December 17, the cofounder of the Bitcoin.com website said that "Bitcoin is right now the riskiest investment you can make ... as soon as people realise how it works, they will start to sell".

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

What is Bitcoin?
Cryptocurrency: Bitcoin is a digital form of money that you can use to pay for some transactions online. It 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.

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".

Regulation. In March 2014, the IRS, the US government agency responsible for tax collection, stated that all virtual currencies, including Bitcoins, would be taxed as property rather than currency.

South Korea is reportedly also looking to tax the money made from trading in cryptocurrencies. The government will also ban minors from opening accounts on virtual coin exchanges, and propose a bill to allow only eligible exchanges to operate.

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 the Bitcoin software to verify Bitcoin transactions, independent of any bank or treasury.

Every time people exchange Bitcoins 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: Like printing new bank notes, new Bitcoins are created by solving "blocks" of mathematical equations that are created each time Bitcoins are exchanged online.

Even though the Bitcoin software can crunch all those equations automatically, it requires a lot of computing power to do so.

This automatic process is known as "mining" and requires a lot of computing power. For this, large data centres, known as "mining farms", have been set up. Many of the largest farms are located in Russia and China.

Blockchain.info counts 16 million Bitcoins in circulation, while there can only be up to 21 million Bitcoins. This limit is set in the Bitcoin algorithm.

Where can you buy it?
Costs more than gold. At December's peak rates, one Bitcoin costs as much as $18,000. For this much, you could also buy 300 grams of gold, at current rates.

In 2010, you could buy one Bitcoin for less than $0.10. Back then, it would take 10,000 Bitcoins to buy two pizzas.

Bitcoin exchanges. Bitcoins can be purchased, or sold, through exchange operators dedicated to cryptocurrencies, as well as traditional operators such as Chicago-based CME and Switzerland-based Swissquote, among others.

In those public exchanges, Bitcoin is traded under the XBT and BTC symbols. BCH stands for Bitcoin Cash, which is a "hard fork", or a new variation, of the original Bitcoin algorithm.

CME's Bitcoin Reference Rate (BCC) is a spot price index used by CME, and is based on the daily Bitcoin price on specialised exchanges such as Bitstamp, GDAX, itBit and Kraken.