Bitcoin: what is it and how does it work?

Computer geeks created it. The banks have nothing to do with it. And if you mine it right big windfalls are possible. But what is virtual currency Bitcoin? And how do you use it? AAT Comment  cashes in

News this week that Kristoffer Koch had an unexpected windfall of $850,000 from a $22 investment in the virtual currency Bitcoin four years ago caused a stir.

Not that the 29-year-old Norwegian is too worried: he’s been able to buy an upmarket flat in Oslo by selling one fifth of his windfall. Meanwhile over in Vancouver, a Bitcoin ATM has been unveiled in a coffee shop.

But what is the online currency that everyone is talking about? And how do you use it the way Kristoffer Koch did?

What is Bitcoin?

How Bitcoins work (click to enlarge)

How Bitcoins work

The history of Bitcoin

November 2008
An online message from a shadowy figure calling himself Satoshi Nakamoto outlines the principles of a new digital currency, liberated from the oversight of government and banks. Despite assorted unproved theories, Nakamoto’s identity remains a mystery to this day.

January 2009
Nakamoto mines the first 50 Bitcoins, dubbed the Genesis Block. The first Bitcoin software is unveiled six days later.

May 2010
Laszlo Hanyecz, a programmer living in Florida, conducts the first real-world Bitcoin transaction, spending 10,000 Bitcoins on a delivery pizza. Today, spending the same number of Bitcoins would make your pizza worth £750,000.

August 2010
A cunning geek manages to spot a bug in the Bitcoin protocol and generates more than 184 billion Bitcoins in a single transaction. The coins are cancelled and the bug quickly fixed.

March 2011
Bitcoin (now called Intersango), the first UK exchange allowing the conversion of Bitcoins to pounds sterling, opens.

June 2011
Renegade transparency campaigning group Wikileaks begins to accept Bitcoin, along with a growing number of other organisations.

March 2013
The US Financial Crimes Enforcement Network issues guidance clarifying that anyone mining Bitcoins or exchanging them for real currencies is covered by money-laundering and other regulatory requirements.

April 2013
After two weeks of steady rises, Bitcoin reaches a peak value of $266 before crashing back down to $60. Since then, its value has risen again, veering between $70 and $130.

July 2013
The US Securities and Exchange Commission charges a Texas man with running a fraudulent Ponzi scheme after raising more than 700,000 Bitcoins in 2011 and 2012 through an investment scheme.

July 2013
Thailand’s central bank turns down an application to license a Bitcoin exchange in the country, leading to fears that the Chinese may follow suit.

How to use Bitcoins (click to enlarge)

How to use Bitcoins

More information on setting up a Bitcoin wallet can be found on the official website.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.