A Bitcoin wave has been sweeping the world and the waves have reached Malaysian shores.  Bitcoin is a cryptocurrency. So what is a cryptocurrency and why has Bitcoin become so popular?

A cryptocurrency is a decentralized, peer-to-peer digital currency, backed up with cryptography. As of now, the products and services that you can buy with a Bitcoin are pretty limited, but the options continue to grow. More companies are starting to accept Bitcoin payments and more people are starting to invest in the Bitcoin currency. This is despite the fact that many Central Banks have warned of the risks associated with Bitcoin.

Buying Bitcoin now might seem like a hasty decision to make, considering its current price and its volatility. But that has not stopped some Malaysian residents from buying and selling Bitcoins. Here’s what you should know about Bitcoin.

Some Background about Bitcoin

Bitcoin was created by a person or a group known as Satoshi Nakamoto, which is actually just a Japanese pseudonym. The real identify of the creator(s) behind Bitcoin is unknown. The Bitcoin open-source software was first introduced in 2009.

Bitcoin is a completely virtual currency; this means there are no physical notes, and there might never be. The lowest Bitcoin unit of measurement is called a Satoshi, which equals 0.00000001 (one hundred millionth of a) Bitcoin.  Also, there is a limit to how many Bitcoins can ever be in supply, which is 21 million Bitcoins.

Every Bitcoin has an address with a matching secret number, known as a private key. The private key is a series of 51 alphanumeric characters, beginning with the number “5”.  You use these private keys to spend Bitcoins. This means your personal identity is not directly associated with your Bitcoins. This has advantages and disadvantages, which are discussed further below.

Note that central banks around the world have said that they will not regulate the cryptocurrency; in short, the central banks should not be blamed if anything goes wrong with Bitcoin, such as a crash in the prices. That being said, the central banks have also not out-rightly rejected Bitcoin, nor have they made it illegal, which indicates that they are keeping their options open.

Advantages of Bitcoin

In some respects, the Bitcoin cryptocurrency has a high degree of safety due to a complex peer-to-peer system in which all transactions are publicly accounted. This is validated through a public ledger (known as block chain) where every transaction is recorded. This means anyone can see the transactions and balance of a Bitcoin address.

Since your identity is not associated with a Bitcoin, you do not have to worry about any identity theft occurring when making online transactions. You simply use your private key to spend a Bitcoin.

There is also a lot of freedom in regards to how you can control your Bitcoins. You can transfer Bitcoins to anywhere in the world, anytime you want.  It is not restricted by holidays, national borders, or other limits. Additionally, there is typically either zero cost or very little cost associated with Bitcoin transactions.

Lastly, Bitcoin is decentralized. This means there is no single authority who can control or manipulate the Bitcoin protocol. The Bitcoin money supply is transparent for everyone to see and monitor.

Disadvantages of Bitcoin

The negative side with Bitcoin not being tied to your identify is in the event of someone stealing your Bitcoins. As mentioned, every Bitcoin has an address with a matching secret number, known as a private key, which is how you spend Bitcoins. So, if people know your private key, they can then spend your Bitcoin.

Furthermore, since the cryptocurrency is internet based, it is possible that hackers will find loopholes in the system and steal Bitcoins or operate ‘pump and dump’ schemes, like what happens in the stock markets. After all, Bitcion is unregulated and it is not backed by any assets, except what people are paying to buy it.

One thing that is clear right now is that the price of Bitcoin is highly volatile, and its future seems very difficult to predict. So, you should be very cautious if you choose to invest in Bitcoin.

Historical Price Chart of Bitcoin

As you can see in the chart below, the price of Bitcoin has increased dramatically over the course of the year. In January 2013, Bitcoin was priced at around US$ 20 and within 12 months it surpassed a price of $US 1,000. Remember that the future of Bitcoin is widely debated though: Some say Bitcoin will utterly fail and other says the price will continue to increase dramatically, as it becomes more widely accepted. Ultimately, most agree Bitcoin remains a very risky investment.

Bitcoin Closing Price Chart Source: BitCoin Charts

Bitcoin in Malaysia

Recently, the central bank of Malaysia, Bank Negara Malaysia, joined other central banks around the world by releasing a statement on the use of Bitcoin. The statement said that Malaysia’s central bank does not recognize Bitcoin as legal tender and will not regulate the operation of the cryptocurrency. It cautioned the public about the risks associated with using the digital currency.

But many Bitcoin groups in Malaysia are dismissive of the central bank’s warnings. Colbert Lau, BitcoinMalaysia.com founder, said that the warning has not changed anything. He said that the effect was meager and Bitcoin trades are still going strong. He also said that the demand for Bitcoin mining hardware in Malaysia has not diminished either. This brings us to our next question, ‘how can you get a Bitcoin?’

Update (25 March 2014): The first bitcoin automatic vending machines were launched in Malaysia in March 2014. They are located in Bangsar Shopping Centre in Kuala Lumpur and Gurney Plaza in Penang.

How to Acquire Bitcoin

You can acquire Bitcoins through the following means:

• Bitcoin exchanges, like Coinbase.com (only available to those with American Bank accounts)
• Selling services or products for Bitcoins
• Mining; the process of creating Bitcoins through a special software known as a Bitcoin Miner

The Bitcoin protocol allows for a certain amount of Bitcoins to be gradually produced (i.e. ‘mined’) until 21 million Bitcoins are in total supply. Mining involves solving complex mathematical problems. Currently, when a ‘mining’ problem is solved, you will be issued 25 Bitcoins, quite a sum considering the current rate of exchange.  As more and more people start using Bitcoins the difficulty of the questions will increase, taking more and more time to give a payout.

Mining for Bitcoins is very difficult and normal computers do not have the computing power to mine them fast enough. So, many people are forming mining groups. The mined Bitcoins are then divided among the members of the group, according to their contribution of computing power. As a result, the time taken to mine a Bitcoin comes down to a more reasonable time frame.

The Future for the Cryptocurrency

To the best of our knowledge, no Malaysian companies are accepting Bitcoin in payment as of the time of writing this article. There are some companies abroad that accept Bitcoins, such as Virgin Galactic and Overstock.com. Some believe Bitcoin has enormous potential, others believe it will crash. It’s very difficult for anyone to know for sure.

At the very least, Bitcoin should help us learn a lot about the practicality of cryptocurrencies. If Bitcoin does fail, it might even lead to new and improved cryptocurrencies, which might finally be accepted by governments. Even now, there are many alternatives to Bitcoin emerging, like Litecoin, Namecoin, among others. Only time will tell about the sustainability of these cryptocurrencies.

What do you think about Bitcoin? Post in the comments below.

2-Minute Video Explaining Bitcoin

SEE ALSO: Malaysia’s Central Bank Issues Caution about Bitcoin

AND: Malaysia’s Southern Neighbour Opens First Bitcoin ATM

Photo credit: PerfectHue / Foter.com / CC BY