Bitcoin is a form of cryptocurrency that can be used to purchase everything from online goods to multi-million dollar mansions. They are currently more valuable than gold, with a single Bitcoin equalling more than three thousand Australian dollars. Needless to say, there is a huge amount of interest in bitcoin and it's not too hard to start mining bitcoins of your own.
What are Bitcoin?
Bitcoin is a decentralised digital currency that was created in 2009. There is no central authority and you can legally use bitcoin in most countries. It is maintained and secured by a peer-to-peer network where each node verifies all the transactions that ever occur.
Every new transaction is sent to the network and ‘mined’ into the blockchain, which is essentially a ledger of who owns which bitcoins. Unlike national currencies, if you own bitcoins, you actually own the keys to unlock and spend those funds. Bitcoin is just one of many new crypto-currencies which are revolutionising the way we do finance.
People have found many benefits to owning bitcoins, as they share many attributes with gold but are much more easily transferrable. You can pay anyone in the world with a relatively low transaction fee. There are more and more companies accepting bitcoin as payment, but bitcoin is a young currency that still sees high volatility. At this point most users are speculative investors and traders. However there have been large investments into making bitcoin easier to use for smaller payments.
There is a thriving bitcoin community in Australia. The governor of the RBA made bitcoin legal in 2013. From July 1st of this year, the Australian government will treat bitcoin “just like money” and it will no longer be subject to double taxation when spent. (On the flip side, this also means you need include all bitcoin-derived income in your tax return. You can find information on what you need to do here.)
How to get your first bitcoins
Some people are put off by the high price of one bitcoin, however it can be divisible to 8 decimal places, so a lot of people start off by buying only a small fraction, even $10 worth. There are two main ways to obtain bitcoins – buy them from an exchange, or receive them for goods and services.
There are many reputable bitcoin exchanges in Australia and setting up an account is very straightforward. Most will ask for a few forms of identification but once you are set up you can buy and sell bitcoins with just a few clicks. Some even offer setting up regular purchases. Here are a few of the larger exchanges.
Once you purchase the bitcoins using Australian dollars they will become available in your account for you to send elsewhere. As with real money, it’s important to get a good wallet.
Where to store your bitcoins
Securing your wallet is the most important aspect to owning bitcoins, and it is recommended not to keep your coins on an exchange. There are several wallet options you may consider, depending on the level of your investment.
For small amounts, using a mobile app such as Mycelium (Android) or Xapo (iPhone) stores the private keys to your funds on your phone. Typing in long bitcoin addresses when you want to send payments is inconvenient so most wallets use scannable QR codes to send and receive. You can also store your bitcoins on a laptop or computer using software like Bitcoin Core, with the added benefit of running your own node to contribute to the security of the network.
For larger amounts, you’ll want even higher levels of security by using a ‘hardware wallet’ such as Trezor. While expensive, these protect your bitcoins through passphrases and only ever connect to the Internet securely through a USB port.
Where to spend your bitcoins
More and more retailers both online and offline are accepting bitcoins as payment. You can use this map to find businesses near you. From buying a coffee to booking a holiday, it is now possible to use bitcoins as a means of quick, hassle-free payment involving no third parties.
OK, I’m interested. What next?
Bitcoin is still young but the underlying blockchain technology is going beyond just currencies and changing a lot of different industries. For more information on bitcoin, bitcoin.org is a great resource. To understand more about how the blockchain works, this is an excellent intro video.
If you're the proud owner of a sizeable bitcoin collection, we have some bad news for you. the Australian Taxation Office has announced it will be taxing bitcoin transactions this year. What’s more, the online currency has been taxable since inception, which means you could owe the ATO money from as far back as 2009.
The cryptocurrency Bitcoin has been in the news lately with a sudden surge in value followed by a spectacular crash – not to mention the unfortunate tale of $US4 million in bitcoin on a hard drive that was accidentally dumped in a rubbish tip. Bitcoin was the first widely used cryptocurrency, but few people know it is not the only one. So how do the top five cryptocurrencies by capitalisation compare?
Note: This article does not constitute investment advice. Bitcoin is a highly volatile asset and should be treated as such.