Everything you need to know about Bitcoin and the new contender Ethereum

Here’s your print-out-and-keep guide to Bitcoin and the new contender, Ethereum
Rosamund Urwin23 June 2016

Well, if we leave the EU and the Pound plummets, there’s always Bitcoin,” a glum currency trader joked last week. “Assuming our computers still switch on after Brexit.”

He was being facetious. But then the king of all currency speculators, George Soros, said this week that an “out” vote would trigger a more damaging fall in Sterling than the day he forced Britain out of the Exchange Rate Mechanism in 1992.

So could Bitcoin be a “safe haven” asset for just that kind of situation? Only for the ultra-brave. The crytocurrency’s recent rally - in which it hit $780, a 28-month high - was broken yesterday by a drop of $100. However, Ethereum, the rising star of cryptocurrencies to Bitcoin’s grande dame, rebounded, following a sell-off in wake of an attack by thieves who exploited a software bug.

Volatility certainly keeps the Bitcoiners busy. According to Arthur Hayes, the co-founder of BITMex, a Bitcoin derivatives exchange: “[If] Britain flips the bird to the EU, expect a fire to ignite under Bitcoin.”

But if every time you hear someone talk about virtual currencies, your mind goes blank, here’s your cut-out-and-keep guide to Bitcoin and the new contender, Ethereum. To adapt a not-at-all patronising line from L’Oreal, here comes the computer science bit, concentrate...

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Bitcoin

What is it?

Cocaine! Heroin! Ecstasy! That’s what the oldies thought the young were going to buy with their bitcoins (and also my desperate attempt to make it sound exciting). Three years ago, the virtual currency escaped the shadows when global attention fell on Silk Road, an online blackmarket where you could buy drugs using Bitcoin. Of course, you can use the currency for thousands of non-nefarious purchases too, from cupcakes to a Canadian goldmine. There’s even a Church that accepts it.

Bitcoin - the titan of the cryptocurrencies - was released in 2009 by an unknown genius, who goes by the name Satoshi Nakamoto. The idea isn’t intrinsically migraine-inducingly complex. It’s a virtual payment network, not unlike Paypal. Only Bitcoin has no owner: it’s a peer-to-peer set-up, with computers all over the world processing transactions and keeping a shared ledger (a “blockchain”). And it has its own currency - the bitcoin - the unit in which the network carries out transactions.

How do you get bitcoins?

There’s no Bitcoin version of the Bank of England, printing fiat money. Instead, the Bitcoin computers - which are known as “miners” - have computational races in which they can gain prizes in bitcoins. That rewards those who lend computing power. However, that prize keeps shrinking (it’ll halve next month), which limits the number of bitcoins that can ever be in circulation. And yes, if you’re clever, you could mine them - or you could just buy them using your bog-standard currency. There are now ATMs that take cash and convert it into bitcoins. The first in the UK was - you guessed it - in Shoreditch.

Advantages

You can hide behind a pseudonym. No one’s in charge. For businesses, it’s an efficient way to accept payments - there’s no credit card firm skimming off two per cent.

And its Cryptonite? Well, you wouldn’t tell Grandma to bet her house on Bitcoin. It’s volatile, its value yoyo-ing day-to-day. There are worries around security - a chunk of financial malware attacks target the currency. Just this month, scammers tried to cheat bitcoiners by fraudulently asking for donations in the wake of the mass-killings in Orlando. Although venture capitalists have poured more than $1bn into Bitcoin start-ups, these are yet to break through into the mainstream.

Who are the Bitcoiners? Techies with Mensa-IQs and libertarians who want financial privacy.

Best Bitcoin meme? The Queen looking irked: “Tried Bitcoin. Didn’t have my face on it.”

Ethereum

What is it? Ethereum is like the Superman to Bitcoin’s Batman: it’s faster, it has a less dark back story and may eventually make its counterpart look rather impotent. Either that, or it could mess things up Man of Steel-style. Some experts reckon Bitcoin and Ether don’t need to be rivals, though: they could coexist peacefully, with Ethereum riding on Bitcoin’s coattails (or, to extend this simile far too far, its cape).

Ether is the unit for the Ethereum system. Like Bitcoin, the network can be used to make payments. But it can also create binding financial agreements (known as “smart contracts”) that are completely software-enforced - i.e. they put the lawyers out of work. That’s because once a programme is running, no one can stop it.

As a result, there is a new entity called The DAO which has raised more than $150 million to support projects in the sharing economy. The simple explanation is that’s like a computerised venture capital fund that will pick investments based on investor votes. And it’s what was hacked this week, sparking the sell-off.

How do you get your hands on Ether?

A growing number of cryptocurrency exchanges - including the Bitcoin exchange Coinbase - now offer trading options.

What are Ether’s advantages?

A big problem facing Bitcoin is a row within its community over expanding the network’s capacity - not an issue with Ether. Transaction times are faster and Ethereum releases the same amount of Ether every year.

And its Cryptonite? Since its software is more complex, critics claim it could suffer more security issues than Bitcoin in the future. The authorities may find cause for concern too, as potentially fraudulent contracts - such as the Ponzi schemes made famous again by Bernie Madoff - can be written into the system.

Who are the Etherers? Microsoft, IBM and JPMorgan Chase have all shown interest.

Best Ether meme? Economist Ben Bernanke looking glum with the tagline “Oh joy: more disruption”.

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