When people invest in Bitcoin, the money is going into into the underlying technology - known as blockchain - not the payment instrument itself.
The blockchain is essentially a giant record book of all Bitcoin transactions, it is to Bitcoin what the internet is to email.
This is the decentralised network where every bitcoin transfer is verified, processed and written down. It has the potential to make economic interactions cheaper, faster and more secure.
The idea is to remove the need for middlemen like banks to vouch for facts, such as a person’s identity or the health of their finances — authentication processes that can be slow and costly, and vulnerable to corruption and cyber attacks.
Instead, the blockchain relies on a combination of code-breaking and crowdsourcing that aims to create a self-maintaining and reliable system of record.
“It’s a giant accounting ledger that everybody agrees to but nobody owns,” says Peter Kirby, president of Factom — a US start-up that helps developers build products on the blockchain.
The technology is also a big electronic system and on top of which you can build applications. Currency is just one. Land registries, identity storage and peer-to-peer stock exchanges are just some of the potential uses of the blockchain, but there are big risks, as over time the cost of maintaining the technology will rise due to tougher regulation.
In February 2013, an FT mentioned that experts said the blockchain infrastructure is one reason why, despite the scandals and wild swings in the bitcoin price, venture capitalists and traditional financial services groups continue to make bets on bitcoin companies.
An Australian peer-to-peer software company is using the digital currency to create an online record book called Blocktrace. This works by creating digital certificates, stored in the blockchain, that are mapped on to diamonds. The idea is to reduce fraud and eliminate the patchwork of third parties that perform identity and value checks.