Who wouldn't want to be the next Kristoffer Koch? In 2009, the young Norwegian engineer invested $27 in a little-known virtual currency called bitcoin and promptly forgot about it. Four years later, Koch discovered that his 5,000 bitcoins were worth some $900,000.
Today, those same bitcoins are worth a staggering $14.3 million.
While it is impossible to ignore altogether any opportunity with such an incredible historical rate of return, investing in the booming cryptocurrency clearly presents plenty of real-world risks.
Because it lacks the backing of any government or central bank - and doesn't exist in physical form - bitcoin can't really be compared to conventional currency. As supply is fixed and has no link to an underlying asset, it's likewise hard to consider it a commodity.
Indeed, while Carl-Ludwig Thiele, a board member at the German Bundesbank, has aptly described bitcoin as a "highly speculative financial instrument," it is a lot easier to explain what bitcoin is not than what it actually is.
In relatively simple terms, bitcoin is a peer-to-peer digital payment system in which every transaction is recorded in a public ledger, known as the "blockchain." Those who keep track of transactions in the blockchain are called "miners" and are paid in bitcoin for their labors - with new bitcoins generated as a side effect of the mining process. (There are currently some 16.4 million bitcoins in circulation; total potential supply has been capped at 21 million units.)
The blockchain itself is a record of movements of the virtual currency that stores all transactions, including the relevant cryptographic addresses and transaction totals.
In theory, everybody can see which cryptographic address holds what amount of bitcoins. In practice, however, bitcoin owners tend to use several automatically generated addresses. Indeed, it is possible to obscure an identity and use bitcoin for illegal activities. Especially in its early days, that cloak of anonymity made bitcoin the de facto currency of the so-called "dark web," where dodgy websites traffic in the sale of illegal drugs and other illicit goods or services.
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