Bitcoin recently surged to a record high of over $1,200. But the currency’s workings still remain a mystery to many. Here's what you need to know.

What is bitcoin?

There are four important things to know about bitcoin and how it works.

First, bitcoin is digital. It can only be created, held and traded electronically.

Second, bitcoin is decentralised. It is not controlled by a central authority, such as a national bank. This means there is little risk that bitcoin users’ wallets will be impacted by a change in monetary policy – or that their savings will be taken away completely.

Third, bitcoin is encrypted. Each "coin" has a "private key" – a secret number known solely to the individual who created it. Only the owner of a coin’s private key is able to spend those funds, and must confirm that a transaction is legitimate via a mathematically generated signature.

Finally, bitcoin is not just a currency – it is also a payment system. Bitcoins can be created and transacted – at high speeds and low costs – within the same network. All transactions are then detailed on a huge ledger called the blockchain, which is visible to all.

Is bitcoin anonymous?

Not exactly. While real-life identities are not used, all payments are made to bitcoin addresses – virtual pseudonyms – that are publicly stored on the blockchain. Users can complicate this by setting up multiple bitcoin addresses, but this still does not provide complete anonymity.

Who can create bitcoins?

In theory, anybody with a computer.

It takes a lot of computer power (and time) to run the blockchain effectively but as there is no central authority, it is no single person or organisation's responsibility to expend the power, time and money necessary. This is where the so-called "miners" come in - they opt to provide their own computer power and time, along with their own energy costs, in hope that a pay-off (of course in the form of bitcoin!) will make it worthwhile.

Why has bitcoin hit an all-time high?

Nobody seems sure, though there are several possibilities.

Bitcoin has traditionally been considered an asset that -- like gold, the Swiss franc and Japan's yen -- tend to perform well when stock markets, which are considered riskier, sell off.

Perhaps unusually though, several US benchmark stock indices – including the S&P 500, the Dow Jones Industrial Average, the Nasdaq and the Russell 2000 – all registered record highs last week.This could indicate that bitcoin is beginning to act in-line with stock markets, as more businesses view it as a credible form of payment.

Another factor at play is the recent regulatory crackdown by Chinese authorities. Bitcoin has proved incredibly popular in China and the Chinese market accounts for much of the world's bitcoin trading volumes, but this has long been a thorn in the government’s side. Earlier this year, Chinese regulators implemented tighter controls on the currency but bitcoin rallied regardless. Some speculate that the crack-down wasn't as widely anticipated. Others say that plenty of trading happens away from regulated exchanges making it hard for authorities to control.

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