While digital currency has created new millionaires in 2017, real world applications remain limited. Startups and traditional businesses are looking for uses of blockchain technology and cryptocurrencies with varying levels of success. Initial Coin Offerings (ICOs) are another factor fueling digital currency growth. Similar to an IPO from a traditional company, ICOs allow users to buy a stake in a new digital currency — the next bitcoin — with the hopes of making money once the value increases.

Related: Blockchain in insurance: What's the real story?

While much of this sounds exciting, bitcoin has historically shown itself to be very volatile, already having three major bubbles with ensuing plunges in value. Bitcoin has defied critics, however, by recovering and then increasing to new heights. Because of this, some are issuing warnings due to market unpredictability and immaturity. Security and Exchange Commission (SEC) Chairman Jay Clayton urged both main street investors and market professionals to, "please exercise extreme caution and be aware of the risk that your investment may be lost."

This hasn't stopped some people like Joseph Borg, president of the North American Securities Administrators Association, who recent said: "We've seen mortgages being taken out to buy bitcoin."

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Buyer beware

Consumers also need to be aware of bitcoin's rapidly increasing transaction fees. In the first week of December, a bitcoin transaction cost $6. Now, this cost ranges between $20 and $26. This is problematic because it doesn't make financial sense to use bitcoin for smaller transactions.

The transaction fees are somewhat complicated to explain. But when the number of demanded transactions exceeds the network's capacity, users have the ability to attach an additional transaction fee allowing the expedition of their transaction. Those unwilling to pay this additional fee may wait hours or days for their transaction to occur.

In addition to urgency requested and network capacity, the most important factor in transaction fee pricing is the size (in bytes) of the transaction. The size is dictated by the number of input and output coins in the transaction. In a simple example, inputs are similar to the amount of money you would have before making a purchase, and the outputs are the change that is made from the transaction.

Another word of caution

Over the years, there have been a number of high-profile attacks aiming to steal bitcoins. From phishing to social engineering to malware, attackers have continued to find ways to steal digital currency. Security researchers have discovered more than 100 variants of malware targeting bitcoins. "In August 2016, the bitcoin exchange Bitfinex announced that hackers had stolen $77 million worth of bitcoins. The company foisted these costs on to users, forcing them to take a 36-percent reduction in the value of their deposits." It is important to note that these attacks have been on exchanges, digital wallet software and human error. Bitcoin's underlying technology has so far proven secure.

Lastly, it's worth mentioning that the amount of electrical energy that the bitcoin network is consuming annually is massive, currently quoted at 32TWh — equivalent to the usage of country of Denmark. According to a December article in Ars Technica, Eric Holthaus, a writer for Grist, projects that, if the bitcoin network continues to grow at its current rate, by 2020, the energy consumption of the network will be equivalent to the current (2017) usage of the entire world.

But there is reason to believe that the bitcoin network will not continue to increase at the same rate. Bitcoin energy consumption is not tied to the number of transactions processed, but, more likely, to the effort put into bitcoin mining.

Thankfully, the creator of bitcoin has stated only 21 million bitcoins will ever be created, and the reward (number of bitcoins) miners get for their work will continue to decrease, having fallen from 50 bitcoins in 2009, to 25 in 2012, to 12.5 in 2016 and set to fall to 6.25 in 2020. With this knowledge, we can remain hopeful that the bitcoin network will eventually find a sustainable amount of electrical consumption.

Nick Graf serves as Consulting Director of Information Security for CNA's Risk Control unit. He can be reached by sending email to [email protected].

See also:

Ransomware and the perils of shoddy attribution

Ransomware: What to do when it happens to you

Cyber (in)security: Can insurance solutions keep pace with threats