What is Bitcoin?
The Bitcoin symbol resembles a dollar sign with a double-barred letter B.
CREDIT: ppart | Shutterstock
Bitcoin is a decentralized, digital-only currency. It has no central monetary authority. Instead, a peer-to-peer computer network maintains transactions and "creates" Bitcoins through a process called mining. Users and their transactions are anonymous; there are no international exchange rates to figure out, and no middlemen to collect fees.
Bitcoins were created in 2009, a year after an individual known as “Satoshi Nakamoto” — likely a pseudonym — wrote a paper discussing the idea and how Bitcoins could work as a method of currency.
Bitcoin transactions are done through a Bitcoin wallet, an app that users download and install on their computers or smartphones. Purchasers and sellers are identified only by their digital wallet address, a string of letters and numbers. Wallets can be set up for free and with relative ease, meaning consumers can open and close wallets at will to maintain their anonymity.
Bitcoins can be purchased using real money, but they can also be generated or "mined." Users generate Bitcoins by having their computers solve difficult mathematical algorithms that help verify the creation of new Bitcoins and the transfer of Bitcoins between users. An official log keeps track of all transactions and announces new transactions across the network. Computers that are participating in the network communicate and agree on updates to the log. About every 10 minutes, a user whose log updates have been approved earns 25 Bitcoins. The total number of Bitcoins that can ever be mined is 21 million. The cap prevents anyone from flooding the market and devaluing Bitcoins already in circulation.
Bitcoin exchange rate
When first released in 2008, the Bitcoin wasn’t worth much. A single U.S. dollar could buy more than 1,300 Bitcoins. As the Bitcoin became more popular internationally, and the ongoing European economic crisis dragged on, speculation caused its value to soar to $140 in March 2013.
Several cyberattacks caused the value to plummet in a wave of panic selling. As of April 12, 2013, a single Bitcoin exchanged for about $72. Its current value can be monitored on Bitcoin exchanges such as Mt.Gox, Instawallet and Preev. Bitcoin exchanges allow you to buy and sell Bitcoins for real money.
Attacks on Bitcoins
Criminals have set their sights on Bitcoins recently and have attacked Bitcoin exchanges. In early April 2013, with the Bitcoin trading at about $130, hackers tried to steal Bitcoins from several exchanges. Instawallet had to suspend its service after hackers accessed their database and stole thousands of dollars' worth of Bitcoins. Mt.Gox suffered a DDoS attack that caused lags in trading and locked users out of their accounts.
Theft of Bitcoins due to server breaches have occurred before, in several cases to other online Bitcoin trading and storage services. In other instances, malware has been written to steal Bitcoins from infected computers.
Because of the nature of the currency, once a Bitcoin is stolen, it's nearly impossible to recover.
What you can buy with Bitcoins
Because of the built-in anonymity, Bitcoins are an ideal vehicle for illicit activity. Sales of things from drugs to guns and many illegal items are sold with Bitcoins. However, many legitimate online sources also accept Bitcoins as a form of currency, from hotels to electronic stores.
The legality of Bitcoins
Bitcoins aren’t regulated by any government, which raises questions about their legality. Within the United States, use of the Bitcoin is legal because it isn't a physical form of currency like the dollar. Were the currency to be given a physical form like a silver dollar, the creators would be held guilty of “making, processing, and selling” their own currency.