What Is Bitcoin?

The Bitcoin symbol resembles a dollar sign with a double-barred letter B.The Bitcoin symbol resembles a dollar sign with a double-barred letter B.

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.

MORE: 7 Ways to Lock Down Your Online Privacy

Bitcoin wallet

Bitcoin transactions are processed 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.

Bitcoin mining

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. The algorithms become progressively more difficult over time.

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 2009, one Bitcoin wasn’t worth much. A single U.S. dollar could buy more than 1,300 Bitcoins. As Bitcoin became more popular internationally, and the ongoing European economic crisis dragged on, speculation caused its value to soar to $230 in early April 2013.

Several cyberattacks caused the value to plummet later that month in a wave of panic selling. In mid-April 2013, a single Bitcoin exchanged for about $72 before the rate stabilized at about $100.

But in November 2013, the rate skyrocketed due to Chinese speculation, which peaked on Dec. 1 at about $1,200. At that point, the Chinese central bank took steps to prevent domestic trading in Bitcoin, which dampened but did not diminish speculation.

Its current value can be monitored on Bitcoin exchanges such as Mt.Gox, which allow you to buy and sell Bitcoins for real money.

Attacks on Bitcoins

Criminals have set their sights on Bitcoins and 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 its 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.

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