What you need to know about Bitcoin and digital currency
by Phil Hornshaw
The rise of the digital currency Bitcoin has been an interesting one. With a whole lot of math and programming protocols behind it, the currency has gone from being something somewhat speculative to what can be considered a viable form of money among certain merchants and users. But just what is Bitcoin and digital currency, and how does it work?
Put simply, digital currency exists only as numbers in computer programs – it doesn’t have a paper equivalent, like the dollar bill, for example, and it isn’t backed by a central bank or other authority. In the case of bitcoins, the system exists through computer programs that all work off the same rules; essentially, it is a currency that users agree upon, and therefore, it’s viable – at least to some.
The benefit of digital currency is that your transactions aren’t tracked by anyone. Instead of a credit card company keeping track of your transactions to create a profile on your spending habits and likes and dislikes, bitcoin allows you to make transactions anonymously with other users. And since bitcoins are digital, you can instantly create transactions with people no matter the distance.
But just how do bitcoins work if there are no bills and no central authority? It’s all about encryption. Users have a private encryption key that allows them to verify that they own a particular bitcoin – that way, you can’t spend a bitcoin in one transaction, and then spend that same bitcoin again in another. Each transaction has the bitcoin passed from one owner to another, and a community managed transaction registry keeps track of them all. A bitcoin is currently valued at around $60, according to the Mt. Gox bitcoin exchange, although that value fluctuates. More bitcoins are added to the system over time in increasingly smaller numbers, in order to keep control of factors such as inflation, through a process called “mining.”
While bitcoins might sound like an interesting alternative to traditional currency systems, don’t go converting your life savings just yet. Bitcoins aren’t accepted by many merchants – in fact, they might be better for mostly peer-to-peer transactions. You can find a list of merchants that accept bitcoins here.
