By now, most people have heard of Bitcoin. Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto.
Transactions are verified by network nodes through cryptography and recorded in a public dispersed ledger called a blockchain. Bitcoin is unique in that there are a finite number of them: 21 million.
Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services.
As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment.
Bitcoin can be used to pay for things electronically, if both parties are willing. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.
However, bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that it is decentralized. No single institution controls the bitcoin network.
This puts some people at ease, because it means that a large bank can’t control their money.
But the flip side is that there is no central authority to ensure that things run smoothly or to back the value of a bitcoin. Bitcoins have value because people are willing to trade them for real goods and services, and even cash. But once you’ve bought bitcoins, they exist in the digital ether on your computer or smartphone.
There is no central database to keep track of who owns what bitcoins. Instead the ledger is distributed across a network of computers.
This setup has led some people to view bitcoins as something akin to Monopoly money: not real currency but digital tokens with limited real-world value that can be used mostly just within their own closed ecosystem. That’s why you’ll see a lot of talk about bitcoins being used to buy drugs or other illegal activities on so-called dark markets on the internet.
Some people have also been buying bitcoins as an investment in hopes that their value will go up as more people start using them for real transactions.
The value of each bitcoin has fluctuated wildly since they were first created in 2009. In 2013 alone it took several sudden jumps and drops in value; from $13 in January to over $1,100 in December, before crashing back down below $500 by December 2014 (though it has since recovered somewhat).
These swings have been linked to everything from Chinese investors buying up bitcoins to get around government restrictions on currency trading, to drug dealers cashing out their profits in bitcoins because they don’t want their money traceable by authorities, to hackers trying to cash out after breaking into major exchanges like MtGox (which went bankrupt after losing 850,000 bitcoins).