What is Bitcoin?

Much has been written about Bitcoin of late. About how it is crashing one minute and not the next, and how people are losing real cash through its widely variable rates. But what is Bitcoin? From where has this strange currency suddenly sprung, at least into the public conciousness? And why should we care?

Everyone has heard of the euro, peso, won, pound and dollar, all forms of monetary units across the world. But Bitcoin? Let us reveal all.

What is Bitcoin?

Founded in 2009 by Satoshi Nakamoto, a pseudonymous person or group whose true identity is unknown, Bitcoin is a digital currency that was created to exist outside of a central bank and thereby avoid normal rules of monetary transaction.

As a purely internet-based currency, its benefits include the speed at which transactions can be completed - there are no humans shifting paper documents from one vendor to another - and it can be moved between companies and individuals alike without the need for an intermediary organisation.

Of course, as it's not a real, tangible object, it's a bit like trading in clouds or dreams, but the software used and organisations involved are robust enough for traders to buy and sell the currency much like they do with any other. Plus, there are plenty of retailers out there that accept Bitcoins for goods, so you are able to spend it too.

That's because it does have real value - you can buy Bitcoins for traditional currency if you like - but its overall value and how that is determined is actually more complex than that. In fact, it's very complex indeed, which may be why it's recently hit the headlines.

How much is a Bitcoin and how do I get one?

Bitcoin is based on a mathematical formula, which in turn means its value is determined by how many are in circulation across the internet. When Bitcoin was created, it was set that a maximum of 21 million Bitcoins would be issued, and at the time of writing, roughly 11 million are in circulation. Every 10 minutes, 25 Bitcoins are generated to users on the internet by different means. And by the year 2017, this will be halved to 12.5 Bitcoins, and then halved every four years after, until the limit of 21 million Bitcoins is reached by 2140.

At the time of writing, one Bitcoin is worth $120 (£78), but it has recently been as high as $258.49. Very recently, in fact, as it is currently in flux. And this might be partly because of the amount of Bitcoin "miners" out there and how they might be affecting the market.

Miners?

Given that the Bitcoin market is constantly changing, experts have pointed to mining Bitcoins as one of the best ways to collect them, rather than straight out buying them.

Bitcoin mining is a slang term for something rather technical, far too technical to go into in too much depth here, other than saying that it uses computer hardware and dedicated software to generate new Bitcoins.

The process starts by creating an online Bitcoin wallet from services like Coinbase and Blockchain; there are several services available online that are pretty easy to use and look like normal online banking. You will be issued a 34-36 character identifier that starts with 1 and is used to receive and make payments.

The next step is to go to a service like BitcoinPlus to begin generating Bitcoins. You will be mining Bitcoins with others. As we outlined earlier, the number of Bitcoins awarded is already pre-determined, but who they go to depends on the amount of "work" being done on the server. The more work being done, the more Bitcoin is being awarded.

If you're a site owner, you can actually embed a generator on your website so your vistors mine the coins for you. Another popular way to mine is by downloading a desktop application, such as DiabloMiner, to use your computer's processing power to mine, rather than being in a huge shared pool on the web. There are some Bitcoin enthusiasts who even have dedicated computers just for mining.

Transactions and payments are stored through the Bitcoin network in the form of "blocks", since Bitcoin isn't managed by a centralised body but by the people. Data is permanently recorded and can't be changed and each block memorialises what took place immediately before it was created. Blocks are downloaded to the computers of those who mine Bitcoin, in the form of a 6GB file.

Should I mine?

Bitcoin isn't exactly a free-for-all of money and goods. It actually takes a long-time to mine and has some of value attached.

As we mentioned earlier, several websites offer the ability to exchange Bitcoin for currency, and vice-versa. One of the most popular is Mt. Gox, which boasts a simple 24-7 trading platform for local currencies.

As previously mentioned, as with any other form of currency, you can also buy goods. While it's not widely accepted in retail stores (well, a New York bar) across the nation as one might hope, there are several online market places that do take it. Here's a list of hundreds.

Given that Bitcoins are traded on the internet, a popular use is to buy illegal materials, because in a way, they are anonymous. There's no Federal Reserve that can keep track of what people are buying, since it's free and open. There are marketplaces for almost any illegal drug you can dream of and places to buy porn with Bitcoin. It isn't taxed, either.

Bitcoin in 2013

This year so far has been a big one for the digital currency, as more users have jumped online to mine Bitcoin, and it's begun to garner more media attention.

On 10 April Bitcoin hit a big crash after maxing out at a high of $265 per Bitcoin. In the matter of an afternoon, Bitcoin quickly plummeted to $105, losing 60 per cent of its value, following problems that surrounded popular exchanges for the currency such as denial of service attacks and hacking. It then quickly jumped back to $200. The market is always fluctuating.

Industry watchers are uncertain of where Bitcoin is going. Will it ultimately crash and people who invested real currency lose everything? Or will Bitcoin continue to explode? It's hard to tell.

Felix Salmon, a finance blogger at Reuters, is cautious of Bitcoin and its nature. He wrote in a great blog post: "In any event, Bitcoin is never going to work as a global payments system. Not only does it suffer from having a slow-growing money supply and a metastasising transactions file which has to live on every user's computer, it also encourages destructive computer hacking.

"The way that the money supply grows, in the Bitcoin system, is by people harnessing the power of hundreds or thousands of computers to solve very complicated mathematical tasks, earning Bitcoins for doing so along the way. And the easiest and cheapest way of doing that is to do so illegally, by stealth: set up a 'botnet' of hacked computers to do your bidding for you. The incentives, here, are very bad indeed.

Those who purchased Bitcoin six weeks ago when it was priced at $35, now have 7x their money if the price stands at $235. If someone then buys Bitcoin at $235 and the currency rises 10x to $2,350, they have a 10x reward on their hands. But there's always the chance it could dramatically crash and cause a huge loss.

Of course with mining, there's no risk of losing actual money. It just takes much longer than investing recognised currency.

But considering the instability of late, that is perhaps your safest option if you want to get in the Bitcoin game.

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