What is Bitcoin?

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A new digital currency called “legitimate” by SEC – but what is it?

The Securities Exchange Commission and the Department of Justice declared bitcoins a “legal means of exchange.” But what exactly are bitcoins? They’re a nerdy new type of currency that has a lot in common with gold, except for one important detail: they’re not physical. A bitcoin only exists as a string of numbers; a string of numbers that is now worth around $7,000 each.

So how does bitcoin have value? Well, it has value in the same way that gold does. Gold is valuable because it’s a limited commodity: there’s only so much of it. Bitcoins are limited too. Each bitcoin is unique because it exists as the answer to a very very complex mathematical problem. Think of an equation like 2 + x = 4, but where x is a 64-number-long answer. The math behind bitcoin gets complicated very fast.

But this complexity makes it valuable as a currency, say its proponents. Because bitcoin is a “cryptocurrency,” you have a higher chance of getting hit by an asteroid than you do of someone stealing your bitcoin without your password.

Proponents of bitcoin also advocate its use because it’s decentralized. Most monetary systems have a central bank, like the Fed in the United States. The Fed can print more money as it sees fit. But bitcoins, like gold, are limited: there’s only 21 million of them, and that’s built into the software itself. Bitcoins are “mined” by very powerful computers who work for days, even weeks, to solve the mathematical problems whose answers are the precious numbers.

Bitcoin emerged in 2008 when it was described by a developer known as Satoshi. Because bitcoin is decentralized, simply having the idea wasn’t enough: someone needed to write the software and invest money in the network. In order to make a bitcoin payment, users often print out a QR code (included), which links to their bitcoin “wallet.” Anyone can buy or sell bitcoins online in one of the many exchanges, which facilitate the currency’s transfer. The price of bitcoin has gradually grown from nothing to its current high around $7,101.

Bitcoin achieved notoriety several years ago during the raid of the online black market “Silk Road.” Users of the Silk Road had exchanged over one billion dollars worth of bitcoin over its five years. Bitcoin’s status as a cryptocurrency makes it also ideal for underhand dealing because it is impossible to trace transactions without the other party’s approval.

The popularity of bitcoin is growing. WordPress and a number of other major websites are beginning to accept bitcoins as cash, and there have even been local franchises spotted accepting the currency, including several Subways. There’s a list of websites that accept bitcoin here. If you’re interested in learning more, there’s a video here which explains some of the principles of bitcoin: http://www.youtube.com/watch?v=SEbCbp1vc9Y. You can also check out this article on how to invest responsibly in bitcoin.

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About The Author: Andrea Eldridge is CEO and co-founder of Nerds On Call, a computer repair company that specializes in on-site and online service for homes and businesses. Andrea is the writer of a weekly column, Nerd Chick Adventures in The Record Searchlight. She prepares TV segments for and appears regularly on CBS, CW and FOX on shows such as Good Day Sacramento, More Good Day Portland, and CBS 13 News, offering viewers technology and lifestyle tips. See Andrea in action at callnerds.com/andrea/.