What is Bitcoin?
Bitcoin is a digital currency that can be used to buy goods and services from merchants that accept it, such as Overstock.com, or traded for cash on an exchange or brokerage, such as ExpressCoin in Santa Monica. I
How does it work?
Bitcoin’s technology uses cryptography to control the production and transfer of the individual currency units, called bitcoins, which is why it is often referred to as a cryptocurrency. There are reportedly 12.4 million bitcoins in circulation with a total market value of $8.2 billion. As of Feb. 12, one bitcoin traded for $656.25.
How do you acquire bitcoins?
Aside from purchasing them with cash through one of the bitcoin exchanges, people can also acquire bitcoins through a process called “mining.” Bitcoin miners use powerful computing to verify recent transfers between wallets and are rewarded with bitcoins for doing so.
How do you spend bitcoins?
A bitcoin transaction is essentially a digital message. Every Bitcoin user has to establish a Bitcoin address through a website such as Coinbase.com or Blockchain.info that creates a “wallet.” The wallet comes with two keys: the first would be comparable to a bank account number, the second a PIN. If you send bitcoins to a friend, you have to have the first key, which brings you to his wallet, where you deposit the bitcoins. You then use your private key to confirm the transaction, and the bitcoins are sent to your friend’s wallet.
Is there a record?
Bitcoin has a publicly available general ledger, called the block chain, that records the current ownership of all bitcoins in circulation as well as the historical record of every Bitcoin address.
How would any disputes be resolved? Who’s in charge?
There is no way to resolve a dispute; no one’s in charge.
What is the history of Bitcoin?
Bitcoin was introduced by software developer Satoshi Nakamoto (a fake name) in 2009, to serve as both a digital currency and payment infrastructure. It originated as a piece of open-source software and is not controlled by any central authority.
What’s the advantage of using them? Why not just spend dollars?
Bitcoins can be held in accounts requiring no personal information, can be transferred around the world within minutes at no cost and are not governed by any central authority. That third reason might seem like a huge risk factor to some, but Bitcoin enthusiasts point to events like the government of Cyprus confiscating money from bank deposits last March as a case for holding currency outside of the purview of any government or organization. Bitcoin is currently most popular in the West, but many in the community see it having the most potential for widespread use in countries where banking infrastructure is weak or nonexistent. Bitcoins can’t be stolen in a strong-arm robbery like cash, and its encrypted private key technology makes it harder to hack into than the 16 digits and a PIN it takes to get into a checking account.
What’s backing them up? I mean, currencies have the full faith and credit of a sovereign nation behind them. Bitcoins were invented by some guy with a fake name.
Nothing backs them up. Bitcoins are generated by a piece of software and are only worth whatever the market is willing to pay for them. There is nothing preventing them from being worthless.
Are they cheaper than using dollars to buy something?
Yes, because the Bitcoin payment processing system is maintained by miners who earn built-in bitcoin rewards for doing so, it doesn’t have operating expenses that need to be paid by users. While most brokers and exchanges charge a 2 percent to 5 percent fee to trade into and out of bitcoins, there is no cost involved in making a transaction using Bitcoin.
Why would a merchant choose to accept bitcoins? What are the advantages and disadvantages?
There are no processing fees like those charged by credit card companies, payments can be made from around the world, as long as there is an Internet connection, and after the block of transactions that contains the charge is confirmed by miners (which can take up to 10 minutes), the transaction is irreversible and untouchable by banks. Disadvantages include the currency risk of being exposed to bitcoins before a merchant is able to trade back into local currency, holding bitcoins in a wallet that can be stolen by someone else getting a hold of the private key and Bitcoin’s anonymous nature making it harder to collect information about customers.
– Matt Pressberg
