Bitcoins Explained ~ Part 1


Bitcoin is a new digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority: managing transactions and issuing money are carried out collectively by the network. Bitcoin is also the name of the open source software which enables the use of this currency.

What is a Bitcoin?

How did you pay for your coffee this morning, by cash? By credit card? If a growing number of bank-fearing techies have their way, you’ll soon be able to pay for that mocha latte through an untraceable virtual currency called Bitcoin. As of this month, Bitcoins are worth over a billion dollars, and interest in the currency is skyrocketing. Here’s everything you need to know about a currency that sounds like it belongs in a fantastical realm: You can’t touch it, it’s prized in the underworld, its creator disappeared in a cloud of mystery, and if you want to keep it safe, you should keep it hidden in a bunch of different places.

No, but really. What is it?




A Bitcoin is a unit of currency, launched in 2009, that only exists online and isn’t controlled by any kind of central authority, like the US Federal Reserve. You can send Bitcoins to anyone who has a web connection (or hand someone your hard drive containing the currency.) You hold on to Bitcoins by setting up a virtual wallet, either through a third-party website, or by storing it on software run on your computer—although storing your Bitcoin wallet only on your computer is about as secure as stuffing hundred-dollar bills under your mattress. As soon as you have your wallet, you’re part of the big Bitcoin network. If you want to buy something from your neighbor, you simply need to obtain their anonymous identification number and send them some Bitcoins, which takes between 15 minutes and an hour to process.

What is a Bitcoin wallet?

A Bitcoin wallet is a service that holds your Bitcoins for you. Unlike banks, Bitcoin wallet firms don’t generally invest the money you deposit with them. But there’s a catch—Bitcoin wallets don’t have the Federal Deposit Insurance Corporation backing that insures Americans’ bank deposits up to $100,000. “There’s no such thing as FDIC insurance when it comes to Bitcoin,” says Reuben Grinberg, an attorney at Davis Polk & Wardwell who specializes in financial matters and wrote an early legal analysis of Bitcoin. If your Bitcoin wallet gets robbed or collapses, you’re out of luck. Here’s what a Bitcoin phone wallet looks like:

Why do people use Bitcoin?

Bitcoin appeals to people who are suspicious of financial institutions and central banks like the US Federal Reserve. “There are types like me, libertarian gold-buggish folks,” for whom “inflation is a constant worry” and who “see the cryptography in Bitcoin as insulation against inflation,”  explains Jim Harper, the director of information policy studies at the Cato Institute. People seeking privacy in their financial transactions—for legitimate or illegitimate reasons—might also use Bitcoin because it’s more anonymous than financial transactions using credit or debit cards. “A lot of these people who have a deep distrust of government are really interested in anonymity and autonomy. They want to keep the government out of their business,” Grinberg says. “In a lot of these people’s minds, governments will come and go, financial instruments will disappear, you could have have anarchy, but Bitcoin will be here to stay.” As with gold, the idea is that the value of Bitcoin could survive some sort of cataclysm.

Where do Bitcoins come from?

New Bitcoins are created in a process called “mining,” which involves Bitcoin users attempting to figure out a complex mathematical solution related to the current number of Bitcoins. Grinberg compares it to finding the missing piece of a puzzle. Whomever finds the puzzle piece wins a certain number of Bitcoins, and the process starts all over again. Finding the Bitcoin solution involves an incredible amount of processing power, and so users often band together in “pools” in order to find the solution and to earn Bitcoins more regularly. However, there have been incidents where Bitcoin users have illicitly attempted to use other people’s computers to mine Bitcoins. You can do this by hacking people’s computers and telling them to mine Bitcoins. In one incident referenced by the FBI, a system administrator at a university in New York set its computers to mine Bitcoins for him.

Is Bitcoin legal?

In the United States, the answer is probably yes, but it could depend on what state you’re in. Doing something illegal with Bitcoins—like bribing someone or buying drugs—is still illegal. As we all know you can find away around anything if you want to do something illegal. Remember when we thought that having a credit card would keep our money safe. Look how well that turned out.

How many Bitcoins are there?

The Bitcoin foundation states that there will never be more than 21 million Bitcoins at a time. That could create a problem for the currency, however, because people might sit on their Bitcoins rather than buy things with them, hoping that they appreciate in value. Watch this and get back to me for more information.

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About Debi

I am a retired nurse. Wife, mother of three and 2 wonderful grandchildren. “Watch your thoughts, for they become words. Watch your words, for they become actions. Watch your actions, for they become habits. Watch your habits, for they become character. Watch your character, for it becomes your destiny”
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