With the news surrounding Bitcoin garnering a ton of attention lately, The Motley Fool put together a quick overview of the digital currency.
The FAQ on the Bitcoin website includes 46 questions and over 6,000 words that help address some of the countless questions that many people have about the digital currency -- which indicates the immense amount of curiosity and confusion that surrounds this newfound form of payment.
What exactly is Bitcoin?
To start, Bitcoin is a digital currency. That means that if two people would like to conduct a transaction (like buying a watch online for instance) so long as the buyer has the number Bitcoins the seller requires for the good or service, a transaction can be conducted. Using a digital wallet, users can securely and privately transfer a Bitcoin in a transaction. Many have simply described it as "cash for the Internet."
Where do they come from?
Knowing that it is a form of digital currency, the next logical question is, where did it come from? Bitcoin proof of concept was first published in 2009 and has been in circulation ever since. Bitcoins are found through an elaborative discovery process known as "mining."
The mining process involves harnessing computing power to process the Bitcoin transactions and ensure the system runs smoothly. Bitcoin operates through a complex set of mathematical equations and formulas that ensure each transaction is verified and secure, and needs a wealth of computer power to operate. In order to incentivize users to assist in the mining process, users who are involved in the mining process are in turn rewarded when their systems find new Bitcoins in the encrypted computer program.
Currently, about 12 millionBitcoins have been found, but Bitcoin itself notes that the number of Bitcoins created each year is halved until Bitcoin issuance is completely halted when supply reaches 21 million.
How much are they worth?
Like any other currency, Bitcoin has a value that is set by supply and demand. However, very uniquely, unlike any other currency, it's not regulated by any central authority, so it can be subject to rapid changes in price. As of the most recent check, a single Bitcoin is worth about $700, but users can also have fractional amounts of them. At the beginning of November, a single Bitcoin was worth right around $200 -- but the currency has seen incredible fluctuation in value.
The chart below shows the exchange value of one Bitcoin over a 48-hour time period earlier this week:
As you can see, the price of one single Bitcoin is subject to incredible movements over just 15-minute intervals.
Who uses them?
As previously mentioned, there is no single person or unit that regulates or controls the flow of Bitcoins. It is an open-source platform that is ultimately controlled by countless users that all either make transactions using the currency, or are the ones who actively assist the process itself through mining.
There are a lot of legitimate businesses that accept the currency, and multitudes of people who use them across the globe. However, Bitcoin has been the subject of many investigations and negative press as a result of nefarious criminal organizations that have used the currency to conduct illicit activities.
Why would anyone use a Bitcoin over other forms of payment?
Bitcoin proponents highlightthat it is a secure and often cost-effective way to make a payment for a product or service. Since it is an entirely digital currency, within 10 minutes (the time it takes to process a Bitcoin transaction), a person can make an anonymous payment to anyone, anywhere in the globe without having to pay exchange fees that are often associated with transactions.
Some may find Bitcoin preferential to other forms of payment, but the Bitcoin foundation general council Patrick Murck, in a recent senate hearing, noted, "this is a high-risk environment, and potentially it's not quite ready for mass consumer adoption." And I may have to agree with him.