What Is A Bitcoin?

Physical Bitcoins

[Photo Credit: Flickr/Antana]

You may have first heard about Bitcoin sometime last year, when it was the subject of nearly every newspaper, magazine, and news broadcast.

You may have heard of it due to a recent data breach of one of its exchanges, Mt. Gox, considered to the largest bitcoin exchange in the world, leading to another round of exposure in the media as publicized losses has led Mt. Gox to file for bankruptcy protections (specifically Chapter 15 bankruptcy) in the United States.

Bitcoin has been written about and spoken about across the Internet and on television. But no matter how you’ve heard the word bitcoin, there’s probably one thing you’re still wondering about it.

Just what is a Bitcoin?

Bitcoin is two things: one is money, and the other is the network you’re able to buy and sell on. As money, more specifically, it’s a form of money known as digital currency, virtual currency, or cryptocurrency. (Cryptocurrency refers to the fact that cryptography — a way to secure information — is used to create and transfer bitcoins.) It’s a form of peer-to-peer payment that occurs electronically without the use of a credit card company, bank, or other financial institution.

Bitcoin logo


Bitcoin
refers to the technology and network used to create and manage the currency; the currency itself is referred to as a bitcoin (lower case “b”).

The way that Bitcoin works is actually simple. The bitcoin itself is mined in a process that involves a series of mathematical equations. This mining in essence mints the digital currency. Getting bitcoins requires either mining, bartering for bitcoins in exchange for products and/or services, or trading other currencies for bitcoins.

Bitcoin was created five years ago and has been used as a source of investment or as a means of exchange. More and more vendors are accepting payments via bitcoin, including services ranging from real estate to pizza delivery to travel. All that’s needed for a bitcoin transaction is a digital wallet (which can either be cloud-based, existing online, or on your computer). The wallet acts like a bank account with many of the same uses as a traditional bank account.

A digital wallet can send and receive bitcoins, make payments, and also be used for savings. The major difference between a digital wallet and an online bank account, aside from the fact that the digital wallet uses bitcoins, is that digital wallets are not insured against losses by the Federal Deposit Insurance Corporation (FDIC). Bitcoin, however, is subject to certain forms of virtual currency regulation that have been enacted by the European Central Bank and by the Financial Crimes Enforcement Unit, an office of the U.S. Department of the Treasury.

According to to Bitcoin, last year the value of all bitcoins in circulation exceeded $1.5 billion (US). While it is mostly unregulated in the strictest sense, and untaxed and uncontrolled at the government level as it’s an anonymous, digital form of money, it still presents as an intriguing investment for some. Despite the breach of the Mt. Gox exchange (resulting in a loss of $409.2 million USD) and the decline in trade prices, bitcoin still carries a buy price of $631.02 USD and a sell price of $628.66 USD (this as of March 10, 2014). It’s worth noting that late last year bitcoin saw a price of $1,126.82 USD, which shows the popularity of bitcoin for both payments and as an investment.

[Figure 1: Bitcoin Price (USD) | via Coinbase]

[Figure 1: Bitcoin Price (USD) | via Coinbase
(click to enlarge)]

Whether or not bitcoin is able to recover from the loss of one of its major exchanges, as well as gain widespread legal acceptance in certain countries, remains to be seen. Given the growing adoption of bitcoin as a payment method, especially by vendors providing goods and services, it may be that the use of bitcoin becomes as common as electronic payments sent via PayPal or online payments direct from a checking or savings account.