What Are Bitcoins: The How, Why and Why Not

What is a bitcoin?

A bitcoin is a virtual currency. It is used peer to peer, transacted electronically, created by a user community and free of any centralized bank or government.

So instead of creation of currency by the central authority, bitcoins come from the community of users, themselves. Their digitally signed-transactions are “mined,’ by so called “miners." The miners use costly supercomputers and software that do massive computations to solve incredibly difficult mathematical problems. This action, called “hashing,” insures authenticity. For their effort, miners are rewarded in blocks of bitcoins. That is the initial creation. The blocks are then turned into “blockchains, a shared database of all transaction." That is SO confusing! In fact, my eyes blurred over while trying to understand this myself.


The best analogy is if you think of the California gold rush. Miners stood in rivers, panning for gold. They would save up the little “bits” of the shiny metal until they had enough in a little pile to be substantive. After the quality was assessed, they would have something of value. Then the gold would be sold and melted into bars. Because there is a limited quantity of gold, early human societies assigned value to it and used it as money. The theory is that bitcoins offer value in the same way. 

Bitcoins are created at an approximate rate of 25 every 10 minutes. The number of bitcoins created is limited, with the amount created being halved every four years. The total is expected to reach a cap of 21 million by the year 2140. This is meant to prevent the inflationary problems of our current currencies.


As of this writing in late August, the exchange rate is about $121 per bitcoin. The 30-day range has been between $93 and $125, trading below $10 in 2012. Yes, they are very volatile. There are many sites to see the exchange rate. See live quotes here: http://bitcoinity.org/markets


The concept came from a person or group of persons in 2009 under the pseudonym Satoshi Nakamoto.  Thus, the smallest fraction, currently, 8 decimal digits or 0.00000001 is called a “Satoshi”or a microbitcoin (Mikeybits). You hold your bitcoins in electronic “Wallets,” which show your holdings in increments as small as 1/1000 of a bitcoin or “Millybits.” Oh my gosh!


You start out by creating your online “wallet” by signing up with an online service. This is to give you security and the ability to transact with other users. Once up and running, you to link up with your bank. Then you’re ready to buy your first bitcoins. You’ll receive bitcoin addresses that allow you to send and receive. Depending on your service, this can take a number of days.


It has been very tough to transact in bitcoins during your everyday spending. However, as time passes, they are being more widely accepted. There is a large and growing list of internet based companies that do business in bitcoins. Earlier this year, bitcoin payment processor BitPay partnered with gift card company Gyft, which now accepts bitcoins for its mobile gift card products. So now, buy using these gift cards, you can use your bitcoins at large number of big companies that include names like Burger King and Nike. Interestingly, areas in Germany have many merchants that do business in bitcoins. Germany has now declared this virtual money as official “unit of account.”

Adding a bit more credibility to this virtual currency, the Winklevoss twins, of Facebook fame, are working on launching an ETF that will track the value of bitcoins.


Bitcoins is really a tough concept to understand. So, general acceptance, without a middleman bitcoin company, will be hard to accomplish. Also, bitcoin transactions are said to offer anonymity, as your connection to the transaction is only a number. That is attracting governmental departments in charge of anti-money laundering. And, of course, governments want their share of taxes. So they will be watching!

Another risk is security, as your wallet is only as good as the backup of your hard drive or that of the online service that holds your bitcoins. So be sure to back up your data.

Additionally, there are other ideas out there for virtual money. And if a different one takes hold, the value of bitcoins could plunge.

I really love the concept, and hope it takes off like crazy. Over the decades, the U.S. and other countries have destroyed the value of their currencies. Through reckless spending and currency manipulation, which demands the Federal Reserve continue to print more and more money, the dollar has lost 96% of its buying power in the past century.

Bitcoins might not be the answer. We sure need one.


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[What do you think about bitcoins? Have you used bitcoins? Share a comment below.]

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