How Bitcoin Works


DATE: Nov. 15, 2013, 2:49 p.m.

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  2. They're a bit like money ... and they're a bit like a financial bubble. They're bitcoins, and they are suddenly ubiquitous, showing us a little glimpse of what the future of money might be like.
  3. Bitcoins are generally defined as a type of virtual currency, brought to life by the Internet, very powerful computers and the willingness of lot of people looking to embrace new forms of monetary exchange.
  4. Bitcoins share many similarities with other currencies, but the most important one is that more and more merchants, retailers and individuals, both online and offline, accept bitcoins as payment. You can buy pizza with bitcoins, subscribe to an online dating service, or even shop at your favorite superstore.
  5. Yet bitcoins are also very different from traditional currencies. Unlike dollars or pounds, bitcoins aren't backed by any government. They're a completely decentralized form of money. Bitcoins aren't linked to any sort of central banking system or issuing authority, and that's a big part of their appeal -- instead of being swallowed into system that's often sullied by human greed and manipulation, this currency exists in an online world driven by mathematics and clever encryption protocols.
  6. You can use bitcoins for all sorts of real transactions. To do so, you first buy bitcoins however you like, either through your credit card, a bank account or even anonymously with cash. Then your bitcoins are transferred directly into your Bitcoin account, and you can send and receive payments directly to a buyer or seller without the need for a typical go-between, such as a bank or credit card company.
  7. By skipping the middle man in the transaction, you pay far less in associated fees. Each party in the deal can also maintain a much higher level of anonymity, which has both pros and cons for everyone involved. Think of bitcoins as a digital equivalent of a cash transaction. If you're so inclined, it's a nearly untraceable way to do business.
  8. Spending or receiving bitcoins is as easy as sending an e-mail, and you can use your computer or your smartphone. That simplicity belies the fact that there's a whole lot of complicated math protecting all of these transactions to maintain their legitimacy and security.
  9. Keep reading to see more about the mysterious rise of bitcoins, as well as the inner workings of the network that keeps this so-called "crypto-currency" alive and kicking.

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