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What is Bitcoin? Digital Currency 101

June 19, 2013 by Camille Brenkwitz

Bitcoin is a virtual currency recently introduced to the internet community. It uniquely acts as both an open payment network and a form of crypto currency. Bitcoin is rapidly gaining acceptance in the virtual marketplace and shows signs of purchase power in ever more mainstream businesses.

Where Is the Bitcoin Mint

The coins we use daily are made in a mint, have a date and mint stamp on them and an identifiable value printed into the metal. They are the creation of a scientific team mixing elements from mining operations to achieve the value of each denomination of currency. This is not true for the bitcoin.

Bitcoins come from a mining process, but not the conventional physical mine where silver, gold, copper and nickel are plucked from the earth and sent to the mint. This mining process releases bitcoin into the marketplace when the miners solve a mathematical puzzle or unravel a complex code. This network of miners will never allow more than $21 million in circulation at one time.

Let There Be Bitcoins

The initial release was 210,000 blocks each containing 50 bitcoins. Each block has a separate location or storage point. New blocks will each contain only 25 bitcoins. This ensures that more than $21 million will never circulate.

The magic number of $21 million will always be the maximum amount available in this controlled money supply. To arrive at this amount, multiply the number of blocks by the value of coins within the block and this generates the number of coins in existence.

Creating a new block of bitcoin becomes more difficult with each attempt at a solution because the level of difficulty increases. Every four years, the amount of new bitcoin will be cut in half. Just like stocks and bonds, users can choose to hold or sell bitcoin at will.

Freedom by Anonymity

This virtual currency took a bad rap in its early days because of the anonymous cloak it provides for the user. Not only do law-abiding people enjoy the freedom of privacy, but so do slippery-fingered criminals who engage in illegal activities. The only elusive element of the bitcoin is that a criminal cannot duplicate it.

A bitcoin is not a fiat currency although it is real. It cannot be duplicated and you will never deal with counterfeit money. However, you cannot hold it, see it or mess around with it. The only worrisome element is that its value is volatile and rises or falls over a short period.

Bitcoin Similar to Stock

sJust as worldwide currencies trade on the stock markets, bitcoin is treated in much the same way. Its price comes from the economic principal of supply and demand. When users choose to hold their bitcoin, this action increases the value of the remaining amount in circulation. If they choose to use or sell their bitcoin, the value of the remaining amount decreases.

Bitcoin converts back to mainstream currency through use or exchange. There are local directories of people willing to trade bitcoin for cash or cash for bitcoin. You can obtain bitcoin in the same way by participating in a mining pool or purchase them through Bitcoin Exchanges.

Securing Bitcoin for Use

Just as you do for physical currency, you need a wallet for your bitcoin. This wallet is a bit different because it is online. The digital wallet is a “connection” between the consumer and the bitcoins belonging to that consumer. Digital wallets are available from places online such as: Blockchain.info, Coinbase, and Gyft. You can think of them like banks, they help you store your digital currency. For the more technically savvy you can also store bitcoins directly on your computer or even in "cold storage" like a USB drive.

The Future of Bitcoin

The lure of bitcoin is that a bitcoin is virtual currency with no central governing authority. You have the freedom of physical money and it conceals your identity for online purchases. Contact us to learn more as this trend spreads to more small businesses and merchants realize demand for a digital method of payment.

Does it get any better? Maybe. It’s still too soon to tell.

Tags:   Bitcoin, Payments