What is Bitcoin?
Bitcoins are a form of currency used on the Internet, with no physical format, and that are not backed by any government. Bitcoins can be used by anyone around the world with access to the Internet for any type of transaction. In order to conduct a transaction using bit coins, someone who wants to pay in Bitcoins has to find another person willing to accept Bitcoins as payment. But that's becoming easier as bit coins are becoming an accepted form or currency.
Where is Bitcoin?
Bitcoin uses decentralized software that's managed by a community of users. The software doesn't run on a single computer, but works on many computers at once, communicates between them, and duplicates functions across the network of computers. This feature of the software is called peer-to-peer. The Bitcoin software on one computer is smart enough to know how to connect to other computers running Bitcoin using the Internet. Since no single computer is running Bitcoin, it can cross borders, and no single person or computer can control it. It is because of this network that there is no central authority that controls Bitcoin, or owns the software that makes it work.
People who volunteer to run Bitcoin software on their computers create a network consisting of thousands of computers around the world. By the way, people who let bitcoin use their computers are rewarded by "earning" Bitcoins.
This is very different from how the United States government or any other country controls it's currency. There is no "backing" for a Bitcoin since it's value is determined by what people are willing to trade for it. But when you think about it, that's how most transactions take place, two people agree on what something is worth and then trade, either in goods, services, or currency.
How do you use Bitcoins?
Transactions take place when people transfer Bitcoins between themselves. A software application called the "wallet" is used to hold and transfer Bitcoins for users. Several wallets exist that are available for free at the Bitcoin website, bitcoin.org. Transactions use two types of encryption to prevent fraud or "double spending" of Bitcoins. You can make and receive payments in 10 minutes, which is the time it takes the Bitcoin software to confirm the transaction since more than one computer has to "agree" that the transaction is confirmed. There's no one computer running all of Bitcoin, so it's a pretty resilient software.
There's no transaction fee required, but some Bitcoin services charge a small transaction fee to pay for their computers and will process a transaction faster. The Bitcoin software tracks all Bitcoin transactions, so it's always clear which account owns a specific Bitcoin. Bitcoin is not totally anonymous, like cash since there is a digital record of every transaction.
How are Bitcoins made?
A person who goes by the pseudonym "Satoshi Nakamoto" originally created the technology as a way to trade cash outside the existing financial system. Bitcoins are created in a process called "mining" by the people in the network that host Bitcoin software. A Bitcoin is created when a computer solves a complex mathematical equation, and the equation changes each time it's solved. And it becomes more difficult to solve.
When a computer solves the math problem, a new Bitcoin is created. There's a limit to the number of Bitcoins that can be mining which is 21 million. After that no new Bitcoins can be created. While this might seem like a problem, Bitcoins are designed to be broken up into pieces so you can buy and sell using a fractional Bitcoin.
Value of Bitcoins
While Bitcoins were once worth less than $1 per coin, their value has increased as awareness and use of Bitcoins has increased. You can check the current value at Bitcoin Exchange Rate (http://www.bitcoinexchangerate.org). When I'm writing this article on November 2013, a Bitcoin is worth about $900 U.S. Dollars. Bitcoin value is volatile right now, but more common use will result in what experts predict will be more stable exchange rates.
Investments in Bitcoins
Bitcoins have become an investment. Just like the stock market, increased interest causes the price of each Bitcoin to go up. Similarly, prices have gone up as it has become more difficult for computers to complete the math problems that create Bitcoins. Bitcoin creation has slowed over time, which increases the price. While prices have fluctuated over the last four years, they're currently at an all-time high.
Bitcoins have become accepted by some online sellers, including dating site OkCupid, blog and community WordPress, and Chinese Web services company Baidu. This is due to the fact that fees for processing orders with Bitcoin cost less than traditional credit card processing fees.
The future of Bitcoin
Currency is really just a form of trading. Before currency, people traded in goods and services. Cattle, goats, grain and other goods had a value. Currency made trading easier since the first currency, in the form of coins, were more portable. A coin was essentially neutral form of "value" that could be traded for a goat or wine. Bitcoins are a form of digital currency exist in a computer, and can be moved using the Internet. They can be converted into other forms of currency at public exchange rates, so they are establishing a place as a global form of payment. While using digital currency might seem a strange idea, we use it every day when we swipe a credit card or pay a bill online.
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