The idea of a virtual currency has certainly stirred the world’s imagination. But is Bitcoin the future or just fool’s gold? Here’s a beginner’s guide to Bitcoin.
Everyone’s heard of Bitcoin at some point, probably in the context of fluctuating values or techies throwing away hard drives only to realise they’re worth millions, and especially through the MtGox case. But what is this “virtual currency” and how does it work?
1. No coins or notes
Bitcoin is often referred to as a “virtual currency”, which means there is no physical cash involved. Instead, it exists as a number on a screen – which may have made some investors uneasy, but for others is no different to managing their standard bank account online.
2. It comes from mines
Transactions are processed through the practice of “mining”, in which your computer solves a tough mathematical problem with a 64 digit-long solution. When it completes the calculation, a block of Bitcoins is processed and the computer’s user (or “miner”) gets new Bitcoins.
3. It’s adaptable
Computers are getting more powerful and more miners are taking part, which could easily mean that new Bitcoins are being produced at ever-faster rates. To prevent this and make sure there’s a steady supply of new currency, the maths problems are adjusted to become more difficult. Overall, the system is designed to make sure about 3,600 new Bitcoins are produced in any one day.
4. You keep it in your wallet
Users need to have a Bitcoin address (anywhere from 27 to 34 letters and numbers) to receive Bitcoins. When they do, the Bitcoins are stored in a wallet – an online account which works like a private bank account.
5. Data security is essential
Bitcoin’s biggest strength is also its major weakness – it only exists digitally. If the data is lost which tells users how many Bitcoins they own, the Bitcoins themselves are lost. That’s why the reaction to MtGox’s problems has been so severe: if data has in fact gone missing, some users could potentially face serious financial losses.
6. Markets don’t know what to think
Because Bitcoin is such a new entity in both the business and technological landscapes, traders and investors are still pretty uncertain about its prospects and where the Bitcoin trend might lead. As a result, events which might cause small fluctuations in established currencies can have a much bigger impact on Bitcoin, meaning its value can vary widely. In just a few hours on a single day last April, the value of a Bitcoin started out at $260 and proceeded to lose $100 from its value.
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