Guide: What is Bitcoin and how does Bitcoin work?
- 24 January 2014
Bitcoin is a new way of paying for things that is gaining popularity. This guide explains how it works.
What is Bitcoin?
Bitcoin is a new type of money that is completely virtual.
It's like an online version of cash. You can use it to buy products and services, but not many shops accept Bitcoin yet.
The physical Bitcoins you see in photos are a novelty. They would be worthless without the private codes printed inside them.
How does Bitcoin work?
Each Bitcoin is basically a computer file which is stored in a 'digital wallet' app on a smartphone or computer.
People can send Bitcoins (or part of one) to your digital wallet, and you can send Bitcoins to other people.
Every single transaction is recorded in a public list called the blockchain.
This makes it possible to trace the history of Bitcoins so people can't spend coins they do not own, make copies or undo transactions.
How do people get Bitcoins?
There are three main ways people get Bitcoins.
- You can buy Bitcoins using 'real' money. At the moment one Bitcoin costs about £500.
- You can sell things and let people pay you with Bitcoins.
- Or they can be created using a computer.
How are new Bitcoins created?
In order for the Bitcoin system to work, people can make their computer process transactions for everybody.
The computers are made to work out incredibly difficult sums. Occasionally they are rewarded with a Bitcoin for the owner to keep.
People set up powerful computers just to try and get Bitcoins. This is called mining.
But the sums are becoming more and more difficult to stop too many Bitcoins being generated.
If you started mining now it could be years before you got a single Bitcoin.
You could end up spending more money on electricity for your computer than the Bitcoin would be worth.
Why are Bitcoins valuable?
There are lots of things other than money which we consider valuable like gold and diamonds. The Aztecs used cocoa beans as money!
Bitcoins are valuable because people are willing to exchange them for real goods and services, and even cash.
Why do people want Bitcoins?
Some people like the fact that Bitcoin is not controlled by the government or banks.
That means there are no taxes or bank fees to pay, at least for now.
People can also spend their Bitcoins fairly anonymously. Although all transactions are recorded, nobody would know which 'account number' was yours unless you told them.
Is it secure?
Every transaction is recorded publicly so it's very difficult to copy Bitcoins, make fake ones or spend ones you don't own.
It is possible to lose your Bitcoin wallet or delete your Bitcoins and lose them forever. There have also been thefts from websites that let you store your Bitcoins remotely.
At the moment the value of Bitcoins goes up and down a lot, so it's impossible to say whether it's safe to turn your 'real' money into Bitcoins.