What is Bitcoin?

I received an email from a customer wanting to know what I know about Bitcoin.  My reply was quite simple:  "I know very little, but I am certainly willing to learn more."  I have done some research on Bitcoin over the past two days, and while I cannot say I understand it fully, I do understand it much better.

Bitcoin was created in 2009 as a way to quickly send money online without using banks or processing companies.  Initially, it was used mainly for transactions between individuals, but it has become more widely accepted recently.  I have received notices from several companies recently saying that they are (or soon will be) accepting Bitcoin.

Because Bitcoin does not require a bank or payment processor, the transaction fees for Bitcoin are much lower.  Furthermore, there are no currency exchange fees for an international transaction since Bitcoin can be used worldwide.  There is also very limited government regulation over Bitcoin, although this may change as their use increases.

Bitcoins are stored in a digital wallet, either on your computer on in the cloud.  The wallet is like a bank account that can be used to make payments, but it is not insured.  The easiest way to get Bitcoins is to offer something in exchange for Bitcoins, but you can also obtain them through an exchange (purchasing them for money).

Additionally, you can "mine" for Bitcoin.  Mining allows you to give some of your computer's resources to help process and verify Bitcoin transactions.  In exchange, miners will occasionally receive a group of newly-generated Bitcoins.  However, like actual mining, you may never receive any Bitcoins for your work.

Every Bitcoin transaction is recorded in a public log available for viewing, but no personal information about the transaction is recorded.  The only information that ties the transaction to you personally is your unique Wallet ID.  This keeps Bitcoin transactions anonymous, and it is the reason why Bitcoin has become the primary currency for those engaged in illegal transactions.

Bitcoin is certainly not without risk.  A wallet kept in the cloud could be hacked, like what happened at Bitcoin exchange Mt. Gox, which lost 650,000 Bitcoins (approximately $300 million).  If you decide to store your wallet on your device, it could accidentally be deleted or become corrupted.  The Bitcoin exchange rate could drop drastically and leave you with less dollars when you sell them.  And finally, governments are beginning to look at ways to regulate Bitcoin in order to make sure that people pay taxes and avoid illegal activity.

The future for Bitcoin is uncertain.  With governments all around the world printing money, Bitcoin's limited supply could lead to great increases.  However, the lack of backing by anything except the community of users could result in a mass exodus from the currency at the first sign of a Bitcoin flaw.  For now, it is best to consider Bitcoin as an investment:  don't put money in that you need, and realize that the value could go up or down.