What is Bitcoin?

So, what the heck is Bitcoin? And does it really have a chance to compete against the almighty dollar or euro?

Photo: BTCKeyChain/Flickr

Photo: BTCKeyChain/Flickr

Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009. It is a cryptocurrency, so-called because it uses cryptography to control the creation and transfer of money.

Conventionally, the capitalized word ‘Bitcoin’ refers to the technology and network, whereas lowercase ‘bitcoin’ refers to the currency itself.
Bitcoins are created by a process called mining, in which participants verify and record payments into a public ledger in exchange for transaction fees and newly minted bitcoins.

Users send and receive bitcoins using wallet software on a personal computer, mobile device, or a web application. Bitcoins can be obtained by mining or in exchange for products, services, or other currencies.

Bitcoin has been a subject of scrutiny amid concerns that it can be used for illegal activities. In October 2013 the U.S. FBI shut down the Silk Road online black market and seized 144,000 bitcoins worth US$28.5 million at the time.

The U.S. is considered Bitcoin-friendly compared to other governments, however. In China new rules restrict bitcoin exchange for local currency. The European Banking Authority has warned that Bitcoin lacks consumer protections.

Bitcoins can be stolen and chargebacks are impossible.
Commercial use of Bitcoin, illicit or otherwise, is currently small compared to its use by speculators, which has fueled price volatility.

Bitcoin as a form of payment for products and services has seen growth, however, and merchants have an incentive to accept the currency because transaction fees are lower than the 2–3% typically imposed by credit card processors.

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