Here’s an explanation of what bitcoins are, how exchanges work.
Q: What’s a bitcoin?
A: Bitcoin is an online currency that allows people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks, credit card issuers or other third parties. As a result, this exotic new form of money has become popular with libertarians as well as tech enthusiasts, speculators — and criminals. Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next.
Q: Who’s behind the currency?
A: It’s a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto and then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention, but proponents say that doesn’t matter; the currency obeys its own, internal logic.
Q: What’s a bitcoin worth?
A: Like any other currency, bitcoins are only worth as much as you and your counterpart want them to be. In its early days, boosters swapped bitcoins back and forth for minor favors or just as a game. One website even gave them away for free. As the market matured, the value of each bitcoin grew. At its height last year, a single bitcoin was valued at $1,200. On Wednesday, it was worth $417.99.
Q: Is the currency widely used?
A: That’s debatable. Businesses ranging from blogging platform WordPress to retailer Overstock have jumped on the bitcoin bandwagon amid a flurry of media coverage, but it’s not clear whether the currency has really taken off. On the one hand, leading bitcoin payment processor BitPay works with more than 20,000 businesses — roughly five times more than it did last year. On the other, the total number of bitcoin transactions has stayed roughly constant at between 60,000 and 70,000 per day over the same period, according to bitcoin wallet site blockchain.info.
Q: Is bitcoin particularly vulnerable to counterfeiting?
A: The bitcoin network works by harnessing individuals’ greed for the collective good. A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction. The blockchain prevents rogues from spending the same bitcoin twice, and the miners are rewarded for their efforts by being gifted with the occasional bitcoin. As long as miners keep the blockchain secure, counterfeiting shouldn’t be an issue.
Q: If that’s the case, what’s all this talk about fraud?
A: A lot of the mischief surrounding bitcoin occurs at the places where people store their digital cash or exchange it for traditional currencies, like dollars or euros. If an exchange has sloppy security, or if a person’s electronic wallet is compromised, then the money can easily be stolen.
Q: So why is bitcoin in the news again?
A: Technology publications Wired and Gizmodo published reports this week claiming an Australian businessman is bitcoin’s likely inventor. The Australian Federal Police said the search was related to a tax investigation and not recent media reports on bitcoin.