December 6, 2013

No, bitcoins are not small round bits of metal carrying some kind of information in digital format. Simply put, it is a digital currency created on the expense of certain computation power. It is a peer-to-peer (P2P) digital currency that can be instantly transferred between two parties anywhere in the world. Bitcoin uses digital cryptography, or digital encoding, to control both the creation of new bitcoins (mining) and new transactions.
Users can also buy bitcoin from an exchange like CoinMKT, BitStamp, Mt.Gox and others. They can also accept bitcoins as a method of payment for goods or service.

Bitcoin can be transferred from one party to another using a unique transfer code or address that moves the bitcoin instantly from one "wallet"to another. Setting up a wallet only takes a matter of minutes and it is just as easy to transfer bitcoins to someone in the same room as it is to transfer them to someone at the other end of the world.

Suppose Alice wants to send a bitcoin to Bob.
  • Bob sends his address to Alice.
  • Alice adds Bob’s address and the amount of bitcoins to transfer to a message: a 'transaction' message.
  • Alice signs the transaction with her private key, and announces her public key for signature verification.
  • Alice broadcasts the transaction on the Bitcoin network for all to see.
Only the first two steps require human action. The rest is done by the Bitcoin client software.

Current Status of Bitcoin

Bitcoin's value is not supposed to be regulated by any other currency, organisation, or government. However, at the moment, a bitcoin is valuated in terms of relationship to other currencies because there is not enough of it around. Also, there is not enough of it in the market to have an intrinsic value. Even the few places that accept bitcoins as payment for meals or goods price those goods in dollars or yuan first (or any other major currency depending on your location) before accepting the payment.

Investing in Bitcoin

Bitcoin is a new and interesting electronic currency, the value of which is not backed by any single government or organization. Like other currencies, it is worth something partly because people are willing to trade it for goods and services. Its exchange rate fluctuates continuously, and sometimes wildly. It lacks wide acceptance and is vulnerable to manipulation by parties with modest funding. Security incidents such as website and account compromise may trigger major sell-offs. Other fluctuations can build into positive feedback loops and cause much larger exchange rate fluctuations. Anyone who puts money into Bitcoin should understand the risk they are taking and consider it a high-risk currency. Later, as Bitcoin becomes better known and more widely accepted, it may stabilize, but for the time being it is unpredictable. Any investment in Bitcoin should be done carefully and with a clear plan to manage the risk.