Find out what you need to know about Bitcoin right here. This primer will get you started on understanding the digital crypto-currency.
Who: Bitcoin was started by a cryptographer/developer calling himself Satoshi Nakamoto. Satoshi never revealed much about himself, and after getting the project off the ground, left in 2010. Since then a large group of developers has taken on the task of building the currency’s infrastructure.
What: Bitcoin is a digital currency, protected by cryptographic tools used to prevent rapid money expansion and counterfeiting. Bitcoin isn’t the first crypto-currency, but it is the first one to solve some of these major problems and the first to gain a large following.
Where: Bitcoin trade takes place around the world, but the four largest exchanges are BTC-E, located in Bulgaria, BitStamp in the U.K., Mt. Gox in Japan, and BTC-China. Together these four exchanges account for over 90% of trading volume according to Bitcoin Charts. The exchanges post transaction prices in various currencies, and buy and sell orders, trade history and more.
Why: Bitcoin is an emerging electronic currency, and investors may wish to purchase it for the same reasons they’d buy any emerging country’s currency. Diversification, and high-risk/reward possibilities. Bitcoin can also be used as an extremely fast and low cost method of money transfer around the world.
How: Bitcoin’s essence is a ledger known as the block chain. The block chain is a record of every transaction that has ever happened using bitcoins. When checking balances and transferring bitcoins, the entire block chain is checked to see who owns which bitcoins. For this reason, the system takes a massive amount of computing power to run. The transactions must all be processed, and for supplying the computing power to do so, people called miners are given access to new bitcoins. This process has created a cottage industry of its own where coalitions of miners come together to process blocks of bitcoin transactions faster in order to split the rewards. The currency operation is run on the backs of these systems.
Everything Else You Need to Know About Bitcoin:
At the moment, with no legal tender status anywhere in the world, Bitcoin is essentially a commodity. But it doesn’t have an intrinsic value like any other commodity; instead it only has the value that users assign to it, more like a currency. It is often compared to precious metals (whose ample intrinsic value is often overshadowed by their investment value).
Bitcoin prices are extremely volatile, prone to wild swings. If you’re a high-risk speculative investor who doesn’t mind putting money into an investment that may or may not pay off, Bitcoin is something you could investigate. If you are at all adverse to risk, Bitcoin should probably be avoided. As you can see in the chart below, the price has been volatile, producing boom-and-bust swings over the last year.