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How Does Bitcoin Work?

Here’s a very quick explanation of how bitcoin works.

Bitcoin is a virtual currency that is not backed by any authority. The currency was invented by someone called Satoshi Nakamoto who, in 2008, published a paper explaining how the financial transactions could be processed without going through a financial institution.

Bitcoins are created using a complicated mathematical process called mining. This provides one method of obtaining bitcoins. An alternative way is to buy them using a bitcoin exchange. To do this you will need a bitcoin wallet. Bitcoin wallets can be online (web-based), they can be downloaded and installed on a computer, or they can exist in the form of a dedicated ‘hardware’ wallet.

When bitcoin transactions are processed, a long string of letters and numbers is used to identify the buyer of the bitcoins, and another for the seller. There is not identification in the form of a real name associated with the transactions. In other words, money is effectively transferred anonymously, which has led to the process being used for such illegal activities as money laundering.

There are currently two main problems with the currency: one is its volatility, and two is that because the currency is unregulated, if your bitcoins get stolen, for example, there is no authority you can go to for help.

Supporters of the currency see it as an effective way to transfer money, whilst skeptics say that it is too volatile and that governments and other other authorities will eventually clamp down on its use and make it obsolete.

You can read a more detailed introduction to the bitcoin currency here: http://www.mybookkeepingmanager.com/user-guides/getting-started-with-bitcoin.html