How Exactly DOES Bitcoin Work?

You may have heard people talk about bitcoins. What are they and where did they come from? Should you buy them? How exactly DOES Bitcoin work?

A Brief History of Bitcoin

Bitcoins can best be described as virtual currency. They trace their history to late 2008, when a person (or persons) posted an internet paper using the name of Satoshi Nakamoto. The paper described a system of encrypted digital currency that used peer-to-peer e-cash system. Within a few months, Satoshi released the initial bitcoin software. The Bitcoin network began to take shape and the first bitcoins were released. Bitcoins started being traded for goods and services by users on the initial bitcoin forums. Those initial users set the value of the currency by their trades. You can have a go at trading through secure and trusted platforms. One of the best in the market for beginners is ilike Bitcoin Lifestyle.

Nakamoto continued in his bitcoin software releases working with other developers until in 2010. It was then he gradually disengaged from the group, but not before he had apparently acquired 1 million bitcoins. He turned over the alert key to Gavin Andresen, a developer who had worked in 3-D graphics in Silicon Valley, who was involved in an early VOIP company, and co-founded a company that worked in developing multi-player internet games. The Bitcoin Foundation was set up with a board of seven including Andresen and a General Counsel.

Initially, accepted by a small group of users, recognition of bitcoins grew. Non-profit organizations like Wiki Leaks and others began accepting donations in bitcoins. The Silk Road, a website where users could buy just about anything both legal and illegal anonymously, notoriously accepted the digital currency. When the FBI seized the Silk Road and its bitcoins in 2013, the value of the currency dropped but has since rebounded. Today, bitcoins are more broadly accepted, and recently the Sacramento Kings of the National Basketball Association became the very first team in pro sports to accept bitcoins. Today, acceptance of bitcoins is still mainly online.

How Do They Work?

To use bitcoins you must first acquire a bitcoin wallet and then acquire bitcoins to put in it. A bitcoin wallet is a downloadable app-like program that serves as a virtual wallet. Acquiring bitcoins is generally done in one of two basic ways.

1. Sell a product or service and accept bitcoins into your wallet as payment.
2. Trade for them using traditional backed currency on online exchanges.

Once acquired bitcoins can be used to buy products or services from someone who accepts them, they can be saved for future use or they can be viewed as an investment.

Every bitcoin transaction is encrypted. Although anonymous, they are tracked in a ledger. This allows the foundation to manage the currency and helps keep them secure.

Using bitcoins is sort of like using PayPal or a credit card online. The difference is their value is determined by its users and not by a central bank.

Should You Buy Them?

In 2010 when bitcoins were first used, they were traded and given freely with little or no value attached to them. Within six months they were valued at eight cents each. Eight months later they were on par with a U.S. dollar. In just a few more months they hit $31 before crashing back down to $2 by the end of 2011. By the end of 2012 they had risen to $13. Last year the bitcoin saw tremendous volatility, breaking the $1,000 mark in November of 2013, but dropping back to $500 by the end of the year. Since then it has bounced mainly between $600 and $800. Bitcoins may not be for the faint of heart, but they sure have gained the interest and fascination of millions.

Author Bio:
Katrina Matthews is a tech expert and product specialist for RackSolutions, manufacturer of custom racking solutions for businesses! She likes giving data center tips and advice on our blog.