What the Hell Is Bitcoin (and How Does It Work)?

Source: Thinkstock

Source: Thinkstock

Bitcoin is a digital currency, created to take out the middleman (read: the banks) and put control of the currency and its value in the hands of its users. But why does it exist, and how and where can you use Bitcoin? Hopefully we can provide some answers for you here.

Bitcoin has been around since 2009, but has only seen real traction in the past few years as adoption among mainstream retailers and media coverage increased. Users have set up elaborate “mining” operations, and in some cases lost virtual fortunes as the value of Bitcoins rose and fell with its increasing popularity and boom-and-crash cycles — just like paper currencies.

How does it work?

As we said previously, Bitcoin is completely digital and uses encryption to control its distribution and creation. According to CNN, there are three ways you can obtain Bitcoins. The easiest way is to purchase them on an exchange, much like you would go to a bank to exchange currency when you’re planning a trip to a foreign country.

Examples of popular exchanges include Bitstamp, Bitfinex, and Coinbase. All you need to do is purchase the Bitcoins using traditional currency, and you’re ready to go. You can also transfer Bitcoins between users.

The coins are stored in a “wallet” that resides within a mobile app or computer application, and this handles the sending and receiving of all Bitcoin transactions. While the network itself is decentralized, all transactions are placed on a public ledger to make verification of payments possible and to prevent fraud.

What is “mining”?

While we’ve described two ways to get Bitcoins, you can actually “mine” for coins. Mining works by installing a computer application on your computer, which is used to support the background processing required to operate the network. “Miners” are rewarded with Bitcoins for their participation. Not everyone can mine though, Bitcoin says, as it now requires some advanced computing power due to the growth of the network. To learn more about the process and what you need, see the website BitcoinMining.com.

Who accepts Bitcoins?

Bitcoins are accepted by a wide variety of small and large businesses. Microsoft added Bitcoin as a transaction method in 2014, Coinbase reports, and other retailers including Dell, Dish Network, Overstock, and computer parts retailer Newegg will let you use Bitcoins too. This doesn’t prevent you from opting to use Bitcoins to pay for transactions between you and someone else. As long as they have a “wallet” of their own, the payment process is pretty similar.

Is it safe?

Despite being set up in the same way that peer-to-peer file-sharing networks are, the network is generally secure. Most of the security issues occur as a result of user error, Bitcoin claims, where users lose or accidentally delete security keys for their Bitcoins. The organization also admits that security vulnerabilities have popped up from time to time, although it claims it acts quickly when it finds an issue.

Are people using it for illegal uses?

Yes, over time Bitcoin has found uses for a variety of not-so-sanguine uses, with CNN calling it the “currency of choice” for illicit activities. While that use of words might be a little harsh, the description is based in some fact. A survey conducted earlier this year found that drug users were using Bitcoins to purchase drugs on the so-called “Dark Web,” while national security experts claim that ISIS is using Bitcoins to fund its activities outside the detection of authorities.

What are the advantages?

As far as electronic transactions go, on average, Bitcoin transactions have far shorter processing times than other electronic methods such as PayPal, especially considering that there’s no transferring to your bank or anything, Coindesk argues. It’s also much harder to create fraudulent chargebacks — the payment is gone forever once it is sent. Finally, since there is no identifiable personal information sent with transactions, there is no possibility for identity theft, making it considerably more secure than typical credit card transactions.

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