What Bitcoin is, and why it matters

March 31, 2013

The Bitcoin, the digital currency that many either love or hate, has recently surpassed $1 billion in value. That mark, which was past by some combined 10.9 million Bitcoins according to TechCrunch, doesn’t mean the currency’s critics are wrong, but it does suggest that a digital “crypto-currency” can work.

Here’s how the Bitcoin works: the currency is purely digital and isn’t generated by any central banking authority. It changes hands digitally and can be transferred into cash if the need arises. The currency is created based on complex mathematical formulas solved by computers. As more coins are created, more mathematical problems are created, creating the need for more computational power and, as The Economist explains, setting a floor underneath the price of the currency.

The Bitcoin is typically used as an alternative to PayPal in order to avoid hefty fees, and has the additional benefit of making digital transactions anonymous (though this may soon change, but more on that later). But the currency is also used to buy and sell drugs in the Internet’s dirty, dirty underbelly. There are other problems as well: Bitcoin exchanges have been hacked before, and, as The Verge reports, has had damaging technical problems. Investors, too, are wary of investing in a currency which they perceive to be insecure and open to hackers.

But despite its problems, the Bitcoin is starting to look appealing to many operating in the virtual world. Expensify, WordPress, Reddit and others are now supporting the Bitcoin. Even the United States Treasury Department has jumped on the Bitcoin bandwagon and is seeking to regulate the virtual currently like a real one in order to fight against money laundering. (This development, despite the anarcho-libertarian background of the Bitcoin, may lend some stability and credibility to the fluctuating currency at the expense of the aforementioned anonymous transactions.)

So the $1 billion mark is, if anything, a signal that the currency is gaining more acceptance in the virtual world. The Bitcoin, as TechCrunch‘s John Biggs explains, wasn’t created with the intention of becoming a “real monetary exchange,” but rather an experiment to prove a virtual currency could work. The experiment, so far, has succeeded.

As of reporting, the currency is worth $97 to each Bitcoin, according to bitcoincharts.com.

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6 Responses to “What Bitcoin is, and why it matters”

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