What Is Bitcoin and Should I Be Paying Attention To It?

First things first…what is bitcoin? According to the website bitcoin.org, bitcoin is a new kind of money and an innovative payment network that “uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part.” That explanation is a little vague so, in doing a little more research, we find out that bitcoin is essentially a way for individuals and organizations to exchange money without the use of a bank and for low (or in some cases zero) transaction cost. Bitcoin is not the U.S. Dollar or the Euro or any other national currency; it is a currency unto itself.

So, a bitcoin is currency that can be used between two consenting parties. Individuals and companies can use bitcoin to pay each other for goods or services. While it is somewhat easy to understand how standard currency is created (http://en.wikipedia.org/wiki/Money_creation), it can be a little more confusing to understand how bitcoin is created.

Like standard currency, there is a limited amount of bitcoin available, and getting a hold of it is a bit of a gold rush scenario. To generate bitcoin currency computer hackers (no, they aren’t all bad) use their computers and software to solve difficult mathematical problems that require a known amount of “brute-force” computer time. When a solution to a particular problem is found, the individual that solved the problem is rewarded with a twenty-five-coin reward. These computational transactions can take extended periods of time and significant computing power (and electricity) to “mine.” Once mined, that transaction is stored in the decentralized system in an “account” in the name of the individual it was awarded to. That individual can now use that earned bitcoin to pay for goods and services from anyone that is willing to take bitcoin as payment. Just like the gold rush of the 1800s, the hackers do lots of work to get a little bitcoin—just like lots of digging produced a little gold. The bitcoin makes its way into the economy as transactions are made between the hackers.

That may sound like something out of the Matrix or some other sci-fi movie, but companies like overstock.com, Virgin Atlantic, Zynga, Tesla, Etsy, Tiger Direct and others are accepting bitcoin. The Sacramento Kings accept bitcoin for tickets to NBA games and there are several hotels in Las Vegas that accept bitcoin for rooms. Ebay, Paypal, Amazon and Google are looking into using it as an accepted payment method in the near future. According to bitcoin.org, there was the equivalent of more than $1.5 billion U.S. dollars worth of bitcoin in circulation as of the fourth quarter of 2013.

Does that mean we will be buying our groceries and paying our mortgage with bitcoin in the future? I doubt it, but that does not mean you won’t see a rise in bitcoin activity and usage, so pay attention to it. Like any other new technology, bitcoin is something that should be watched and kept track of and thoughtfully investigated prior to using for payment or as a form of payment.