How Bitcoin Works

Bitcoin's Backstory

The genesis of Bitcoin is the stuff of Internet legend. In 2008, a person (or persons) working under the pseudonym Satoshi Nakamoto published a document outlining the feasibility of the Bitcoin concept. Nakamoto mentioned the 2008 financial crisis -- as well as the failures of government-backed currencies and corruption of existing banking systems -- as a motivating factor for inventing a new currency.

Bitcoin could be, perhaps, a purer form of money, working for regular citizens of the world instead of being leveraged against them by the powers that be.

In 2009, Nakamoto released the first Bitcoin application, and also "mined" the first bitcoins for circulation. Then it was just a matter of spreading the word about this new currency.

To use bitcoins, you need wallet software, which encrypts and maintains your bitcoin balance on your personal computer. To get started, you must first download and install the wallet software to your computer or smartphone. Then you can fill your wallet with bitcoins by using your bank account, credit card or other form of payment.

Then it's just a matter of finding a vendor that will accept bitcoins as payment. Although pickings were slim when bitcoins first launched, these days there are many merchants that accept these newfangled coins. That includes restaurants, clothing stores, dentists and many others. Some people even use bitcoins for property rental and vehicle purchases. And if you use a related service such as Bitspend or Bitpay, you can use bitcoins for purchases from any retailer you can imagine, from big box stores to the smallest businesses.

If you follow financial news at all, you already know that bitcoins aren't just used for goods and services. A lot of the hype around bitcoins has centered on speculating in the currency itself, via currency exchanges such as Mt. Gox, which currently handles the bulk of bitcoin transactions. That is, people invest their real-world cash in bitcoins, hoping that the latter will appreciate in value. Already, fortunes have been made (and surrendered) as the value of bitcoins has careened all over the charts.

But how does this invisible, virtual currency wield so much financial power? How can a brand-new type of money be a workable concept? Well, it's complicated. Keep reading and you'll see how bitcoins come to life.