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 would be, according to its creators, 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 Bitcoin, you need a Bitcoin wallet, which encrypts and maintains your bitcoin balance on your computer, smartphone or in the cloud. Then you can fill your wallet with bitcoins by using your bank account, credit card or other form of payment.

After that, it's just a matter of finding a vendor that will accept Bitcoin as payment. Although pickings were slim when Bitcoin 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 Bitcoin for property rental and vehicle purchases. The gift card website Gyft accepts payment in Bitcoin, letting you turn Bitcoin into store credit that can be spent at every major retailer and restaurant in America.

If you follow financial news at all, you already know that Bitcoin isn't just used for goods and services. A lot of the hype around Bitcoin has centered around speculation. That is, people are using online currency exchanges like Coinbase to invest their real-world dollars and yen in Bitcoin hoping that the latter will appreciate in value. Already, fortunes have been made (and surrendered) as the value of Bitcoin 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 Bitcoin comes to life.