How Bitcoin Works

A Question of Money

When you have a store of bitcoins in your wallet, you can leave them there and hope that they appreciate it value. Or you can cash them out into local currency. If you store them on your computer, it's imperative to remember that there's no central company with a backup of your wallet.

That means you have to create a backup record of your balance. It's best to store that record on a device such as a flash memory drive that can you keep in a safe location. Otherwise, if your hard drive dies and takes your wallet down with it, you'd lose your bitcoin savings.

Bitcoin transactions are irreversible and generally very fast. However, because the bitcoin verification process must share data regarding the transaction with the entire network, sometimes you'll wait minutes before a payment is completed.

Because there are no national regulations for bitcoins, you can transfer them into or out of any country and dodge the steep fees that other such services charge. And because the system has no governing authority, your account has no limits and can never be frozen.

It's at this point that many people wonder about the legitimacy of bitcoins. How can a currency just appear overnight on the Internet and have actual value? Economists might offer a long, philosophical explanation about the history of money, but the short answer is this: All currencies have value only because people believe that they have value.

Bitcoin is no different in that regard. It's been embraced by libertarian-minded activists, financial speculators and people who simply no longer trust government-backed banking systems. These people trust the mathematics and encryption of the Bitcoin system, and their trust has been contagious, lending even more legitimacy to this virtual currency.

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