How Bitcoin Works

A Question of Money

Once you have a stash of Bitcoin in your wallet, you can leave it there and hope that it appreciates in value. Or you can cash it out into local currency.

If you store Bitcoin 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.

Another option is to use an online Bitcoin wallet that stores all of your encryption keys in the cloud. The advantage of an online wallet is that you don't have to worry about constantly backing up your data, but the downside is that you're putting your Bitcoin security in the hands of a third party. If they lose your keys, there's no way to get your Bitcoin back.

Bitcoin transactions are irreversible and generally fast, but not instantaneous like credit cards. 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.

A big advantage of Bitcoin is its lack of transaction fees. Because there are no national or international regulations for Bitcoin, you can transfer the virtual currency into or out of any country without the steep wire fees that banks and services like Western Union 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 Bitcoin. 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 proven contagious, lending even more legitimacy to this virtual currency.