Tech Corner with Greg Enslen, 05/15/13: What is a Bit Coin?: Lately, you might have heard the word “Bitcoin” floating around in the news – it’s a pretty interesting concept, and one that’s causing a “bit” of controversy…thanks to Susan for passing along the question.

bitcoins_1020_large_verge_medium_landscapeWhat is a Bit Coin?

Bitcoins are a virtual or digital currency, a method of spending and tracking “money” that doesn’t actually consist. Confused? Oh, I’m just getting started. Computers create Bitcoins out of thin air. A computer, running a particular program, creates or “mines” the Bitcoins by solving complicated mathematical formulas. These “miners” work for hundred (or thousands) of hours to “create” one Bitcoin.

There will be a maximum number of Bitcoins – the total is set for 21 million. But all of them are not in circulation — only around 11 million have been “found” at this point. The computer programs set up to create the Bitcoins are essentially “discovering” or mining those missing coins. In the end, there will be 21 million total – after that point, no more can be created.

What Are They Worth?

Well, that depends on a curious aspect of all currencies, real or pretend. Money is really only worth what a group of people “thinks” it is worth — for example, the U.S. Dollar is worth one dollar of goods or services, right? But what is a “dollar?” It’s a piece of paper, backed by the “full faith and credit” of the U.S. Government. They back the dollar with their power.

If the American government went away tomorrow, that dollar might become worthless, much like the “value” of currency of the southern Confederacy became much less valuable after the end of the civil war. So, money is worth what everyone collectively thinks it’s worth.

As of May 13, the value of one Bitcoin was about $115.83. Bitcoins, stored in virtual “wallets,” are growing in popularity — according to a recent Wall Street Journal article, some 60,000 transactions per day are being carried out using the currency. While it is contained to the high-tech portions of society, people are using Bitcoins to pay for products and services, and the article points out one person who is even receiving his paychecks in Bitcoins.

Transactions are carried out “in the open” – all financial transactions are encrypted and shared will all the other connected computers, so there can be no secret transferal of Bitcoins from one person to another. With all transactions public, it creates a transparency that, while maintaining privacy through encryption, increases trust in the virtual currency.

So, Why?

The mysterious creators of the Bit Coin concept were trying to create a democratic currency that could not be manipulated. If the U.S. Government chooses (as they often do), they can simply go out and print more dollars. It injects more money into the system and can help avoid things like inflation. But it also decreases the “value” of each other dollar bill floating around out there.

This works well because people around the world trust the “solidity” of the American financial system and, therefore, put their trust in the American dollar. But if something were to happen to decrease the level of trust in the American dollar, investors and others might stop holding that currency and switch to another.

Bit Coins can also be manipulated — one buyer could purchase a large group of them, thereby making all the other outstanding bit coins more “valuable.” But, again, they are only worth what everyone in the bit coin community agrees they are worth. The big difference here is that there are a limited number of coins – that helps to keeps the value stable. For more information, please visit en.wikipedia.org/wiki/Bitcoin.

Next Time

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