Money to many people exists in a few forms: cash, credit cards, debit cards, and checks, among others. People holding these believe will easily refer to any other form of currency as funny money, but with the introduction of Bitcoin, that perception may soon change.

What is Bitcoin?

Bitcoin is a new form of electronic money, and a Bitcoin is the unit of currency of the Bitcoin system. A physical Bitcoin is an object, which — you guessed it — looks like a coin with a number carefully embedded inside. The number enables Bitcoin’s state-of-the-art cryptographic security system and enforces the idea of a limited commodity, similar to gold and silver (where there is a limited supply).

The identity of the creator of Bitcoins, Satoshi Nakamoto, is shrouded in plenty of mystery. In 2008, he presented a research paper to an obscure cryptography listserv detailing his design for the new digital currency. Satoshi mentioned in his P2P foundation profile that he is from Japan; beyond that, not much else is known about him. His involvement in the Bitcoin project seems to have ended in 2010, when he sent a message out saying he is “gone for good.” He does not seem to exist outside of Bitcoin, and his name and identity could possibly be a pseudonym.

How Bitcoins Work

Since a digital dollar is just information, digital data preventing people from copying and pasting it as a chunk of text and ‘spending’ is numerous times is a challenge. The solution lies in using a central clearinghouse to keep a real-time ledger of all transactions, thus preventing fraud. However this creates the need for a third party to administer it. Bitcoin did away with the third party by publicly distributing the ledger to users called miners. They would be tasked with running software on their computers that maintains the block chain collectively and generates new currency.

Where Bitcoins Are Used

Bitcoins are accepted by a wide range of organizations covering a variety of service sectors: design, gambling, and mobile app development. These are well detailed in a wiki on Bitcoin trade. Donations in the form of Bitcoins have been accepted by organizations such as Wikileaks, Freenet, Singularity Institute, Internet Archive, and Free Software Foundation.

Although this is by far the most successful outcome of digital money, the idea of having digital money that is convenient and untraceable has been thought of a lot ever since the development of the Internet. Its predecessors include Bit-Gold and B-Money, neither of which ever really succeeded. The main reason of the success bitcoin is that it solved the problem that most of the prior currencies run into: double-spending.

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Bitcoins as Real Money

Automated online markets determine the value of Bitcoins in real money, US dollars, or any other currency. These markets are in operation throughout the year, 24 hours a day. The value of a Bitcoin is simply the last amount a Bitcoin sold for on one of the major markets (or an average of several). According to real time conversion of Bitcoins at preev.com, at the time of this article publication indicated that 1BTC is equivalent to 11.85 USD.

Why Use Bitcoins?

There are several reasons for using Bitcoins over any more currency. Here are the ones that stand out:

• No point of failure: It is more secure than the banking network, which have been known to fail and cause users huge losses. Since Bitcoins rely on millions of computers all over the world, which are connected via the Internet, there is no single point of failure. The entire Internet would have to go away for the Bitcoin network to fail.
• Ease of use: Bitcoin payments are sent with just one mouse click and transactions are always free. Whereas credit card and other online payment systems typically cost 3- to 4-percent or more per truncation, all Bitcoin transactions are free regardless of the amount.
• Anonymity: Bitcoin transactions can only be identified by a users Bitcoin address, of which users can have as many as they like.
• Privacy: Third parties can’t prevent or control users transactions. Transferring money is done via the Internet, without having to trust middlemen, no central bank or central authority
• Infinite: Bitcoins are currently divisible up to eight decimal places. This means it possible to send 0.00000001 of a Bitcoin. In the future, as the value goes up a coffee might cost about 0.00000003 Bitcoin. This divisibility could go up as the value of Bitcoin becomes larger and larger.

Although the benefits of Bitcoins and other forms of virtual currency are great solutions for current trading platforms, it is a sure bet that it is going to take a lot more time and further improvement before virtual cash becomes a real threat to traditional money. But given the success rate of credit and debit cards, that time might come sooner than expected.