Bitcoin - Bit.... what?

You've probably already heard people talk about Bitcoins, especially during the Cypriot debt crisis last week. It seems that some Cypriots tried and are still trying to exchange their Euros (or at least part of them) for Bitcoins. So I guess it's about time that you learn about the basic facts of this new currency.

What is Bitcoin?

Bitcoin is an electronic currency which was invented by Satoshi Nakamoto in 2009. It's based on cryptographic keys and a P2P network which is formed by the users who run Bitcoin clients. Each transaction of money between users is recorded in a public database.

What can I buy with Bitcoin?

There are some small companies that accept bitcoins for all kinds of services: internet hosting, blogging, online gambling, etc. But even some big well-known entreprises like Wordpress accept payments in this new electronic currency.

How much is a Bitcoin worth?

A bitcoin cost about 20$ at the beginning of 2013, but it's risen to more than 120$ lately.

What's the difference between Bitcoin and “traditional” money?

Almost all national currencies are controlled by a central bank which manages the money supply by raising or reducing interest rates. The value of “traditional” money depends entirely on the capacity and possibility of exchanging this paper money for physical goods and services.

Unlike “traditional” money there is no central bank which controls the money supply of bitcoins. New bitcoins are generated with digital signatures (“bitcoin mining”) and the (future) supply of bitcoins is limited to 21 million units.

How and where do I get Bitcoins?

You can buy them on websites like MTGOX or can accept payments in Bitcoins. And you'll also need an application like BitcoinQT or Armory Bitcoin in order to use and manage your bitcoins.

What are the advantages of Bitcoin?

Bitcoin can have many advantages. For example:

• All payments are anonymous.
• You don't have to pay any comissions to any “middleman”.
• Nobody can rob you: your Bitcoins are clearly yours.
• It's technically very difficult (if not impossible) to counterfeit bitcoins.
• Any payment made in Bitcoin is irreversible. This means nobody can trick you when you try to sell something on the Internet.

Are there also some disadvantages and even risks?

The biggest disadvantage is that there are not that many stores that accept Bitcoins. And there is also one majoy risk: many analysts and prestigious economists (like Sala i Martín) are already talking about a “Bitcoin bubble” - you could lose a lot of money if you bought Bitcoins right now!